Cryptocurrencies - intelligent commentary

[funcrusher]

I try to invest in assets where I can worry about my return on capital, not the return of capital. Crypto falls into the later camp.

cold storage solves that problem

[zachateseverything]

cold storage solves that problem

but not the fundamental problem with Crypto: it's an ecological disaster

[fastupslowdown]

Waking up old thread. I can't seem to understand what happened with FTX

One set of articles says it was too few illiquid assets against too many liabilities while another says it was customer assets being used in inappropriate ways sort of like MF Global. Further confused because customer crypto is apparently gone, missing, poof and yet for years we've been told block chain technology makes that impossible -Mike G

[fastupslowdown]

cold storage solves that problem

FTX sort of disproved that , NO?

[72gmc]

Waking up old thread. I can't seem to understand what happened with FTX

One set of articles says it was too few illiquid assets against too many liabilities while another says it was customer assets being used in inappropriate ways sort of like MF Global. Further confused because customer crypto is apparently gone, missing, poof and yet for years we've been told block chain technology makes that impossible -Mike G

My layman interpretation is that it was a classic savings bank too close to investment bank sort of scenario. Sam used FTX as a piggy bank for risky bets by Alameda. Poof.

[fastupslowdown]

[j44ke]

From that video, it sounds like a 30 year old whiz kid panicked and made some bad moves that allowed his primary competitor who was also a large investor to withdraw the investment and sink the company relatively easily. I expect that missing $370bill never existed.

[funcrusher]

FTX sort of disproved that , NO?

huh? ftx was an exchange...cold storage is keeping tokens off chain

[fastupslowdown]

huh? ftx was an exchange...cold storage is keeping tokens off chain

did FTX tell customers their coins were kept in cold storage?

[vertical_doug]

did FTX tell customers their coins were kept in cold storage?

No. Their terms of use just states the assets belong to the customer in their name. How that is implemented is anyone's guess.

I just wonder how much longer it will take the crypto faithful to realize there is no magic in crypto. As soon as you try to make it useful, it just becomes regular old currency in finance subject to all the old scams which have existed for 1000s of years. It's a feature.

Speculation is as old as the hills and there is never anything new in finance.

[fastupslowdown]

No. Their terms of use just states the assets belong to the customer in their name. How that is implemented is anyone's guess.

I just wonder how much longer it will take the crypto faithful to realize there is no magic in crypto. As soon as you try to make it useful, it just becomes regular old currency in finance subject to all the old scams which have existed for 1000s of years. It's a feature.

Speculation is as old as the hills and there is never anything new in finance.

I prefer my speculative assets held in Alpacas and Tulips, but I'm old fashioned.

[fastupslowdown]

No. Their terms of use just states the assets belong to the customer in their name. How that is implemented is anyone's guess.

I just wonder how much longer it will take the crypto faithful to realize there is no magic in crypto. As soon as you try to make it useful, it just becomes regular old currency in finance subject to all the old scams which have existed for 1000s of years. It's a feature.

Speculation is as old as the hills and there is never anything new in finance.

FTX used customer assets for trading. Same as MF Global
https://www.cnbc.com/2022/11/13/sam-...y-sources.html

[vertical_doug]

FTX used customer assets for trading. Same as MF Global
https://www.cnbc.com/2022/11/13/sam-...y-sources.html

MF Global was a futures broker who bet too big, couldn't post the margin call and poof.
FTX wanted to be a Bitcoin derivatives which is basically the samething and had the same result.

I hope when Michael Lewis book or magazine article comes out, he highlights how the scam originated. MF Global was because Jon Corzine bet too big and thought he was still at Goldman without any of the Goldman risk guardrails. SBF maybe thought he was still at Jane Street, just without any of the guardrails.

But I think he was over his head and had no idea how much implied leverage he was using. If you listen to his odd-lot interview from Bloomberg this summer, that is evident. The FT even wrote an editorial about the craziness of the interview.

[fastupslowdown]

MF Global was a futures broker who bet too big, couldn't post the margin call and poof.
FTX wanted to be a Bitcoin derivatives which is basically the samething and had the same result.

