Bitcoin, Ethereum, Luna, FTT -- everyone has heard of cryptocurrencies over the past few years. The decentralized digital currency market, while a subject of numerous memes, has also just experienced a multi-billion dollar collapse. This implosion was due to the bankruptcy of one of the biggest crypto trading companies, FTX.
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| FTX founder, Sam Bankman-Fried |
It turns out, people were pulling out money FTX did not have (classic). The Wall Street Journal reported that FTX had used its users' investments for “risky bets” tied to the company Alameda. On November 11, FTX declared bankruptcy, being valued at $32 billion only months ago. More than a million investors in FTX have had their assets frozen or lost, as “Reuters reports that between $1 billion to $2 billion of customer funds have vanished from the failed crypto exchange.”
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| Steph Curry in an FTX commercial |
Marketed as a “safe, easy” way to get into crypto, FTX is now being investigated for fraud. Bankman-Fried, along with celebrities who helped promote FTX, including Tom Brady, Stephen Curry, and Shaq, were named as defendants in a class-action lawsuit, with investors comparing FTX to a Ponzi-scheme “designed to take advantage of unsophisticated investors from across the country.”
Although this ordeal will not end the crypto market, it raises further questions about its reliability. There has always been an air of skepticism regarding online currencies (Elon Musk literally called Dogecoin a “hustle” on SNL). I mean, how many people really know what cryptocurrency is and how it works? The public is already aware of crypto’s volatility, but FTX was supposed to be the “reliable” company. What is clear is that if the market is going to recover from this scare, there needs to be much more transparency to build up investors’ trust. Crypto is inherently risky -- there may be no way around that. But a good place to start might be letting users know where their money is going and not secretly transferring $10 billion of it to a separate company.
This issue also has connections to recent elections. Bankman-Fried “helped bankroll Democrats’ overperformance in the midterms” contributing “more than $40 million to Democratic candidates and a network of super PACs that promoted crypto and public health policies.” In exchange for writing multi-million dollar checks for politicians, Bankman-Fried became the number one guy for politicians to turn to when making new policies regarding crypto. But any influence he had in Washington has quickly disappeared. It turns out you can buy influence, but politicians will likely tread lightly dealing with crypto and crypto magnates in the future.
Sources:
https://www.cnbc.com/2022/11/12/1-billion-to-2-billion-of-ftx-customer-funds-missing-report.html
https://www.cnn.com/2022/11/18/business/ftx-crypto-downfall-explained/index.html
https://www.politico.com/news/2022/11/10/crypto-megadonor-sam-bankman-fried-00066062
15 comments:
FTX's collapse highlights the overhype in both cryptocurrency and the tech industry's glorification of risky new technologies. Going forward, the crypto industry needs to be better regulated so that such risky investments are prohibited to protect the money of customers. While investors understand the risks, customers should never have to lose significant amounts of money deposited in an exchange. Does this industry really add any economic value, or is it really just a giant unstable casino where only a small number of people will get rich?
It's pretty insane that Bankman-Fried managed to lose 10 billion dollars of investor and consumer money. Seriously though, everyone is wondering: Where did the money go??? The downfall of FTX certainly does highlight the risks of crypto. If Elizabeth Holmes is going to jail for 11 years for the Theranos debacle, Sam Bankman-Fried is in some real trouble.
As an individual learning the baseline of investing and the crypto market, this post is an excellent reflection of the risks and tragedies that occur so quickly in the market. While the info of the who, what, when, and how is extremely important in building up the knowledge of how FTX fell apart with their investments going into a completely different company, it is most important to note the connection to campaign contributions, mentioned at the bottom of the post. As the course has started to get into information regarding the Citizens United Case and the Federal Election Commission, Bankman-Fried’s contributions to the Democrat party are essential to note. His $40 million contributions to Democrat candidates and a network of super PACs reflects risk with significant multi-million contributions from major companies. For now, nothing can be done, but as the post states, knowing where campaign contributions come from for influence on major topics might be necessary, as users should know where their money is going. Maybe Bankman-Fried is not the best individual for politicians to turn to when making new policies that regard crypto.
