THE CRYPTO BRO' EVERYBODY TRUSTED

Man, homie flamed out in a flash. From an eccentric billionaire to a dude some suspected of running a Ponzi scheme. From a thirty-year kid with nice digs in the Bahamas to a cat who, like Bernie Madoff, could end up bedding down on that proverbial block. From a guy with a net worth once estimated at $26 billion to one whose wallet is now a lot thinner than he’s used to.

All of this from a fellow who hosted events that could attract A list celebrities, including, for instance, Tony Blair, Bill Clinton, Katy Perry, and Orlando Bloom.

All of this from the founder of what everyone thought was a kick-ass cryptocurrency exchange—FTX—and that had recently been valued at $32 billion.

All of this from someone once considered the new and promising “face of crypto” but who now faces the possibility of becoming yet another face in that pantheon of White dudes who became famous for operating financial flim flams.

Get rich or die trying, right?

Actually, there’s much that we don’t know. This stuff is still unfurling, and there appears to be several moving parts. But we’ve seen this particular play—or some variant of it— enough times to have a pretty good idea of what’s likely the deal, and how uglier it might get.

What follows then, is the quick and dirty; it’s admittedly an oversimplification but, nevertheless, it captures some of the fundamental dynamism underlying what could become a colossal crypto collapse.

THE QUICK AND DIRTY

So, here’s the quick and dirty, beginning with the relationship between the cryptocurrency exchange FXT and the hedge fund Alameda Research. The former—FTX— is a cryptocurrency exchange and the latter— Alameda Research—is a hedge fund specializing in cryptocurrencies and with a gargantuan appetite for risk.

Bankman-Fried co-founded Alameda in 2017 and, two years later, launched FTX. One of the ways in which Alameda pulled in revenue was through arbitrage trading in cryptocurrencies — that is, they exploited and pocketed the price differential between what they paid for the digital asset in one market or part of the world and what they were able to sell it for in another. They also, unsurprisingly, used leverage—- borrowed bucks— to finance their trades and to boost their returns.

As a currency exchange, FTX was an intermediary that enabled participants to change one crypto currency for another (crypto-to-crypto) to exchange fiat money for crypto (e.g., trading dollars for crypto). To facilitate trading, people would often park sums of money with FTX— and FTX, of course, made bank by charging fees for trading on the exchange.

From the jump, though, both entities—FTX and Alameda— were joined at the hip, and a good part of FTX’s raison d’ etre was to help finance Alameda’s activities. The majority owner in both was none other than Bankman-Fried, and anything that shook one would shake the other. If one’s died, the other’s funeral wouldn’t be far behind.

FTX created its own digital token, FTT, Alameda imbued that otherwise worthless token with value by buying it and, in the process, being the “market maker” that helps to establish and prop up the token’s price. FTX wins because, among other things, it collects fees from people trading in the token on its platform.

Alameda comes out on top because it gets access to a fresh source of financing and, furthermore, it can use the FTT tokens as collateral to get loans to further finance its expansion and activities.

If it seems like a lot of smoke and mirrors—it should.

If the price of that FTT token declines, then stuff can get funky pretty quick and start to implode. A sustained drop in the price of crypto—including FTT— would deprive Alameda of a source of capital and, if lenders called in loans, they’d be hard press to come up with the money, especially since they were highly leveraged and largely doing that OPM thing— playing with Other’s People Money.

All of which could—and did— lead to good old fashioned bank-type run. Folks start getting skittish and start to increasingly think:

“I better get my….out now!”

They now want to cash out, so to speak, and start demanding their money from FTX. Now, if it’s just you and your cousin Pookie wanting out, that’s no problem. But when it’s virtually the whole damn hood that wants out, well…that’s a huge problem.

And this stuff can be contagious. Other folk start to see y’all wanting out and, not surprisingly, they start wanting out also. And then still other folks see them getting out, so yet another group wants to exit. This keeps picking up steam, more and more people want their funds, FTX ends up in a liquidity crunch (which is just a fancy way of saying, “I ain’t got your money”) and, before you can say “WTF?!,” the bro’ everybody trusted implodes and Alameda and FTX ends up declaring bankruptcy.

Couple of quick points before moving on, though. First, it’s suspected that one of the reasons FTX came up short $8 billion is that they had been using customers deposits to prop up Alameda, it’s sister organization. Second, a competitor—Binance— didn’t come through on a non-binding commitment to purchase FTX. According to Binance—which really didn’t have much love for FTX— once it opened up the hood and cranked the whip up:

The “check engine” light came on.

All of which undoubtedly increased the rush for the door.

AFTER THE BRO’ IMPLOSION

So, Sam Bankman-Fried has imploded big time.

The initials loving dude—SBF- who achieved damn near cult like status.

The guy who relished in being seen—and treated— as an eccentric scrapper who brought a fresh vision and transparency into the crypto ecosystem

The buddy who inked deals with sport leagues, brainstormed with policy makers, and advertised the supposed wonders of crypto on television

The cat who got well-known celebs like Steph Curry, Tom Brady, MLB hall of famer David Ortiz, and tennis star Naomi Osaka to help in the hyping of all things SBF.

The deep pockets who talked incessantly about using his money to lead the fight for social justice and pandemic prevention.

The financial bro’ you could trust.

Bro’ became undone and my guess is that when all the smoke clears he’ll be revealed to be a fraudster who ran a Ponzi-like scheme ; a financial scammer evocative of folks like Madoff and, more recently, Elizabeth Holmes, former CEO of Theranos.

And if he is what I—and others—think he is, then bro could, like Madoff and Holmes, end up getting some much deserved jail time.

We’ll have to wait to see what the Justice Department and SEC discovers.

But know this: There’s more than a few crooks in this crypto space.

Part of the early promise of the crypto evangelists was that it would enable people to make money moves anonymously, outside the purview of the banking system, regulators, and government.

Now, I’m not saying that all the captains of crypto are crooks, but that kind of promise is something that would have fraudsters licking their lips.