The Bahamas sounds nice this time of year

Aaaaaaand we're back

I know, I know - it’s been a while and a lot has happened. The last time I pushed a post up, the market was hitting all-time highs, inflation was just transitory, we were kinda still wearing masks, and I had just gotten a new job. A hiatus was in order, and while I did not intend to make that a year-long one — here we are. Anyways, nothing to see here, let’s get started.

R.I.P FTX arena

It’s been a year since my last post and in that time it seems we’ve entered some sort of alternate dimension because the current state of the US economy is an exact reflection of what it was this time last year (and aren’t we all). Among the list of reversals is a topic that is near and dear to me… Crypto. As cliche as it is, we are once again reminded that all good things must come to an end. The euphoric highs we once cheered for (and I gleefully wrote about one too many times…) have now come crashing down with a deteriorating market littered with scam after scam after scam. The biggest of which (so far) is the collapse of FTX and the downfall of its leader, Sam Bankman-Fried, or as the cool kids call him, SBF.  

As I write this, news has broken of Sam Bankman-Fried’s arrest. According to Bloomberg, SBF was arrested in the Bahamas after the US government filed a criminal indictment, following weeks of speculation that client funds were misused before his empire’s collapse. If you’re unaware or not caught up with this story, the total value of money lost is estimated to be about $10 Billion in both investor money and customer funds. For a detailed timeline of events, check out Nerdwallet’s breakdown. 

While the scale of this collapse is quite upsetting, it’s important to note that this is an issue with the regulation, or lack thereof, of crypto in general. It’s funny how a movement rooted in decentralization is now being upended by too much centralization. The core parts of crypto, like Bitcoin and Ethereum, are still intact and moving forward, even if hype (and price) has come down. It’ll be interesting to see how the community evolves from here. Back in 2000, there was the dot com crash which was the result of massive hype and bubble among emerging internet companies… sound familiar? What followed were the innovations that have become commonplace in our lives today: Apple, Facebook, Google, Netflix, etc. So I wouldn’t write off crypto entirely just yet.

One thing that was infuriating over the past month in the coverage of this debacle was that many of the major outlets, from the New York Times to the Washington Post, decided to go soft on SBF. For example, from the Times: 

“People can say all the mean things they want about me online,” he [SBF] said. “In the end, what’s going to matter to me is what I’ve done and what I can do.”

He has also found other ways to occupy his time in recent days, playing the video game Storybook Brawl, though less than he usually does, he said. “It helps me unwind a bit,” he said. “It clears my mind.”

For starters, I don’t know why the author chose to keep those quotes in like we had to know what he was doing in his free time, but also the article includes these quotes near the end with no attempt to even ask if SBF had even thought he did something wrong. Not once is there anything said about how far the losses go. It’s one thing to lose investors’ money – this happens all the time and it comes with the risk of making investments – however, it’s another thing entirely to freeze customer accounts and effectively lose their money as well. There are countless individuals that are far from being considered rich that have lost considerable amounts of money in something they thought was safe. You’d think an award-winning publication like the New York Times would spend a bit more time pressing him to get to the bottom of what happened because they believe the people deserve to know the truth as they’ve claimed during the past couple of years. There’s a difference in tone and reporting that has to be pointed out. Here’s an interview with SBF. Notice his reaction when confronted with his actions:

Many outlets have described what happened to FTX as a “bank run” or a “run on deposits,” while SBF has repeatedly insisted the company was simply overleveraged and disorganized. However, it’s clear that what happened involved a variety of conscious and intentional fraud intended to steal money from both users and investors. The funds were sent to the intimately linked trading firm Alameda Research, where they were gambled away, constituting theft at a nearly unprecedented scale. In less than a month, reporting and the bankruptcy process have uncovered a laundry list of further decisions and practices that would constitute financial fraud if FTX had been a U.S.-regulated entity.

How did we get here

While I could write all day about what happened, I want to focus a bit on why it happened. Let's take a step back and look at 2008 when the US economy was in turmoil and the Fed Chair lowered rates to near zero in an effort to stimulate lending and investments. The Federal Reserve (The Fed) is like the bank for other banks. It helps make sure that there is enough money in the economy and that it's not too expensive or too cheap to borrow money. The people who work at the Federal Reserve are like the grown-ups in charge of making sure everything runs smoothly. Among their many tools, they use interest rates to help control the economy. When they want to make it easier for people to borrow money and buy things, they lower interest rates. When they want to slow down the economy, they raise interest rates as they are currently doing. It's a bit like playing with a lever to make a see-saw go up and down. The Federal Reserve is an important part of how the economy works and attempts to keep everything running smoothly. 

This extended low-rate environment led to a flood of money into the markets and one of the longest bull markets in American history. However, the party eventually came to an end with the arrival of COVID-19, which put a nail in the coffin of the financial climate, or so we thought. In an effort to suspend the economy from free fall, the Fed kicked its efforts into overdrive. Suddenly, money was even easier to come by; paired with boosted unemployment, stimulus checks, and PPP loans — cash was flowing. This influx of money led to a rush of capital into the stock market, VC and Private Equity funds, startups, and of course, crypto. And that's where SBF came in. I think it’s safe to say that many investors could sense that the situation was too good to be true, but they got greedy. It's a story we've heard before and it's likely to happen again.

I have to admit that I too was caught up in the glory, but I think collectively we had a sense that the craziness in crypto was too good to be true. One of my favorite shows, Mad Men, takes place in the 60s and I always find it funny how scenes involving doctors in hospitals always make it a point to show them smoking. There was a time when your doctor would tell you that smoking was totally fine and everyone did it. But as time went on, it was discovered that major tobacco companies were not only suppressing research of the serious negative side effects, but they were also effectively bribing doctors to look the other way. I expect the same to happen here. Were smokers shocked to find found out they had lung cancer? Yeah, probably. But did they ever get the sense that smoking was maybe not good for them? Kinda.

Thank You

I wanted my first post back to be about SBF because, in a lot of ways, his downfall and the subsequent collapse of his empire are indicative of where we are today. Even if you weren’t interested in crypto, the rise, and fall of this community, while extreme, exemplifies what happens when you start to drink your own kool-aid. It’s easy to sit back and say that we all saw this coming, but we didn’t. While the world looks to be in turmoil, from rising costs to wars abroad, we look for who to blame (or rather we’re presented with who to blame) without ever asking how we even got here in the first place. Much to think about, but in the meantime, if you have any questions or still want more explanations, comment below, follow me on Twitter, or shoot me an email. I promise to not ghost you this time.