Excellent write up. It's absolute lunacy to me the amount of money that crypto has been able to attract from 'investors' when the value proposition is so tenuous. When I listen to a crypto promotor attempting to attract capital it's pure psychobabble.
However, I suspect there may be an aspect of crypto that could keep the more prudent fleecers from having to unwind semi-indefinitely.
If you break the token holders into four'ish broad categories along these lines:
1) Idiots being fleeced (greater fool investors)
2) The insider 'crypto bros' who are able to control the float, run the exchanges and impose transaction fees.
3) Criminal entities using it for laundering, transactions, payments, etc.
4) Capital flight that's attempting to dodge capital controls (eg CNY -> USD, EUR or RUB -> USD, EUR)
I'd guess if (3), (4) maintain large enough continuous flows in/out a prudent (2) could possibly keep the mirage going. They could use the fees to build a cushion of 'real' reserves and only live off the excess. Occasionally pumping the mirage would allow them to pump their fees and attract more (1) to help them pad the 'actual' reserves. They'd need enough self control to not overdo it. They'd also need to restrict the people who could uncover the truth. So the companies involved likely would have a very small cadre of individuals controlling the 'black box'.
If you could quantify the cash flows generated by (3) and (4) and the transaction fees that they generate that may give you some indication of how much 'real' capital is in the system at any given time. And then if you could look at 'real' reserves that back the mirage in relationship to that 'real' value you could guesstimate a probability of an unwind.
Fantastic points all around. At the end of the day it all comes down to inflows/outflows. I tend to hold a similar view - even if there is a big unwind of players as big as Alameda, it doesn't mean that every single one will go bust. As you mention, there are other active uses for crypto outside of speculation, though there is probably more regulatory attention on (3) and (4) than ever.
I don't expect BTC or ETH will die even in a deep dark winter, would expect some stablecoins to survive even current holders were forced to take a haircut along the line
China showed US the path for regulating threats to sovereign currencies that have the gall to set up shop within the sovereign's domain. In any event, if left to it's own devices without oversight, I suppose BTC/ETH will survive even a deep dark winter as long as it can fleece enough freshly minted dimwits to pay the electric bills. I've read there was only perhaps $30Bil USD vaporized by SBF/FTX/FFT/whatever. An insignificant amount compared to say the Covid-19 recovery funds siphoned off by fraud. Heck, just last year at least $14Bil USD of digital-shitcoin was stolen (a soundbite I heard on NPR). So as a taxpayer I resent the proposition I might be expected to foot the bill for setting up and maintaining yet another Government Agency for perpetuating a glorified Ponzi scheme. Just pull the plug on the nonsense and move on.
Good points. However what you describe is basically a money-laundering bank entity. It may survive for a bit under the technology veneer, pretending to be something else. But sooner or later regulators will cramp down, and make them comply with AML and “know your customer" rules…
Yes, long-overdue regulatory scrutiny is coming fast - both in AML and securities oversight . The question is will this ultimately produce AML/KYC compliant US firms that opens the door to more institutional activity, or will it kill the current utility of the system, thus rendering it moot?
When you say in the footnotes that "daily trading volume of BTC is 10% of its market cap", have you looked at how much of that is in pairs with US$ and other currencies that you can use vs. Tether and other crypto coins?
I looked a few months ago and was shocked to find that at the time only a few percent of BTC was traded against real-world money. This furthers your thesis about illusionary valuations and convertibilities, even for a blue-chip crypto like BTC
Yes, this is a great point. A large portion of trading volume is in stablecoin pairs rather than actual dollars. But the key is how much fiat is flowing into and out of the system - this is a tiny fraction of the stated market caps and trading volumes. This is why stablecoins being able to maintain there pegs is so crucial for the ecosystem. Terra was a perfect example. Tether stands out as the elephant in the room.
Appreciate you looking at this SBF mess. I have no ties to any tokens or institutions in here. But would be curious what value you do or do not see with respect to the more core projects (e.g., bitcoin, ethereum) and the overall value propositions offered by blockchains. No worries if it's not interesting to you or you don't have time. But I'd love to know more of what you think of the value beyond the SBF types...
Excellent write up. It's absolute lunacy to me the amount of money that crypto has been able to attract from 'investors' when the value proposition is so tenuous. When I listen to a crypto promotor attempting to attract capital it's pure psychobabble.
