In the thick of it, illiquidity and insolvency blur. But not after the fact.
As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet” [1].
Before one is insolvent, illiquidity and insolvency are circular questions of asset value. After the fact, it shouldn’t take someone more than a few minutes to come to a conclusion. (There is a deeper discussion on the folly of accepting as collateral assets correlated with confidence in oneself. I recommend reading the article.)
> 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.
FTX going under due to magic beans reminds me so much of Lehman Brothers going under in 2008. That time the magic beans were "mortgage backed securities" that somehow took low-quality debt, mixed it up with some magic, and out came high-quality debt, only it didn't.
The problem with MBS was always the zero-sum nature of the alchemy. They took 100 low-quality loans in, and returned 10 high-quality loans, 30 ok-ish loans, and 60 dog-shit loans. No harm no foul, until the dog-shit tranches were marketed as ok-ish, and alchemists believed they we're really creating gold.
It feels magical, but that part is actually fine. The senior claims on that combined debt really can be pretty high quality. The junior claims are dogshit though.
There are already a lot of replies, so maybe it is pointless adding my own . . . My understanding of the problem with mortgage backed securities was that the calculations assumed the risks on the low-quality debt was uncorrelated. If that were true, all of the math works out, and there is no problem with mortgage backed securities. The reality was/is, however, that the risks on those loans were, in fact, highly correlated. The conditions that caused one loan to default also made it much more likely that others mixed up in the pot would also default. In that case, the math was wrong and the magic failed. I suppose we could argue all day about whether that was an honest mistake or deliberate manipulation.
"Certainly more study is needed on this issue. But the degree to which the Community Reinvestment Act (renewed and strengthened in 1995; see attached chart), the Home Mortgage Disclosure Act and the many other planks of the raft of federal regulation which have built up over the past couple of decades has pushed the banking industry into making the loans for which they are now being criticized is far and away the most under covered aspect of this story. "
"All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money."
That’s why I hate when people in these discussions refer to needing/providing “liquidity”. It feels like such a weasel word. Unless you know enough to conclude it’s really a cash flow mismatch, then don’t mince words or overcomplicate it.
Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. Maybe they just need a giant dump of free cash.
But it’s money they need. To weasel it away as “liquidity” is to assume something you probably have no way of knowing until later.
It was particularly dubious in the case of FTX, whose assets were in popular cryptocurrencies, which are traded every millisecond. You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
“No, no, the fair market price is actually much higher, it’s just that there’s only one guy who would actually buy it all right now!” No. Stop. We already have a word for an asset that exactly one person wants to pay a positive price for: worthless (because they only have to outbid everyone else).
I agree "liquidity" is a cop out implying they need time to sell things.
In my case I deposited some USDC coins and have asked them to return said USDC coins but it seems no. I think theft is a more accurate term. As in we stole some customer funds to gamble with and having lost them need more funds to cover it up. Not really "liquidity".
This is somewhere between a gross oversimplification and wrong. Sure, most problems can be solved by “money” — if someone just gave FTX $10bn in the form of a wire, they’d probably be fine. But this misses the point.
If a bank holds short term debt, due in one week, but a customer is withdrawing funds now, the bank needs liquidity — they need dollars today, and all they have is dollars next week. If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money. There are many ways a financial company can fail, and lumping them all together as “money” loses all nuance and understanding.
Liquidity means something though. Think of a bank. If everyone withdraws their funds at the same time they may not have the liquidity to pay out. In order to be able to pay out everyone at the same time, they would need to keep it all uninvested/unlent, and then charge you a banking fee instead of paying you interest on it. So there is a tradeoff there.
> You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
this is extremely stupid. you can't just sell arbitrary amounts of coin without moving the market a ton and paying a fortune in slippage. they do need liquidity.
So if I go to the loan shark, borrow money and stick it on a donkey the 10:15, if I get lucky and the donkey wins, I was just illiquid, but if he collapses half way around the course, I was actually insolvent.
