📉What Went Wrong at the $32bn Crypto Exchange that Ended with its Collapse and an $8bn Hole?!

As if 2022’s bear market needed to get any worse, one of the largest crypto exchanges managed to go belly-up. Wiping out billions from rich VCs but also from the ordinary Joe.

Let’s look at the blow-up that was FTX. How did SBF (even the abbreviation of his name makes him sound like a real cool tech bro) manage to fool investors?

For starters, his hairy mane, t-shirts and sneaks were enough for investors to go, yup, he understands tech. Because someone in a starched suit (or anyone remotely well-dressed for that matter) couldn’t possibly understand tech, right?! 

The irony is all around

Since FTX went under last month, it’s become ever so clear that the concentration of power at the top along with a massive lack of oversight has caused gigantic customer losses. Why? Customer’s money (deposits) were being sent around with zero accountability. The very thing crypto was set out NOT to be.

Photo by Ivan Babydov on Pexels.com

The beauty of FTX was that it wasn’t just a broker. It also issued its own currency, gave custody for customers’ assets and (ever so conveniently), it was linked to trading company Alameda. This centralisation (a few with a lot of power) was a whopper contradiction to all things DeFi.

How did $8bn manage to go missing?

You may be asking how on earth FTX ended up with an $8bn hole in its balance sheet but the question we should be asking is how on earth this wasn’t spotted sooner?! 

The answer: we love magical things. We love thinking that new ideas (tech, crypto ect) will transform everything – right away. Whether or not we understand it. We let ourselves be captivated. We also have a habit of ignoring info that would cast doubts over this. 

If it’s too good to be true, it probably is!

This whole blow-up screams similar of what happened back in ’08. Before the crash, a bunch of smartypants came up with something: CDOs. Otherwise known as collateralised debt obligations. What these things did was bundle debt together (like mortgages) into new things which were able to be traded aka on a secondary market. The big selling point? These things would be liquid and – safer, since you’d be diversifying lowering your risk.

Photo by Mikhail Nilov on Pexels.com

And you know how the story ended. Most people fell for it. Only to find out that CDOs were stupidly complex and weren’t that liquid after all. And in the end, instead of lowering risk, it multiplied the risk by 100X. Pulling the entire financial system down with it. The collapse of FTX, which (until Nov) had managed to create an image that it was one of the safest places for digital assets, has led to fears that others could be at risk from their exposure to FTX. And voila, confidence has been destroyed. Just like that.

In our story, combine the crypto fever this with FOMO and greed and you get a scene where investors allowed themselves to get fooled because they thought SBF was the next big thing. The very thing that would net them billions. Ha. How wrong they were. If something sounds too good to be true, that’s because it probably is. SBF was no crypto hero. He wasn’t going to make anyone billions.

He was an outright fraud who ended up scamming their customers. Most of them hard-working, ordinary people. The kind who don’t have massive pockets that they can gamble away a few thousand. And as for investors, time to do some actual DD and not buy-in simply because everyone else is or because you believe his lies.

It’s hard to go against the crowd

Photo by erdinu00e7 ersoy on Pexels.com

FTX’s clients included large financial groups that traded cryptocurrencies, such as hedge funds. The likes of BlackRock, Tiger Global, Inside Partners (and loads more) were all investors – and backers – of the SBF fraudster.

The problem is that when we’re at peak bullishness, it’s so hard to see (or think) clearly. All you see are those $$$ floating around and you can end up believing the lies. (Read here if this is dotcom bust part 2?). And if you think that’s hard, it’s 10X harder to go against the crowd and not back something when everyone around you seems to be doing the opposite. Human psychology is a powerful thing. Don’t underestimate it.

A fund manager who invests in tech start-ups who I was actually meant to intern with back in the summer of 2020 but thanks to covid that didn’t happen. Anyway, he said how he had met with SBF (ugh, this acronym makes him sound too cool) and decided not to invest in him. He didn’t like his chop-and-changing of location. SBF moved from HK to Singapore to the Bahamas. Something smelt fishy.

Photo by Thought Catalog on Pexels.com

But plenty fell for his ‘charm’. And I bet you’re thinking what a bunch of idiots. That that would never be me. And yet, just look at the host of investors that fell for his lies – or wanted to believe them!

If something sounds too good to be true, that’s because it probably is! Something to keep in mind. 

Higher interest rates, that are at levels not seen since 2008, are exposing faults within the system. They’re also flushing out the garbage. The problem with having rates stubbornly stuck to the ground like gum meant the nonsense hung around a lot longer than they should have. 

On the dark side, thanks to SBF and his clown show, crypto took a gazillion steps back. Years of progress was wiped out in a day. Regulation will clamp down and it’ll take time to pick up the pieces.

But don’t that fool fool you. The technology is here to stay. Perhaps it’s time we redefine what crypto actually means.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.