What we’re reading (11/14)
“FTX’s Balance Sheet Was Bad” (Matt Levine, Money Stuff). “[T]he basic question is, how bad is the mismatch. Like, $16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable. $16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad. $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like ‘well we do have $5 billion of this Serum token we made up, that’s something?’ No it isn’t!”
“The Risky Business Of Sam Bankman-Fried” (Wall Street Journal). “Nobody as rich as Sam Bankman-Fried ever spent so much time speaking to podcasters and explaining how they got rich. Weeks before the crackup of his cryptocurrency exchange and spectacular collapse of his wealth, the chief executive of FTX gave an interview that began with an illuminating question: What was the first thing his company did better than any other? ‘Manage risk,’ he said.”
“Who Bears Blame For FTX’s Failure?” (Dealbreaker). “Any time there is a boom cycle like this, otherwise smart investors do dumb things because they see their pals and peers piling in and worry they will be left out. Envy is a pernicious quality — and one that is all too human.”
“Crypto Regulation Bleg” (Scott Sumner, Econlib). “Now there is a call to regulate the crypto industry: I’m wondering if this is just a knee jerk reaction, or if there is some market failure that I missed. A few comments: 1. It’s perfectly legal for Americans to invest in all sorts of extremely risky ventures, such as biotech start-ups. Most of these firms fail, while a few achieve great success. To use the terminology of administration officials, “Americans get harmed” when risky biotech start-ups fail. Yes, investors understand that biotech is risky, but I’d say the same about crypto. 2. It’s perfectly legal to lend money to high-risk businesses, where the loans may not be repaid. Remember junk bonds? 3. Fraud is already illegal.”
“A Cryptocurrency Billionaire Implodes, Showing That The Whole Field Is Built on Quicksand” (Los Angeles Times). “At that conference [the Bloomberg crypto conference in August] — which took place in the teeth of the crypto meltdown — he [SBF] even acknowledged, in his charmingly modest manner, the vacuum at the heart of the entire crypto system: No one has yet explained what bitcoin and other virtual currencies are good for in the real world.”