> The problem is that FTX took its customers’ money and traded it for a pile of magic beans
Yup. Just yet another bank leveraging its fractional reserve. They just can't resist, can they? Actually I'm not even sure they're fractional in the case of cryptocurrency exchanges. Wouldn't be surprised if they were gambling with their entire reserves.
Yet another asset custodian that wasnt happy to only make a billion a year so pretended to be a bank pretending to be an investor while actually just being a degenerate gambler with a hooker, blow, yacht and team / stadium naming rights buying problem.
What's even more funny is that Binance make it look like they are a stable financial institution, and it's thanks to their high standards that they won't acquire FTX.
Binance is most probably much more of a fraud than FTX.
Binance doesn't even have physical headquarters in any country in this world - and the reason is that they are being actively investigated or banned almost everywhere.
I don't know about it, Binance has become a gold standard in crypto exchange business. Here on HN it was always about Coinbase likely because its an American company but for the rest of the world, it's all about Binance and the rest of the world is huge. How huge? About an order of magnitude to Coinbase.
Binance does have significantly lower trading fees than coinbase - so while they do have about 8x the trade volume, it's not exactly an apples to apples comparison, because lower fees mean tighter spreads and more money bouncing around within the system per unit of (deposit -> withdrawal in different currency)
So, I'm not sure "an order of magnitude larger" is necessarily an accurate description. Wouldn't say it's inaccurate either, but just missing some nuance.
mtgox was bigger too. There are other reasons for a crypto winter like high interest rates and a newly credible us central bank.
Rest of the world is not bigger when it comes to non residential real estate: private equity, venture, tech, finance.
Correct until the last I think. Every exchange is looking international because they know what you’re saying too. If Binance goes, there’s a mix of enough international toeholds from regulated exchanges and enough defi to keep the markets live.
All exchanges suffer the same fate. There is just no reason for exchanges to be solvent. The industry is unregulated and there is too much money to be made. Binace will go. Coinbase will go.
I believe "crypto" will always be around. It's an MLM for the digital age. It will always be nonsense.
They are banned mainly because they like to skirt KYC and similar regulations. It doesn't mean their financial engineering is poor. Those two issues are completely orthogonal.
Binance KYC's process is a joke. I've been using them for years, suddenly they needed more KYC and their automated process failed me more than 4 times in couple of months.
Glad they failed me though, life turned out pretty great without me gambling on
meme coins.
The question in my mind with Binance is how reliant they are on BTC. The non-BNB part of their SAFU (a pair of wallets they call an emergency insurance fund) is roughly half BTC, the other half being BUSD which I wouldn't 100% trust if Binance was in trouble. Could they survive a FTX-style panic if BTC had dropped below $10k? I hope so, at least.
Why does anyone trust Binance either? They’re notoriously shady about where they operate and what assets they actually hold, to the point that they’re officially not headquartered anywhere.
If you have $100k at Binance, is there any reason to believe you could withdraw it tomorrow? Any contract you may have with Binance is made with a local shell company that could just as well be a hot dog stand. Any money you’ve sent them is effectively nowhere.
FTX was supposed to be above the board and they collapsed in a day. A few months ago FTX was the white knight buying out distressed crypto companies. Why would Binance do any better?
Why did anyone trust FTX either? The trust was really based on the credibility of the person running it, and the fact they had bailed out some other failing exchanges. But there were no hard facts.
In fact it seemed like all it took was a public quarrel with the founder of another exchange to start the ball rolling toward total collapse -- again, because it was all based on personal credibility.
> the fact they had bailed out some other failing exchanges
That happened after they were buying stadiums and had a Larry David spot on the superbowl. They were the archetypal dumb money, top of the bubble, company. No one should be surprised they couldn’t handle a financial stress test. Sam was great at PR and maybe not much else?
This year this guy has been on every major podcast being touted as a genius philanthropist / “good” capitalist. Remember he just crashed TWO companies. Alameda and FTX. The bubble keeps popping. I’m curious who’s next. This almost certainly will ripple beyond crypto to general tech companies given how.. all the top VCs have billion dollar funds in crypto as my “exhibit A”
They slowly built/clean their reputation, bitcoin going up to 70k made everyone just forget the past.
