“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

— John J. Ray III (the man who liquidated Enron, the new CEO of FTX and in charge of overseeing the bankruptcy procedures)

This quote comes right out of the 30-page FTX Bankruptcy court filing.

You can also read some of the outstanding excerpts of the court filing here. 🤯

In the November issue of the Ataraxia Financial newsletter, I wrote about the events that took place as the FTX & Alameda collapse was unfolding. You can catch up with the story here. What has happened since then is just a nightmare of mind-blowing crazy revelations.

It is just unbelievable, how these entities were run. The whole story provides a perfect script for an amazing ‘Hollywood Fraudster Blockbuster’ about the story of Sam Bankman-Fried — or more appropriately: Scam Bankrupt Fraud! — so, keep the popcorn ready!

There is a lot of talk about his motives and a lot of the coverage about him is astonishingly still quite positive and forgiving.

In my opinion there is zero justification for what he did and how he didn’t care and disrespected his customers and counterparties.

Scam Bankrupt Fraud subscribed to the ethic philosophy of Effective Altruism.

This wrong-headed philosophy aims at trying to find ways to benefit others as much as possible. The main focus is the outcome rather than the means to attain it.

His belief in this philosophy was often displayed in interviews where he said that he wanted to make as much money as possible with the goal of donating it later and do as much good as he possibly could (and on the way also buy himself and his family luxurious real estate on the Bahamas of course).

If you belief that the ends justify the means, then it makes total sense that he did not care at all that the money he used for his purposes were the deposits of customers that entrusted their funds with his companies.

In my opinion this guy is just a complete scumbag!

The good part of the story is that it weeds out a lot of the crypto clown-show. 🤡

The bad part is, that some good actors have gotten entangled in it as well, or are strongly negatively affected by the massive BTC price decline.

In addition, it will likely also lead to increasing wrongheaded regulations. 😵‍💫

Regulation

“The SEC fails to investigate things that they should and places far too much attention on things that are not relevant. The recent FTX thing I think is an example of that”.

— Elon Musk

There are a lot of voices now screaming for more regulation “to protect the customer”. This is one of those phrase-lines that sound good and everyone who doesn’t think about it would immediately agree.

In reality, the topic is a bit more complicated and it is very questionable, whether regulation a) actually protects the customer, b) what are the actual regulations and c) what other consequences such regulations might bring.

First of all, fraud is a crime, no matter in which jurisdiction. The main crime that happened in this debacle, was fraud.
Hence, there is no further regulation needed. Just execute the regular property and fraud laws that are already in place!

But as Sam Bankman-Fried is still running around and is even invited to the New York Times Dealbook Summit and other platforms who still seem to take this fraudster seriously, it doesn’t appear that the law enforcers are too concerned with someone stealing from customers.

Furthermore, when the news about the FTX exchange first broke, it was assumed that only the FTX main entity, headquartered on the Bahamas was affected and that everything on FTX.US was fine and the funds were secure. Some regulators were actually quick in jumping to point out that it is due to FTX.US being registered and regulated in the U.S. However, as it quickly turned out, the U.S. registered entity was just as involved in the whole scheme.

Thus, it doesn’t apear to have helped customers a lot.

Next, the main regulation that is usually applied when it comes to investments (e.g. hedge funds) is, that only ‘sophisticated investors’ are allowed to invest. Since it is — in a parenting manner — assumed that normal retail investors cannot evaluate the risks correctly. According to Investopia, “a sophisticated investor is a high-net-worth investor who is considered to have a depth of experience and market knowledge that makes them eligible for certain benefits and opportunities”.

However, as it often turns out, these ‘sophisticated investors’ are also just as stupid as anyone else. Bloomberg provides a list of some entities that invested in FTX:

FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.

These are all entities, staffed with well-paid Ivy League researchers and analysts, who are assumed to be the cream de la cream of ‘smart money’. These institutions should have the resources, time and capability of doing appropriate research and due diligence for each of their multi-million investments and know exactly about the risk structure of their undertakings.

The reality, as it turns out, is radically different: Here is an example of how the venture capital firm Sequoia Capital arrived at the ‘sophisticated’ decision, to hand over $150 million to FTX:

After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there
must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.

It doesn’t sound like a very deep and sophisticated approach to me.

This whole “customer protection” talk is really just BS!

Let’s be honest, what those government regulatory agencies are after, is more funding and more power.

Unfortunately, they’re likely gonna get it. The average consumer on the other hand, will be worse off and not better ‘protected’.

Current Market Condition

The question on everyone’s mind is whether the bottom is in, or whether we will go through more turmoil in the coming months.

Here is the typical cycle of market emotions:

It’s hard to say where we are. Maybe at “Capitulation”. 🤔

This would mean, we have one more step down, before entering the next boom cycle.

In my opinion it mainly depends on two things:

• Fed policy: When is the Fed gonna pivot and cut rates?
• Will there be more bankruptcies, leading to more forced BTC liquidation events?

The first question is another topic that I addressed multiple times elsewhere.

The second question is in progress and it is hard to tell at this moment how far it will go.

Last week we saw Blockfi, one of the largest lenders, declaring bankruptcy. It is also kind of an irony, since they were already in trouble just a few months ago after the Luna & Terra collapse and then they were ‘saved’ by FTX. Now their bankruptcy filings reveal that the main reason is the liabilities of FTX.

In other words, they went bankrupt because of their previous savior. 🤣

Some contagions to still worry about are:

• Genesis is the biggest entity that served as the prime broker and was the company responsible for a lot of the yield creation for other platforms. They already halted withdrawals and it appears that they are not going to be capable of honoring their liabilities, if they are not getting a liquidity injection soon.
• There are also some concerns about the Grayscale Bitcoin Trust (GBTC). According to their custodian Coinbase, it appears that they have all the underlying Bitcoin. However, Coinbase did not provide any proof for it (for instance signing a transaction), claiming that such a disclosure would entail risks.
• There are also rumors about a possible Digital Currency Group (DCG) bankruptcy. This is the holding company that owns Genisis, GBTC as well as the Gemini exchange.
• Failure of another major exchange (e.g. Genesis, Coinbase, Binance, Huobi or Bitfinex). I am actually a bit suspicious about Binance recent behavior:
  • They first wanted to buy FTX.
  • Were quite quick of providing a Proof-of-Reserves (but only disclosed BTC assets and didn’t state their liabilities.
  • Engaged in creating a recovery fund
  → to me all these activities seem a bit suspicious and it might be that their finances are also not as strong as they try to make everyone believe.
• A stablecoin like Tether or USDC going bust. There are a lot of rumors, especially about the backing of Tether. I personally don’t think that this is one of the main concerns, Tether already had a massive “bankrun” after the Terra & Luna meltdown, and they were able to pay out all the requests. (I think they are actually way better backed than most traditional banks.)
• Bitcoin miners are under severe stress. They took on risky positions with high leverage during the bull market and face the consequences now. Their problems stem from:
  • High debt levels (often secured with BTC as collateral).
  • High energy prices.
  • A low BTC price.
  • The mining difficulty remains high due to machines that were pre-ordered many months ago but are entering the market now.
  → The liquidation of the assets by bankrupt miners further puts downward pressure on the BTC price.

There are more, but these are the main ones that people are worried about at the moment.

To end it on a positive note: We saw a massive withdrawal of BTC from exchanges and a new record spike in new addresses holding between 0.1 and 1 BTC. This is an indication, that there is a rising awareness of Bitcoins value proposition and the importance of self-custody. 🌱