I hope when Michael Lewis book or magazine article comes out, he highlights how the scam originated. MF Global was because Jon Corzine bet too big and thought he was still at Goldman without any of the Goldman risk guardrails. SBF maybe thought he was still at Jane Street, just without any of the guardrails.

But I think he was over his head and had no idea how much implied leverage he was using. If you listen to his odd-lot interview from Bloomberg this summer, that is evident. The FT even wrote an editorial about the craziness of the interview.

Customer assets are supposed to be segregated and protected. That turned out not to be true with MF Global and FTX

[vertical_doug]

The FT article. It was April 2022




Honk honk! Here comes the crypto clown car.

Sam Bankman-Fried, chief executive and founder of Bahama-based crypto-exchange FTX, appeared on Bloomberg’s excellent Odd Lots podcast Monday, and was joined by the Borg’s Matt Levine alongside regular hosts Joe Weisenthal and Tracy Alloway.

Bankman-Fried is widely regarded as one the smartest and most establishment-friendly fellows in all of cypto-dom, having recently been wooed by Goldman Sachs in what might potentially be a Pac-Man takeover defence. Levine took the opportunity to ask SBF about the mechanics of “yield farming”, which involves staking coins or tokens in exchange for some form of interest.

We’re just going to post most of this exchange, as Odd Lots did, because it is quite something. Remember, FTX is worth $32bn and sponsors organisations including Mercedes AMG Petronas F1 Team, the International Cricket Council and the Golden State Warriors. Oh, and Softbank is an investor.

Without further ado, and with our emphasis:

Levine:

Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there’s a more sophisticated understanding than that.

Sam Bankman-Fried:

Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It’s just a box. So what this protocol is, it’s called ‘Protocol X,’ it’s a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.

So far what we’ve described is the world’s dumbest ETF or ADR or something like that. It doesn’t do anything but let you put things in it if you so choose. And then this protocol issues a token, we’ll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box, but I don’t know, you know, maybe there will be, so that’s sort of where you start.

And then you say, alright, well, you’ve got this box and you’ve got X token and the box protocol declares, or maybe votes by on-chain governance, or, you know, something like that, that what they’re gonna do is they are going to take half of all the X tokens that were re-minted. Maybe two thirds will, two thirds will offer X tokens, and they’re going to give them away for free to whoever uses the box. So anyone who goes, takes some money, puts in the box, each day they’re gonna airdrop, you know, 1% of the X token pro rata amongst everyone who’s put money in the box. That’s for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It’s probably not zero. Let say it’s, you know, a $20 million market …

Levine:

Wait, wait, wait, from like first principles, it should be zero, but okay.

SBF:

Uh, sure. Okay. Completely reasonable comments.

Levine:

I mean, that’s not quite true, but, like, when you describe it in this totally cynical way, it sounds like it should be zero, but go on.

SBF:

Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it. In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you buy in box token,’ you know, that’s gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven’t been $20 million dollars that have flowed into it yet. Maybe that’s sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it’s not totally clear that this thing should have market cap, but empirically I claim it would have market cap.

Levine:

I agree.

Weisenthal:

It shouldn’t have any market cap in theory, but it practice, they always do. Okay.

SBF:

That’s right. So, and obviously already we’re sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we’re gonna move on from that for a second. So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that’s interesting. Like if the total amount of money in the box is a hundred million dollars, then it’s going to yield $16 million this year in X tokens being given out for it. That’s a 16% return. That’s pretty good. We’ll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone’s like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that’s it? Like that market cap for this box? And it’s been like 48 hours and it already is $200 million, including from like sophisticated players in it. They’re like, come on, that’s too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.

And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it’s $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens. Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Levine:

I think of myself as like a fairly cynical person. And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.

Weisenthal:

At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I’m going to too, and then it’s more valuable. So they’re gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?

SBF:

So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that’s one framing of this. And I think there’s like a sort of depressing amount of validity…

Levine:

Can you comment on like the sustainability of that? Because, you know, on the one hand you’re like, well, a trillion dollars of institutional money is going to come into Bitcoin. And on the other hand you’re like basically there are a lot of Ponzis that have done really well.

There really is nothing more to add.