But yeah, they are probally the most shady ones, but the fact they actually have no offices and no govs after them, makes it easier to hide your operations, its the same for tether that has managed to get so big with absolutely no offices, no employees or anything.
The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.
Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.
There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by design. Coinbase, to their credit, lost business to the cexes and FTXs for not allowing derivative and defi lending / margin trading. So the customers should have known the fatalistic game they played.
>In fact “gambling with customer funds” was by design.
This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis.
It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.
The issue wasn't the bank run. FTX could just have halted withdrawals, CEX do it all the time. The issue was FTT collaterized loans or equivalent, because they gambled too hard. And I doubt their users were aware of the risks, sBF himself guaranteed on Twitter the day before.
Bank runs are wrong for exchanges. They never should have fractional reserves.
And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?
FWIW you can subscribe to Matt Levine’s column as email newsletter without being a Bloomberg subscriber. (That doesn’t help for reading already-published columns, but of course there are other ways around paywalls.)
No, FTX was making bank in fees. They just got greedy and loaned customer funds the SBF’s hedge fund to gamble with. Hedge fund went bust and now the loans default and the collateral which was just funny money to begin with is worthless.
>The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.
Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.
What always surprises me why does anyone feel the need to steal from users when you are literally "the house" - you are taking a fee on every transaction. Just like in poker - if you are the house, you don't need to take risk by playing at the tables.
FTX was probably hugely profitable before they started stealing.
I’m not sure what you mean by this exactly. Many of the things they said to the public are not true, but these currencies use permanent, public ledgers, so you can see where the money goes if you look carefully.
CZ knew about the bad leverage to begin with, which is why he tweeted about selling all of the FTT
What are the chances he never intended to buy FTX, just to destroy it after their public back and forth? It's almost like a reverse Musk - he sent a purchase offer with an option to back out no matter what
CZ knew from day 1 all he needed to do was crash FTT just enough, and the rest would happen organically
I called it and saw many others call it too. Cause a run on FTX, get due diligence and say it’s F**ed, and get their user-base for free.
My concern is how much funding FTX and SBF in particular were giving to EA/AGI Safety research labs and charities. There’s going to be some significant knock on effects there when the money is no longer available.
What user base? FTX is unable to process withdrawals right now (and who knows if they ever will be), so the money's gone meaning users won't simply migrate to Binance.
CZ seems like a genius, but I'm sure he's panicking now, he doesn't benefit from killing the whole alt-coin world - which increasingly looks like happening.
I think FTX was a very big threat to Binance AND the whole crypto ecosystem. After making sure everything was or could become (practically, at any other event where FTT would crash) insolvent under the hood, CZ went on and killed FTX and actually saved a MUCH, MUCH bigger industry collapse that was impending as FTX went bigger and bigger.
Not to defend him and I also agree that Binance benefited by killing its biggest enemy while still suffering himself as industry collapsed, but if this event didn't happen today, much worse would have happened in the future affecting literally everyone much worse.
Seems pretty likely. The moment FTX publicly accepted the buyout idea they were doomed as a company, it wouldn't have mattered if Binance actually bought them after that.
Just a PSA for any FTX users out there: please make sure you get details of your balances, deposits, withdrawals and trade history whilst the site is still up.
You can download it as a CSV - I'd also take screenshots to be on the safe side.
Save yourself a potential headache when you come to do your taxes down the line.
^ This I had sparse information for the first OG BTC lending website and that information would’ve been super useful to all sorts of three letter authorities in retrospect. It was only $7500 at the time but that has slightly ballooned over the years
It's amazing how all of this was based on personal credibility, and a single Tweet caused the death spiral to start.
Wells Fargo isn't going to go out of business if the CEO of Bank of America insults it on Twitter. But even if it did, there is FDIC insurance for deposits, and nobody whose balances were under the insurance limits will lose a penny.
FTX succeeded solely based on the reputation and personal credibility of its founder. One tweet from the CEO of a rival exchange and the whole thing came crashing down, taking a significant bite out of the value of many cryptocurrencies. So, even people who didn't have accounts at FTX are hurt by their assets losing value.