With the collapse of FTX and the partnerships Bankman-Fried formed with some of the biggest celebrities and media influences (as Niki mentioned), I wonder how extensive the consequences for Bankman-Fried will/can be. Involving FTX's name with these superpower influences likely gives the company some credibility and leeway that Bankman-Fried can fall back on in court. Along with this, it is clear that he has integrated himself with the elites of Washington through his "40 million dollars" donations to the democratic party, which will prove valuable on a national level. As of now, it seems impossible to bring justice to Bankman-Fried with the connections he has made along with the completely unregulated crypto market. Many are trying to compare this to Theranos, in which founder Elisabeth Holmes was recently sentenced to 11 years for deceiving investors about the purported efficacy of her company’s blood-testing technology. This is a completely different situation, as crypto is virtually uncontrolled, signaling difficulty in proving prosecution claims against Bankman-Fried. Big investors in FTX like Kevin O'Leary want to campaign in Washington for regulation in Crypto after the fallout, but that seems implausible with the out-of-touch politicians (OLD) we have now.
The concept of crypto is to be a decentralized currency away from government control to protect itself from issues like inflation, which has proven to be a risk without the backing of a major established organization like the US government or a bank. In an attempt to get away from politics and regulation Crypto has found itself in the middle of many pushing for stronger regulation. FTX is the definition of this as it was a company located in the Bahamas that couldn't handle a bank run and process enough withdrawals from a lack of liquidity. If anything users should know what they are getting into with crypto rather than just jumping on the trend. Whether or not Crypto should be regulated is a difficult question as it might lose the original purpose of a blockchain-based investment, those it seems right now many are disillusioned at a loss of security. Major reform would probably have to go through the many companies that run crypto trading and ensure they have the right procedures in place to protect customers from issues like this in the future.
Bankman-Fried is a hilarious addition to the recent trend of billionaires failing. Mark Zuckerberg and Elon Musk have similarly lost significant amounts of money in the recent weeks. There is a very prevalent myth that these CEOs are "self-made" but I believe their recent disasters will challenge this myth. Many billionaires made their money by accident and are incompetent leeches who are terrible at being rich. They make rash decisions simply to boost their own egos with little regard for their shareholders. I pity the people who invested in these companies but I can't help but laugh at rich people humiliating themselves.
With the fall of FTX, trust will have to build up again. For the celebrities who endorsed the company it's in their best interest to get themselves out of this situation, they're likely to be investigated. The media could use this against the endorsers, who are high-profile athletes. The lawsuit against them argue that their fame and reputation is used to take advantage of, essentially, fans. Blindly investing money and yielding unsatisfactory results will decrease the trust of the public in the celebrity endorsers and the crypto market.
FTX is a prime example of researching before investing. Many news source are now reporting that FTX showed red flags long before its big crash. The news sources mainly emphasize that FTX essentially bought their way into become a "regulated" cryptocurrency exchange. Through various acquisitions and "bribes" FTX became quickly became a crypto power house. I think the funniest thing is that Sam Bankman-Fried's mother, Barbara Fried, is a tax specialist with a education based on moral philosophy and his father, Joseph Bankman, helped write a tax legislation.
Sam Bankman-Fried once touted himself as a flagship for "effective altruism"--he said he'd use his money from FTX to contribute to social causes. The amount that FTX's officials donated to political campaigns before the scandal was roughly 70 million USD. Like Truman said, Bankman is a hypocrite, scammer, and, hopefully a convicted criminal soon.
Cryptocurrency is something that has obvious risks. However, it's ridiculous that a risk could be having your money funneled into some random company that you had no intention of investing in or supporting. This is an abuse of power on Sam Bankman-Fried's part. Because he has an absurd amount of money, he thought it would be okay to mistreat the already skeptical system. While this trend of billionaires abusing their power will most likely continue, hopefully this will serve as a lesson to people about the dangers and risks of investing, and also as a reminder to CEOs that actions have consequences.
