The collapse of FTX was inevitable – Bitcoin Magazine

by James · November 15, 2022

Below is a direct excerpt from Marty’s Bent Issue #1282: “The Personification of Filthy Grift.” Sign up for the newsletter here.

Every once in a while the world is reminded how easy it is for some people to be completely fooled by a con artist. The past week has been such a reminder. Unless you’ve been living under a rock, you’re probably aware of the epic explosion of FTX and the sinister scam that led to it. We won’t bore you with a rehash of the token mechanics of FTT or delve into the deplorable nature of FTX and Alameda openly stealing user deposits and setting them on fire with bad investments and trades. Your crazy Uncle Marty won’t even delve into the flawed theories surrounding Sam Bankman-Fried’s (aka “SBF”) financial support for the Democratic Party and his girlfriend-friend relationship with the regulators who probably should have been investigating him. What I want to focus on is how the hell so many supposedly intelligent people were duped by such an obvious fraud.

The history of FTX has always been a little confusing to me. They seemingly came out of nowhere in 2018/2019 and quickly “emerged” as one of the most respected exchanges in the world. SBF was hailed as a lovable autistic subspecies who somehow, at the ripe old age of 25, figured out a way to take advantage of a price arbitrage opportunity that existed between Western and Asian bitcoin rates that many institutional investors could not. Images of Bankman-Fried pretending to sleep on a beanbag chair placed under his desk, which included ten oversized screens, created a perception of legitimacy that gave all trading geniuses and crypto VCs a hard-on. They were all on his side, as was most of the financial media. At one point, the annoying uncle, Jim Cramer, claimed he thought he was talking to the world’s first trillionaire during an interview with SBF. Everyone seemed to be caught – hook, line and sinker by this lovable autistic.

This seemed very strange to me because if you actually listened to him speak it was obvious that he was a bumbling idiot who didn’t really understand the industry he was supposed to be a domain expert in. Nothing made this clearer than an interview with Bankman -Fried did on CNBC in July 2021, where he attempted to explain proof of work to Joe Kernen. His cluelessness was made clear when he cited the utterly ludicrous “electricity per transaction” calculation that has been thoroughly debunked.

This spring, Bankman-Fried hosted a conference in the Bahamas that included keynote speakers Bill Clinton and Tony Blair. An extremely strange duo who were supposed to be in the lead role for an event that was supposed to be about a technology that defies the state. At the time, I had this to say about the conference:

At this point it became clear to me that something about FTX and its anemic frontman, Bankman-Fried, was off. And then this summer, in the wake of the Terra/LUNA, 3 Arrows Capital and Celsius blow-ups, SBF went on a distressed buyout and rescue spree that raised well over $2 billion just six months after raising $400 million dollars in equity, which led to this question:

This buying spree became even more confusing when you considered all the marketing money FTX had spent: naming multiple arenas, buying Super Bowl ads, getting a celebrity endorsement from Tom Brady, and getting their logo on every MLB umpire’s jersey.

We found out last week that SBF and FTX actually had nowhere near $2 billion. It has become clear that they were about to destroy between 10 and 50 billion dollars worth of assets which included investor capital and client deposits. I had a hunch that this man wasn’t running a legitimate business, but even I couldn’t imagine the carnage it would create throughout the “business”.

This begs the question, if I, a lowly newsletter trader, had good enough instincts to sniff this out, how on earth did some of the “most respected” and experienced cryptocurrency traders and venture capitalist funds who had been tasked with managing other people’s money fall for this scammer ? How did Sequoia put its stamp of approval on this company? How did the head of the Ontario Teachers’ Pension Fund manage to write a $95 million check to this company? How did many venture funds in the area feel comfortable parking tons of AUM on this exchange? How did none of these people ask rudimentary due diligence questions like: How do you make money? Can you show me the receipts of the arbitrage trade that made you rich? Where does all this money come from?

How did no one outside of some Bitcoin Maximalists and some Wall Street short sellers identify this as a massive scam?

I don’t know if we will ever know all the answers to these questions, but one thing is certain: complacency and laziness rule the day. So many in “crypto” think they are geniuses who have discovered a new paradigm that can make them insanely rich, but the reality of the situation is that they have discovered a way to replicate the corruption that exists in the incumbent financial system for much cheaper and in a very short time time. Shitcoins are nothing more than corrupt seigniorage that has been ported to the digital realm. And as we’ve seen in the incumbent financial world, seigniorage is highly profitable for a select few insiders while it lasts. The shitcoiners and the venture funds that enable them have made the conscious decision to become the benefactors of this new form of seigniorage at the expense of retail investors. Fortunately for us, they’ve ruined their own reputations and collective net worth in the process.

Everyone should use the inflation of FTX to notice the scammers caught and how they react. Many of them claim to be shocked that such a thing could happen, but anyone with a partially functioning bullshit meter could have seen this coming a mile away. The signs of abuse were all there. You just had to open your eyes.