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The FTX failure

Column box-John Mangun-Outside the Box

IT started with Mt. Gox in 2010 when Bitcoin was trading at $0.09. By late 2013 MtG was handling over 70 percent of all BTC transactions worldwide and the price was $1,000. On February 24, 2014, Mt. Gox suspended all trading, closed its website, and its exchange service, with its website returning a blank page. Withdrawal requests were also met with a “blank page.”

The company said it had lost almost 750,000 of its customers’ Bitcoins and around 100,000 of its own, totaling around 7 percent of all BTCs. Although 200,000 Mt. Gox BTCs have since been “found,” it turned out most or all of the missing cryptos were stolen straight out of the Mt. Gox cryptocurrency wallet beginning in late 2011.

Was this a matter of theft, fraud, or mismanagement? Yes. All three. Fraud is rarely the only cause unless of course your investment advisor is Bernie Madoff.

FTX was a cryptocurrency exchange, incorporated in Antigua and Barbuda and headquartered in The Bahamas. The exchange was founded in 2019 by Sam Bankman-Fried (SBF), a MIT Wizkid—apparently—and son of Barbara Fried and Joseph Bankman, both professors at Stanford Law School.

SBF also co-founded in 2017 Alameda Research, a quantitative trading firm for trading cryptos, its strategy being profiting from “arbitrage, market making, yield farming, and trading volatility.” Alameda’s CEO was Caroline Ellison, a 20-something 2016 Stanford University graduate —and on/off SBF girlfriend—with a degree in mathematics and two years stock trading experience.

There was no “Chinese wall” between FTX and Alameda. When the crypto “luna” collapsed in May 2022 from $115 to $0.00009, Alameda and presumably Ellison were on the wrong side of the trade. FTX extended loans to Alameda using FTX customer money. Alameda currently owes FTX about $10 billion, which is more than half of FTX’s $16 billion customer assets.

Of course, when you follow the money, there is always a political component. Barbara Fried was a major official fund raiser for Joe Biden and the Democrats with SBF ranking as the party’s second-biggest individual donor in the 2021–2022 election cycle with donations totaling $39.8 million. FTX also funneled nearly $100 million to the Ukrainian government through donations.

FTX made its fortune through high-net worth and high-publicity investors who were also endorsers. These included NFL superstar Tom Brady who invested and now has lost over $400 million. Also on FTX bullet train with the statement that “If there is ever a place I can be and I am not going to get in trouble, it is going to be at FTX” was Kevin O’Leary aka Shark Tank’s Mr. Wonderful. 

Now Mr. Wonderful says he is heading to Washington D.C. to demand regulation of cryptos.

O’Leary may not be aware of it but there are already laws against fraud as well as murder, both of which happen every minute of every day. Crypto exchanges are regulated to a certain extent but what investors do not have that does exist for stock and commodity exchanges is protection.

Since 2017, 305 crypto exchanges have failed. The reasons were: 42 percent without any explanation to consumers, 22 percent due to business feasibility—no profit, 14 percent were bought out, 9 percent were total scams, 8 percent closed by governments, and 5 percent were “hacked” to death. How many stock exchanges have failed? Zero.

Even when a local stockbroker goes under, losses are covered for the most part. Yes, there have been instances in the past when that did not happen, but the days of insufficient enforcement has been greatly reduced. And regulation without enforcement is useless.

FTX tokens were trading at $57.00 and are now at $1.55 but convertibility to “real” money like US dollars is not possible. No liquidity. Now under investigation by the US Securities and Exchange Commission, investors like sports stars Tom Brady, Steph Curry and Naomi Osaka are poised to lose the majority, if not all, of their money. For his part, Bankman-Fried publicly confessed on Thursday: “I f***** up.” Good analysis, which might not be the smartest thing to say pending the lawsuits coming.

On October 3 and BTC trading at $19,800, “Rich Dad, Poor Dad” author Robert Kiyosaki called Bitcoin a “buying opportunity”, but now “may go as low as $10,000.” But that’s fine because “I am a Bitcoin investor. I am NOT A TRADER.” But if there is no liquidity, traders and investors alike can only become one thing: losers.

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

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