Crypto scams made simple
Most of my Reflections are my thoughts on life. My hope is always that perhaps they’ll serve as a jumping off point to do your own thinking. It is rare that I feel an opportunity to teach.
However, when my wife told me her book club of mostly middle-aged women was discussing the crypto drama of the last week, I figured perhaps I could offer a very high-level, non-technical perspective on what happened… and why I’m unfazed.
First, a quick note. I am a bitcoiner. As a bitcoiner, I do not like or trust almost anything in the “crypto” space. Most people conflate bitcoin with other cryptocurrencies, but I’ve spent the last year diving deep on this stuff and for a maybe a dozen reasons, I am well-invested in bitcoin and absolutely not touching anything else in “crypto”.
My disclaimer is that I’m not a financial advisor and you shouldn’t listen to me about financial stuff.
Alrighty, so what went down in crypto this past week? Macroeconomic guru Lyn Alden (one of my favorite economic and financial analysts, and also a bitcoiner) had a great, short tweet thread about what happened:
Imagine McDonald’s makes its own money, let’s call them clown-bucks, keeps most of it, and sells some to the market.
McDonald’s then uses their remaining clown-bucks as collateral for actual loans.
And then people remember clown-bucks aren’t real.
And then Starbucks comes and market sells the clown-bucks they were holding, while reminding the market that clown-bucks aren’t really a thing.
McDonald’s balance sheet is trashed, with their clown-bucks wiped out.
Anyway, that’s what happened in crypto-land this week.
As far as we can tell, this is approximately how it played out. Sam Bankman-Fried (SBF), CEO of the third-largest cryptocurrency exchange, FTX, created his own crypto coin called FTT. Using his other company, Alameda Research, as well as some clever marketing, he was able to pump up the price of FTT.
Another big cryptocurrency exchange, Binance, also purchased millions of dollars worth of FTT, further inflating the price. Retail investors, too, jumped on the FTT train as they saw the price increase. Classic tulip mania sort of stuff.
FTX went out and took on loans and new investors worth, from what I’ve heard, billions of dollars. They were able to do so because they had “billions in assets.” What they neglected to tell people, or what negligent investors and bankers failed to recognized, is that most of these assets were in their own made-up coin that they could manipulate as desired. Many of their other assets were likely in other worthless coins, as well.
Essentially, FTX took on real money debt by posting fake money collateral.
Imagine if you make up your own currency and have a rich friend by half of it for $500 million while you kept the other half. You could take out a big loan from a bank by saying you have assets of $500 million since you could hypothetically sell your share for that much as well. It’s technically true on paper, but it’s also a total lie and likely a felony.
This past week, the CEO of Binance (remember, a major holder of the made-up FTT coin) saw something in FTX that made him nervous and he announced that Binance was going to dump their many millions of dollars worth of FTT.
The price of FTT plummeted as Binance and retail investors all took for the exits. In the panic, people began to try withdrawing coins from the FTX exchange that FTX didn’t actually have (e.g., FTX supposedly had a $1B+ liability in bitcoin but owned no actual bitcoin, which you might quickly recognize to be problematic). Within a day or so of the hysteria, FTX had filed for bankruptcy.
SBF always struck me as something of a weasel. He was touted by many as a genius and appeared on the cover of Fortune magazine as, potentially, “the next Warren Buffett.”
All along, the bitcoin community was calling this for the nonsense that it turned out to be. Cory Klippsten, CEO of Swan Bitcoin, is particularly good at identifying crypto scams long before the floor falls out. He even shared his “greatest hits” thread of the times he called Sam Bankman-Fried (who he affectionately calls Scam Bankster-Fraud) out on his Ponzi scheme before everything blew up this week.
All this to say, I’ve taken away a few simple things from this:
- I’m not interested in “crypto”
- Bitcoin is the only digital asset I buy, and will continue to buy
- I will continue to self-custody my bitcoin in cold storage (don’t leave coins on exchanges)
- I, and other bitcoiners, are unfazed by this; not only were many calling this collapse long in advance, many see it as a way of further distinguishing bitcoin from the trash out there
- I feel for the investors, retail and institutional, that lost everything in this
Any drama in the crypto space has a way of confusing people because most people don’t understand crypto itself. In reality, most of the crypto scams are a lot like the scams that play out in the fiat world – Bernie Madoff, Martin Shkreli, Enron, etc.
There are also well meaning crypto people. But in reality, there just isn’t much use case for anything but bitcoin, in my humble opinion.
Bitcoin solves so many problems if sufficiently adopted. Bitcoin is the signal and crypto is the noise. If you want to learn more, shoot me a note and I can point you to some good resources.
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