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Comment by mumbisChungo | Hacker News Reader

The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.

Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.

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There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by design. Coinbase, to their credit, lost business to the cexes and FTXs for not allowing derivative and defi lending / margin trading. So the customers should have known the fatalistic game they played.

If you have a subscription I recommend it. - https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...

FWIW you can subscribe to Matt Levine’s column as email newsletter without being a Bloomberg subscriber. (That doesn’t help for reading already-published columns, but of course there are other ways around paywalls.)

I bit the bullet and pay for Bloomberg now, it's too good too consistently.

>In fact “gambling with customer funds” was by design.

This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis.

It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.

> ... it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis.

Anyone in crypto who makes this assumption about any other entity in crypto is either brand spanking new or a fool.

Unfortunately this is not true in this case.

Folks who have been in the industry for 10 years, many very publicly cynical, had assets on FTX. It was viewed by many as the safest CEX in the industry.

I'm a bit more paranoid, so I maintain self-custody 100% of the time unless I'm using an on/off-ramp, but some very bright, very oldschool folks got caught up in this one.

Right so they didn’t invest customer assets, they just loaned them to themselves in exchange for their own token so that they could invest the customer assets.

https://archive.ph/CxJqM

The issue wasn't the bank run. FTX could just have halted withdrawals, CEX do it all the time. The issue was FTT collaterized loans or equivalent, because they gambled too hard. And I doubt their users were aware of the risks, sBF himself guaranteed on Twitter the day before.

Bank runs are wrong for exchanges. They never should have fractional reserves.

And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?

Bloomberg is currently the only news source I feel makes me smarter after I read an article.

> FTX was a money printing machine

Turns out, they were a Monopoly money printing machine.

No, FTX was making bank in fees. They just got greedy and loaned customer funds the SBF’s hedge fund to gamble with. Hedge fund went bust and now the loans default and the collateral which was just funny money to begin with is worthless.

If you believe FTX at all. These companies are riddled with fraud. Nothing they say or have said can be trusted (including reported earnings), and Tether and Binance will be next to collapse, at which point the ecosystem around Bitcoin will implode.

>The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity.

Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.

> Where were their profits derived?

Is there any reason to believe there were any profits ever?

Of course. They were one of the highest volume exchanges, taking a % of every transaction.

Unfortunately, they got greedy and started lending money (to themselves in Alameda, where it was gambled away)

They started AS Alameda and THEN made an exchange to facilitate their trades. They did not exist for any other purpose than doing the good old Tether + Bitfinex = iFinex.

Trading fees on billions of dollars of volume.

In this case, where do the liabilities come from?

Edit: nvm I guess this thread is about FTX's original business model

What always surprises me why does anyone feel the need to steal from users when you are literally "the house" - you are taking a fee on every transaction. Just like in poker - if you are the house, you don't need to take risk by playing at the tables.

FTX was probably hugely profitable before they started stealing.

Why do you think a single thing they told the public was ever truthful?

It seems naive to me.

I’m not sure what you mean by this exactly. Many of the things they said to the public are not true, but these currencies use permanent, public ledgers, so you can see where the money goes if you look carefully.

Does the ledger capture loans of user funds held by FTX?

Yes

Not if the asset being loaned is cash

How is that particularly relevant? Data isn't knowledge. Just because some assets have public records doesn't really tell you anything about liabilities or underlying ownership.

Exchanges could practice provable solvency ( https://eprint.iacr.org/2015/1008.pdf ), but they aggressively do not-- in part because they don't want to bring customers attention to the potential issue (and they rightfully reason that once customers are concerned no amount of technical solution will likely satisfy them).

But FTX wasn't really an exchange-- it was a scamcoin casino primarily trading in highly leveraged proxy assets ("perpetuals") as a bucketshop.

How can the provable solvency scheme possible prove solvency for fiat holdings? For example, I deposit $100 into the exchange. How can the exchange prove to me that it hasn't gone and gambled that $100? I think this could only be handled with human auditors going in and checking the actual amounts held in the exchange's bank accounts.

Can't, except as you note. Best trade your fiat for something actually auditable through cryptographic means ASAP. :)

(for a less quippy answer: they could show their fiat liabilities through these means and have a third party bank attest to their fiat account assets (or an encryption of their fiat assets). At least then you'd be trusting some established bank and not just some sketchy cryptocurrency industry company)

If something doesn't make sense after a detailed review - my instinct is that there is hidden knowledge that I don't have.

That instinct will mislead you. It denies stupidity and irrational choices and leads to conspiracy theories

Usually it's just simply old fashioned fraud.

reminds me of LTCM...they were making bank until the Asian bank crisis and Russia defaulting on their debt

https://www.dailymotion.com/video/x225si7

Very different. LTCM was making massive, very risky bets while pretending they were safe.

They were making insanely leveraged bets on real assets.

FTX seems to me to much closer to Madoff.

They were printing their own Monopoly money and pretending it was worth billions.

The core of the issue here was not ponzinomics, it was the exchange gambling directly with user funds, by way of unsecured loans to a hedge fund controlled by the founders.

Fraud? Yes. But users weren’t buying into a ponzi, they were using a centralized exchange product with the understanding that reserves were whole, when in reality they were secretly fractional reserves.

SBF literally describes a magic ponzi box

https://www.youtube.com/watch?v=C6nAxiym9oc

LTCM actually was doing a lot of the risk management people later said they should do. Their problem was the trades they were doing were more crowded than the realized and they couldn't unwind them cheaply because everyone else was doing the same thing. Plus once people realized they were struggling other market participants started betting against them. There have been other similar situations since then. In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.

That's the point. Their models showed their strategies to be safe, while in reality, their strategy was risky enough to bankrupt the fund, and scare the entire financial system.

> In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.

If your strategy works for years and then a single event erases all the historical profits and puts you in the red, your strategy always sucked because it ignored tail events.

See for example, ARKK.

A lesson that few understand, which explains so much of the economic surprises of the past thirty years.

legends say they could have been saved by Warren Buffet, who was interested to buy them at a certain price, but the deal never went on bcs he was in vacation where satellite phone wasnt working.

wikipedia says he turned it down due to risks involved

FTX was the next iteration of beanie babies.

They held a huge supply of an illiquid asset that they made the market on. No surprise that they would offer a high price and then say "these are worth a lot." This happened with beanie baby sellers: they would corner the market on one model and the jack the price. The problem is that nobody else thought they were worth that much.

Then, FTX made it worse by allowing people to borrow against them at the valuation of "a lot," and borrowing against them at the same valuation.

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