What Can We Learn From The FTX Scandal?
Earlier this year, FTX was worth 32 billion dollars. Now? You can get it for free if you are willing to pay its ten billion-dollar debt. How did something like this happen? The story of FTX is one of the most scandalous financial stories ever told. It can teach us some hard truths about crypto, finances, and life. But before we specify some of the lessons we can think of, let’s recap the events quickly.
FTX is a cryptocurrency exchange based in the Bahamas. It was founded by Sam Bankman-Fried, a Jewish guy in his twenties with childish hair nicknamed SBF. SBF came from a lovely Jewish family and grew up on the campus of Stanford University since both of his parents are Stanford legal professors. His Aunt, BTW, is the dean of Columbia University. SBF himself went to MIT, and considered a genius.
This all shows that SBF came from a good family, and until a couple of weeks ago, he was considered as an altruistic and the golden boy of crypto. His good-boy image became very handy when it came to enticing investors, and they came in large numbers in the cheap-money-low-interest climate.
SBF started working in financial investment in 2013 and had an impressive track record in algorithmic trade and in Bitcoin trade. In April 2019, he started FTX in Hong Kong. The company was a great success at the very beginning. When Chinese President Xi Jinping announced his enthusiasm for blockchain technology, FTX experienced a significant boost.
In 2020-2021, when Bitcoin soared, FTX became a major global player. FTX offered sophisticated investments such as Bitcoin options, future contracts, and its own coin (FTT) and launched a series of new coins. The company signed shiny sponsorship deals (MLB, Formula 1 teams, sports stadiums, and more), had great PR, and received the trust of some of the world’s strongest names in Finance: Binance exchange, Sequoia Capital, Third Point Management, Softbank and more. The company moved to the Bahamas, and the future seemed bright.
On November 2nd, Coindesk revealed that Alameda Research, SBF’s trading firm, is holding 14.6 billion in assets that were supposed to be in FTX’s balance sheets. The meaning of that revelation is that FTX was lying in its reports. Afterward, Binance announced that it would sell off all of its holdings in FTX, and FTX took a huge hit. Shortly after, Binance issued a letter of intent stating they would buy FTX but backed down after they found out the company had probably embezzled their client’s money.
In hindsight, all the alarms should have gone on way before. SBF recruited investors using a simple spreadsheet and an amateurish presentation. He also gave them little to no time at all to decide on their investment without conducting proper tests, exploiting their FOMO sentiment. It was published that during an investment meeting on zoom with Sequoia Capital, SBF played League of legends the whole time. Furthermore, investors didn’t get a board seat since, basically, FTX didn’t really have a board: The entire company was run like a frat house by young adults living in their commune in the Bahamas while engaging in a polyamorous relationship with each other!
Crypto was already filled with scammers: Quadriga, Terra Luna, Celsius, Voyager, and more. But FTX’s collapse was a glorious one. If the poster boy of crypto, considered a selfless genius, said that crypto is a scam, and if one of the most credible exchanges was an elaborate embezzlement scheme, how could anyone ever trust crypto again?
However, the lesson is different. First, when enormous amounts of low-interest money were flooding the market, it enticed a lot of scammers who took advantage of people who didn’t understand the technology. Slowly and gradually, these scammers are leaving the market.
Furthermore, this begs the question regarding this kind of custodial crypto services: FTX wasn’t allowed to make investments with other people’s money, but it did it anyway. However, there is a saying in crypto: “Not Your Keys, Not Your Coins.” The whole point of crypto, to begin with, was for people to have control of their money and not the big investment firms. FTX and all of these other scammers are just an evolution of Lehman Brothers, AIG, Fannie Mae and Freddie Mac, and all the other “heroes” of 2008. If you want to hold crypto, hold it in your own wallet! When we store our crypto in a cold-storage wallet, we shouldn’t trust anyone and be safe.