FTX’s Collapse Isn’t Just About Fraud, It’s About What Happens When You Live Inside the Crypto Bubble

Cointime Staff· 4 min read

by James Surowiecki

Disgraced FTX founder Sam Bankman-Fried’s live interview today with the New York Times’ Andrew Sorkin at the paper’s Dealbook conference was predictably odd, with Bankman-Fried at once appearing contrite and apologetic for his many failures as FTX’s C.E.O. while also dodging any suggestion that chicanery was involved in FTX’s collapse earlier this month.

As a result, watching the interview will not give you a clearer understanding of whether, as many reports have claimed, FTX illegally (or at least unethically) funneled customer assets to Alameda Research, the crypto hedge fund SBF also founded, in a foolhardy attempt to let Alameda make big bets on crypto. But what the interview did make clear, I think, is that the story of FTX is not simply a story of corporate fraud, as many crypto advocates would like it to be. Instead, it’s a story about someone who was so thoroughly in thrall to a delusion — the delusion that crypto is the Next Big Thing — that he built and then destroyed a company in pursuit of it.

What, after all, ultimately brought FTX down was that it had made huge margin loans to Alameda, so that it could make highly-leveraged bets on other crypto assets. Some of those loans may have been funded with assets from customers who had never agreed to let their money be lent out, which would be fraud. But that’s not what wrecked FTX. Instead, what wrecked it was that it lent out far more money to Alameda than it should have, and that it then failed to call those loans, and force Alameda to liquidate its positions, when it should have. That’s why, in today’s interview, Bankman-Fried said FTX “completely failed” on risk management, and insisted that he hadn’t realized until too late how big Alameda’s positions (meaning its bets on crypto) were.

SBF’s insistence that he was in the dark about what Alameda was doing may be, of course, a totally false and self-serving statement, particularly given how closely linked the two entities were. But let’s assume, for the sake of argument, that he was telling the truth. What does it suggest about the C.E.O. of a trading exchange when he’s indifferent to the amount of risk his firm is taking on by making big margin loans to customers? I think what it suggests is that he doesn’t actually think there’s much risk at all, because he believes that ultimately the value of the assets those customers are betting on is bound to go up.

One of the things that Bankman-Fried said to Sorkin today was that he didn’t spend enough time thinking about the potential downside of crypto markets, and that he never anticipated the kind of sell-off that’s happened in crypto — and in FTX’s own token, FTT — over the past few months. And I think what that tells you is that this was someone who was essentially living inside the crypto bubble, where every dip is an opportunity to buy, and the fundamentally Ponzi-esque aspect of almost all crypto assets is not something to worry about.

I think the exact same conclusion would be true even if we find out that Bankman-Fried did know exactly how big Alameda’s positions were. In fact, if anything that would make the point stronger. After all, by any normal standard of risk management, lending billions of dollars to a hedge fund to make highly-leveraged bets on fake-money assets is an insane thing to do, particularly when those loans are collateralized (as the loans to Alameda were) primarily by piles of your own tokens. The only way that could possibly seem like a sensible business strategy would be if you thought there was no real downside risk. And the only way you could think that would be if you were living inside an ecosystem built on a delusion. Which seems to be exactly what Sam Bankman-Fried was doing.

Crypto defenders have, of course, been anxious to divorce FTX’s collapse from crypto more generally, and to suggest that SBF was merely a common grifter. But while he may well have been a grifter, he also seems to have thought his company’s fake-money token was actually a valuable currency, one that FTX should be willing to accept as collateral on real loans, and he thought this even though we know, from his notorious interview with Matt Levine, that he understood the Ponzi-like nature of those tokens. He also thought funding huge leveraged bets on random crypto assets, even after things like the Luna collapse had happened, was either a smart thing to do or at least something he wasn’t worried enough about to monitor. This was not the behavior of a cynic. It was the behavior of a true believer, even if all he believed in was that the crypto bubble would never really burst.

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