Ross Clark
Crypto is being hoisted by its own petard
Like Liz Truss, Sam Bankman-Fried will be the stuff of pub quizzes: who lost his entire $16 billion fortune in days? A quick trawl of the internet suggest his only real challenger in losing so much money so quickly was Masayoshi Son, the founder of Softbank, who was estimated to have made a paper loss of $70 billion in the dotcom crash. But he wasn’t completely wiped out, and retained considerable wealth as Softbank rose again.
Bankman-Fried, on the other hand, is believed now to be worth pretty much zero following last week’s collapse of the crypto exchange he founded, FTX. At its peak, Bankman-Fried’s stake is estimated to have been worth $26 billion, and it was still worth many billions in the days before its sudden collapse. All this by the age of 30.
It is possible that many people will not be mourning the sudden demise of Bankman-Fried’s wealth – although some may well do, including the many left-liberal causes to which he generously contributed during his brief life among the super-wealthy. One of them was Joe Biden’s 2020 election campaign, which received $5.2 million of his money. He is also believed to have lavished $40 million on Democratic candidates in last week’s midterm elections.
For many others, if they have heard of the man at all, Bankman-Fried will be the epitome of greed in the mysterious world of crypto. Too late, perhaps, Bankman-Fried realised that he didn’t fully understand it, either. In the passing of FTX he apologised for failing to appreciate that the company’s coffers were not quite as full as he thought they were, and that they were unable to sustain a sudden run of investors wanting to withdraw their money.
Bankman-Fried’s crypto empire seems to have consisted of two main entities: FTX, which traded cryptocurrencies on behalf of clients, and Alameda Research, which was trading cryptocurrencies on its own account. Alameda’s modus operandi was to exploit small differences in the prices that cryptocurrencies were trading at on different exchanges, making billions in the process.
What remains murky, but will now be picked out by US financial regulators, is the precise relationship between FTX and Alameda. CNBC is reporting today that a source has told it that Alameda was effectively borrowing billions from FTX users and using it to gamble on cryptocurrencies itself. If that is what was going on, it would not be surprising, in this year’s crypto collapse, that FTX suddenly found itself short of funds to pay investors who wanted to cash in their chips.
FTX’s demise sounds another warning to those who have dabbled in cryptocurrencies. Never mind the guff about crypto giving us financial freedom from governments; by which we can preserve our wealth against national currencies. Crypto is really just the latest reinvention of that age-old device: the pyramid scheme. It has no intrinsic value and thus trading in it is a classic zero-sum game. Those who cash out in time make a fortune, those who stay too long at the table lose their shirt. Unfortunately for Bankman-Fried, he has become one of the latter.
The evaporation of Bankman-Fried’s wealth also stands as a stark reminder that whatever people may like to believe, left-liberal causes are not necessarily funded by more wholesome enterprises than conservative ones are. Democrats face rather leaner times ahead.