However, I suspect there may be an aspect of crypto that could keep the more prudent fleecers from having to unwind semi-indefinitely.
If you break the token holders into four'ish broad categories along these lines:
1) Idiots being fleeced (greater fool investors)
2) The insider 'crypto bros' who are able to control the float, run the exchanges and impose transaction fees.
3) Criminal entities using it for laundering, transactions, payments, etc.
4) Capital flight that's attempting to dodge capital controls (eg CNY -> USD, EUR or RUB -> USD, EUR)
I'd guess if (3), (4) maintain large enough continuous flows in/out a prudent (2) could possibly keep the mirage going. They could use the fees to build a cushion of 'real' reserves and only live off the excess. Occasionally pumping the mirage would allow them to pump their fees and attract more (1) to help them pad the 'actual' reserves. They'd need enough self control to not overdo it. They'd also need to restrict the people who could uncover the truth. So the companies involved likely would have a very small cadre of individuals controlling the 'black box'.
If you could quantify the cash flows generated by (3) and (4) and the transaction fees that they generate that may give you some indication of how much 'real' capital is in the system at any given time. And then if you could look at 'real' reserves that back the mirage in relationship to that 'real' value you could guesstimate a probability of an unwind.
Thanks Ben!
Fantastic points all around. At the end of the day it all comes down to inflows/outflows. I tend to hold a similar view - even if there is a big unwind of players as big as Alameda, it doesn't mean that every single one will go bust. As you mention, there are other active uses for crypto outside of speculation, though there is probably more regulatory attention on (3) and (4) than ever.
I don't expect BTC or ETH will die even in a deep dark winter, would expect some stablecoins to survive even current holders were forced to take a haircut along the line
China showed US the path for regulating threats to sovereign currencies that have the gall to set up shop within the sovereign's domain. In any event, if left to it's own devices without oversight, I suppose BTC/ETH will survive even a deep dark winter as long as it can fleece enough freshly minted dimwits to pay the electric bills. I've read there was only perhaps $30Bil USD vaporized by SBF/FTX/FFT/whatever. An insignificant amount compared to say the Covid-19 recovery funds siphoned off by fraud. Heck, just last year at least $14Bil USD of digital-shitcoin was stolen (a soundbite I heard on NPR). So as a taxpayer I resent the proposition I might be expected to foot the bill for setting up and maintaining yet another Government Agency for perpetuating a glorified Ponzi scheme. Just pull the plug on the nonsense and move on.
Good points. However what you describe is basically a money-laundering bank entity. It may survive for a bit under the technology veneer, pretending to be something else. But sooner or later regulators will cramp down, and make them comply with AML and “know your customer" rules…
Yes, long-overdue regulatory scrutiny is coming fast - both in AML and securities oversight . The question is will this ultimately produce AML/KYC compliant US firms that opens the door to more institutional activity, or will it kill the current utility of the system, thus rendering it moot?
When you say in the footnotes that "daily trading volume of BTC is 10% of its market cap", have you looked at how much of that is in pairs with US$ and other currencies that you can use vs. Tether and other crypto coins?
I looked a few months ago and was shocked to find that at the time only a few percent of BTC was traded against real-world money. This furthers your thesis about illusionary valuations and convertibilities, even for a blue-chip crypto like BTC
Yes, this is a great point. A large portion of trading volume is in stablecoin pairs rather than actual dollars. But the key is how much fiat is flowing into and out of the system - this is a tiny fraction of the stated market caps and trading volumes. This is why stablecoins being able to maintain there pegs is so crucial for the ecosystem. Terra was a perfect example. Tether stands out as the elephant in the room.
Aged Well
Indeed it proved timely!
Excellent recap! Thanka for all the work you share!!
You're welcome! Thanks for reading!
Thanks, sorry for the typo
Thanks for this write up!
Thanks for reading Phillip!
"Some people end up with dollars, others end up with tokens."
Also, it turns out, some people end up in jail! And thank goodness.
Appreciate you looking at this SBF mess. I have no ties to any tokens or institutions in here. But would be curious what value you do or do not see with respect to the more core projects (e.g., bitcoin, ethereum) and the overall value propositions offered by blockchains. No worries if it's not interesting to you or you don't have time. But I'd love to know more of what you think of the value beyond the SBF types...
Wow, this piece was really well timed, good job TLB
Best way to short?
Sometimes its best just watch things from the sidelines.
I also wonder how to short or buy some kind of puts...?