The nature of cryptocurrency is inherently very volatile. It's supposed to be decentralized with no third-party intermediary, but in this case, FTX is an exchange platform for the crypto that users store on it. This slightly defeats the purpose for crypto, and makes it susceptible to third party interception, consequences which are seen through this scandal. The irony is that people turned to crypto to get away from potentially corrupt or unreliable government maneuverings with fiat money, and in exchange got some irresponsible billionaire losing all their money. It's interesting that people's options are either billionaire or banks, corporations or the government. This also calls into question the actual level of "decentralization" of cryptocurrency if it's susceptible to fraud like this.
FTX's crash was a long time coming. FTX had to back their multi-billion dollar company with something called FTX tokens which helped show its stability as a company while their actual cash went to Alameda research to be used in risky bets that did not pay off. FTX did not just randomly crash out of nowhere because of no one using their service it was actually caused by Binance one of their competitors after their CEO Changpeng Zhao heard FTX talk bad about him so he went off Twitter and was announcing that he will sell his companies worth of FTX tokens and everyone that follows him to do the same. The mass selling of these tokens caused the value of the token to crash. So Sam doesn't lose all of FTX he tried to negotiate a deal where Binance buys FTX, but after Binance looked at FTX's booking realized they were fraudulent and backed out causing the company to go bankrupt. With FTX looking as a scam now questions are being asked on why he hasn't been arrested and why he is still allowed to be living in his penthouse in the Bahamas there are many theories such as because of the donations he has given to both sides of the political spectrum they are protecting him.
This is just another great, but rare example of billionaires dealing with the consequences of their actions. Being investigated for fraud is very important, considering that such incredibly large sums of money can only be gained in such a short amount of time through deception and taking advantage of the public. I also thought their advertisements were interesting since as stated in this article, they are persuading gullible investors without giving them the true facts of the process of investments. Additionally, this wave of panic mirrors the Panic of 1930 before the Great Depression (even though that happened on a much larger scale), and how as people grow more anxious about the security of their money and take their funds out, it can actually harm their banks since millions of dollars were lost within this process.
It’s really interesting because I remember asking my father what Bitcoin really is a couple of days ago. I remember asking what exactly a bitcoin is, how do people get one, and how much is one actually worth? What is it in general, and what is up with the hype? I’m genuinely really confused and intrigued by the rise in cryptocurrency in this nation. Similar to the FTX situation, but also quite different, my mother’s friend had invested some money into this cryptocurrency thing a while ago, and she spent like 20,000 and then the company got into some trouble with fraud or something, I don’t quite remember the company, but it definitely was not reliable. The money she lost was said to be refunded, but so far she has only got 14 K back, which is still not the full amount, which his company had promised. She is indeed very lucky that the government was able to give the money that she had lost because there was a high possibility that she had completely lost 20K to this company that just took money from just a bunch of people without guaranteeing the reliability of their cryptocurrency. I was also kind of funny because I remember seeing a picture of the company going out of business and having to lay off a bunch of people, and there was a pic of a blurred out face walking out of the building. I remember my father remarking that they are so embarrassed, they cannot show their face. I believe that people should be more careful when it comes to investments because you never know how reliable the company you are investing in is, which could result in possible fraud.
With the collapse of FTX and the partnerships Bankman-Fried formed with some of the biggest celebrities and media influences (as Niki mentioned), I wonder how extensive the consequences for Bankman-Fried will/can be. Involving FTX's name with these superpower influences likely gives the company some credibility and leeway that Bankman-Fried can fall back on in court. Along with this, it is clear that he has integrated himself with the elites of Washington through his "40 million dollars" donations to the democratic party, which will prove valuable on a national level. As of now, it seems impossible to bring justice to Bankman-Fried with the connections he has made along with the completely unregulated crypto market. Many are trying to compare this to Theranos, in which founder Elisabeth Holmes was recently sentenced to 11 years for deceiving investors about the purported efficacy of her company’s blood-testing technology. This is a completely different situation, as crypto is virtually uncontrolled, signaling difficulty in proving prosecution claims against Bankman-Fried. Big investors in FTX like Kevin O'Leary want to campaign in Washington for regulation in Crypto after the fallout, but that seems implausible with the out-of-touch politicians (OLD) we have now.
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