It's not based on personal credibility, it's based on regulation. Wells Fargo wouldn't collapse because it's regulated and has some actual provable guardrails in place.
No surprise whatsoever. They killed a competitor, avoided being on the hook for ~$6B in missing funds and without paying anything they are basically inheriting all FTX customers still happy to trade crypto. FTX or whatever is left will be under massive legal scrutiny for years to come. The "institutional investors" they were attracting and lobbying for are the kind of folks you don't want legal battles with.
Meanwhile, FTX is still operating (!), accepting new users and accepting customer deposits even though it is insolvent. If you haven't been following the crypto news much or aren't on Twitter, you will have received ZERO direct communication from FTX that they are insolvent (not even an email). This is coming from someone who went on the record[0] trying to lobby, blaming the financial industry for lack of transparency and taking on too much risk and publicly lying that FTX doesn't use customer funds to trade (tweets have since been deleted)[1]
Readit News
As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet” [1].
Before one is insolvent, illiquidity and insolvency are circular questions of asset value. After the fact, it shouldn’t take someone more than a few minutes to come to a conclusion. (There is a deeper discussion on the folly of accepting as collateral assets correlated with confidence in oneself. I recommend reading the article.)
[1] https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...
> 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.
I suppose he was right ;)
https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm...
https://twitter.com/HaloCrypto/status/1590417311839981569
https://www.cnbc.com/id/25195425
It's amazing how the government somehow managed to successfully pin all the blame on corporations for problems it helped cause. From wikipedia: https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
"Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities."
Of course, it was the government itself that pressured banks to make these loans in the first place. From https://www.appeal-democrat.com/thomas-sowell-government-cre...
"All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money."
Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. Maybe they just need a giant dump of free cash.
But it’s money they need. To weasel it away as “liquidity” is to assume something you probably have no way of knowing until later.
It was particularly dubious in the case of FTX, whose assets were in popular cryptocurrencies, which are traded every millisecond. You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
“No, no, the fair market price is actually much higher, it’s just that there’s only one guy who would actually buy it all right now!” No. Stop. We already have a word for an asset that exactly one person wants to pay a positive price for: worthless (because they only have to outbid everyone else).
Sorry, /rant
In my case I deposited some USDC coins and have asked them to return said USDC coins but it seems no. I think theft is a more accurate term. As in we stole some customer funds to gamble with and having lost them need more funds to cover it up. Not really "liquidity".
If a bank holds short term debt, due in one week, but a customer is withdrawing funds now, the bank needs liquidity — they need dollars today, and all they have is dollars next week. If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money. There are many ways a financial company can fail, and lumping them all together as “money” loses all nuance and understanding.
this is extremely stupid. you can't just sell arbitrary amounts of coin without moving the market a ton and paying a fortune in slippage. they do need liquidity.
Yup. Just yet another bank leveraging its fractional reserve. They just can't resist, can they? Actually I'm not even sure they're fractional in the case of cryptocurrency exchanges. Wouldn't be surprised if they were gambling with their entire reserves.
https://news.ycombinator.com/item?id=33524912
https://www.youtube.com/watch?v=g4IQjUpTNVU
Binance doesn't even have physical headquarters in any country in this world - and the reason is that they are being actively investigated or banned almost everywhere.
If Binance goes, crypto isn't coming back.
This was FTX and Alameda like a week ago.
So, I'm not sure "an order of magnitude larger" is necessarily an accurate description. Wouldn't say it's inaccurate either, but just missing some nuance.
Interesting statement for a decentralized asset
Also, cryptography isn’t going anywhere.
I believe "crypto" will always be around. It's an MLM for the digital age. It will always be nonsense.
Bitcoin, however, I do believe is different.
No regulations, no protections, only idiots "invest" in this garbage.
It's just one scam after another
Glad they failed me though, life turned out pretty great without me gambling on meme coins.
It is one of the toughest licenses to get in the world, so I would be surprised if BUSD somehow collapses.
That's not an indication of anything wrong with Binance. A more plausible explanation is that the laws are too oppressive "almost everywhere".