Nevertheless, if you’d like to gain greater insight about “valuable boxes” with no economic use case that go “to infinity” because of “the bullishness of people’s usage of the box”, don’t forget to sign up for the FT’s Crypto and Digital Assets Summit beginning Tuesday.

[vertical_doug]

Customer assets are supposed to be segregated and protected. That turned out not to be true with MF Global and FTX

Too simple an assumption for modern finance.

That is only if you are not signed up for leverage (margin trading). If you are in a margin account, you are a unsecured creditor to the firm as a whole. This is the issue with FTX because they have multiple types of products, and they spent a lot of time on the website discussing SPAN and cross-margining.

This is why hedgefunds at Lehman Brothers were creamed in 2008. Even though they were customers of the firm, most where in the Prime Brokerage unit which provided leverage. All of your assets were unsecured versus the Lehman Brothers International which was the London entity. On Friday nights, LBI transferred all excess cash to Lehman Brothers Broker dealing in NY. When Lehman brothers declared bankruptcy in NYC on Monday, LBI was just another unsecured creditor to Lehman. It always comes down to which legal entity in the holdco structure held your assets.

I have no idea with this cross-holding FTX structure, where assets are held. But you have a lot of different jurisdictions all with different requirements.

[fastupslowdown]

Too simple an assumption for modern finance.

That is only if you are not signed up for leverage (margin trading). If you are in a margin account, you are a unsecured creditor to the firm as a whole. This is the issue with FTX because they have multiple types of products, and they spent a lot of time on the website discussing SPAN and cross-margining.

This is why hedgefunds at Lehman Brothers were creamed in 2008. Even though they were customers of the firm, most where in the Prime Brokerage unit which provided leverage. All of your assets were unsecured versus the Lehman Brothers International which was the London entity. On Friday nights, LBI transferred all excess cash to Lehman Brothers Broker dealing in NY. When Lehman brothers declared bankruptcy in NYC on Monday, LBI was just another unsecured creditor to Lehman. It always comes down to which legal entity in the holdco structure held your assets.

I have no idea with this cross-holding FTX structure, where assets are held. But you have a lot of different jurisdictions all with different requirements.

That chart is way above my pay-grade, but the wsj wrote this:

Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion, a person familiar with the matter said.

[vertical_doug]

That chart is way above my pay-grade, but the wsj wrote this:

Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion, a person familiar with the matter said.

But this does not tell you which FTX legal entity lent what customer assets from what type of accounts to which Alameda Research Legal entity and where did the funds go.

What WSJ wrote is fine, it just doesn't really have any informational value..
I think a lot of naive customers had no idea what they actually signed up for. And more importanly, SBF may not have understood fully the implications of what he was doing.
Now that you are in bankruptcy, legal entity details and jurisdictions really matter.

For example, right after Lehman went Bankrupt, Bob Diamond, the CEO of Barclays bought the Broker Dealer in NY. Why? Because he knew the broker dealer held all the cash collateral for the firm (Lehman Brothers Holdco). I think he made like 3.5 billion that day because people didn't think about legal entities. Barclays liquidated all assets to just take the cash.


Read the FT article above.

[fastupslowdown]

But this does not tell you which FTX legal entity lent what customer assets from what type of accounts to which Alameda Research Legal entity and where did the funds go.

What WSJ wrote is fine, it just doesn't really have any informational value..

perhaps its simplistic but customers who deposited money at FTX understandably expected that their funds would be available for their own use to trade and could be withdrawn when they decided to cease trading on FTX.

It’s unlikely that they were told that their money could be gambled away by Alameda.

[vertical_doug]

again, what they thought and what they signed may be too very different things. It all comes down to documentation.

since MF Global and Lehman, the rules for client segregation in developed markets became much more robust. This is not the world Crypto operates in.
It goes back to my original point, once you try to make crypto useful, it turns into finance. If it is not regulated like finance, bad stuff will happen.

The darkside of finance always moves to the least regulated jurisdictions. That is why global regulators are trying to blackball BVI, Cayman, etc. . . PO Box finance is not a good look.
Digital PO Box is even worse which is essentially what crypto is.