If you have $100k at Binance, is there any reason to believe you could withdraw it tomorrow? Any contract you may have with Binance is made with a local shell company that could just as well be a hot dog stand. Any money you’ve sent them is effectively nowhere.
FTX was supposed to be above the board and they collapsed in a day. A few months ago FTX was the white knight buying out distressed crypto companies. Why would Binance do any better?
In fact it seemed like all it took was a public quarrel with the founder of another exchange to start the ball rolling toward total collapse -- again, because it was all based on personal credibility.
That happened after they were buying stadiums and had a Larry David spot on the superbowl. They were the archetypal dumb money, top of the bubble, company. No one should be surprised they couldn’t handle a financial stress test. Sam was great at PR and maybe not much else?
This year this guy has been on every major podcast being touted as a genius philanthropist / “good” capitalist. Remember he just crashed TWO companies. Alameda and FTX. The bubble keeps popping. I’m curious who’s next. This almost certainly will ripple beyond crypto to general tech companies given how.. all the top VCs have billion dollar funds in crypto as my “exhibit A”
But yeah, they are probally the most shady ones, but the fact they actually have no offices and no govs after them, makes it easier to hide your operations, its the same for tether that has managed to get so big with absolutely no offices, no employees or anything.
Both are best friends.
Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.
If you have a subscription I recommend it. - https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...
This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis.
It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.
And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?
Turns out, they were a Monopoly money printing machine.
Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.
Is there any reason to believe there were any profits ever?
FTX was probably hugely profitable before they started stealing.
It seems naive to me.
https://www.dailymotion.com/video/x225si7
They were making insanely leveraged bets on real assets.
FTX seems to me to much closer to Madoff.
They were printing their own Monopoly money and pretending it was worth billions.
What are the chances he never intended to buy FTX, just to destroy it after their public back and forth? It's almost like a reverse Musk - he sent a purchase offer with an option to back out no matter what
CZ knew from day 1 all he needed to do was crash FTT just enough, and the rest would happen organically
My concern is how much funding FTX and SBF in particular were giving to EA/AGI Safety research labs and charities. There’s going to be some significant knock on effects there when the money is no longer available.
Did a malicious AI orchestrate this downfall?
If they are not part of a university, it is probably pretty sketchy anyhow.
Not to defend him and I also agree that Binance benefited by killing its biggest enemy while still suffering himself as industry collapsed, but if this event didn't happen today, much worse would have happened in the future affecting literally everyone much worse.
You can download it as a CSV - I'd also take screenshots to be on the safe side.
Save yourself a potential headache when you come to do your taxes down the line.
Deleted Comment
Wells Fargo isn't going to go out of business if the CEO of Bank of America insults it on Twitter. But even if it did, there is FDIC insurance for deposits, and nobody whose balances were under the insurance limits will lose a penny.
FTX succeeded solely based on the reputation and personal credibility of its founder. One tweet from the CEO of a rival exchange and the whole thing came crashing down, taking a significant bite out of the value of many cryptocurrencies. So, even people who didn't have accounts at FTX are hurt by their assets losing value.
In that context, it’s not so surprising that a tweet had the effect it had.
This is why so many people compare crypto to the pre-regulation banks, and why they predict a similar fate for the exchanges.
Deleted Comment
https://twitter.com/cz_binance/status/1589283421704290306
For context this tweet is referring to reports that a very large percentage of Alameda's holdings are FTT.
Deleted Comment
Meanwhile, FTX is still operating (!), accepting new users and accepting customer deposits even though it is insolvent. If you haven't been following the crypto news much or aren't on Twitter, you will have received ZERO direct communication from FTX that they are insolvent (not even an email). This is coming from someone who went on the record[0] trying to lobby, blaming the financial industry for lack of transparency and taking on too much risk and publicly lying that FTX doesn't use customer funds to trade (tweets have since been deleted)[1]
[0] https://twitter.com/HaloCrypto/status/1590417311839981569
[1] https://cointelegraph.com/news/ftx-founder-sam-bankman-fried...