Why the FTX Scam Is Not the End of Crypto

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Why the FTX Scam Is Not the End Of Crypto

The only thing more volatile than crypto is people’s opinions about it.

In less than a week, mainstream media, bloggers, and TikTokers went from singing the praises of FTX’s genius founder to calling him an evil scammer.

While it caught some off guard, almost everyone else with a keyboard and a Twitter handle claimed to have predicted the FTX collapse ages ago. It’s just unlucky these financial oracles were too shy to warn the 1.2 million people who got fucked by Sam Bankman-Fried and his clique.

For our humble human brains, every unexpected event feels obvious after it happens — the keyword here being “after.” It’s both a bug and a feature because it helps us cope with catastrophes and makes our reasoning suck like a vacuum cleaner.

In reality, nobody saw the FTX fiasco coming. Not Bloomberg. Not politicians. Not celebrities. Not crypto heads. No one.

That’s precisely why when FTX imploded and took billions of dollars down with it, an outrage bomb went off — and the resulting shockwave feels strong enough to threaten the very existence of the crypto market.

As someone who lost more than $78,000 in a crypto scam in 2020, I can only understand people’s reactions. But once the dust settles and rationality makes its way back to our minds, we’ll realize this was a natural phenomenon that occurs in every free market.

What exactly happened with FTX? (Skip if you know)

FTX is a crypto exchange where customers can trade digital currencies using traditional money. It made a lot of noise for being the fastest-growing platform of its kind, reaching the #3 spot in less than two years.

FTX’s performance is one of the reasons why founder Sam Bankman-Fried (SBF) became the poster boy of crypto. The other reasons are his public image built around altruism, his huge support for a political party in the US (hello Democrats), and his other company called Alameda Research.

Alameda Research is a trading company that made a fortune by doing “arbitrage trading” around Bitcoin.

Arbitrage trading is a fancy term to say that you use small differences in Bitcoin prices between two separate markets to make profits. For example, you can buy Bitcoin for $20k from the Japanese market and sell it for $21k in the US. Alameda Research did exactly that and rinsed and repeated the process for months, making around a million dollars every single day.

Later, as its capital grew, Alameda expanded its trading activities to the point where it began to invest in other companies, which is a detail you want to remember for later.

Now let’s talk about FTX.

SBF’s diabolic master plan started when he used FTT coins, a cryptocurrency he created through FTX, to inflate the balance sheets of his trading company (Alameda). He then leveraged the inflated numbers of Alameda to secure bank loans in traditional dollars.

In other words, SBF used money he printed himself as collateral to borrow billions of dollars that he later used as capital. And he got away with it until a news site called Coindesk exposed him in one of their reports.

As soon as one of the early investors of FTX caught wind of Coindesk’s news, he tweeted that he planned to sell his FTT coins over the following few months. This would’ve been a minor event if this particular investor wasn’t Changpeng Zhao (CZ), the CEO of Binance, the world’s #1 crypto exchange.

When a prominent figure like CZ wanted to get rid of his ties with FTX, the entire crypto space saw a red “WARNING” sign. Everyone with an FTX account and a bit of brain rushed to their phone and withdrew their money. Two things happened as a result. The price of FTT collapsed from around $20 to $4 in less than 72 hours, and FTX found itself unable to respond to withdrawal demands, which spread panic across the board.

“FTX is fine,” SBF wrote on Twitter to reassure his FTX users. “Assets are fine.”

Except he lied.

Before we knew he was full of shit, SBF argued that FTX had a “liquidy crunch.” At the time of his initial claims, FTX owed about $8 billion to its customers — and still does as I write these words. Usually, liquidity crunches aren’t a big deal. All you have to do is sell some assets to provide the needed cash. But in the case of FTX, the main asset was FTT coins, the money they printed out of thin air.

Even if Sam decided to tank the discount (from $20 to $4) and sell every FTT at his disposal, he wouldn’t get out of trouble. He’d flood the crypto market with his homemade coins — and you know what happens when supply far exceeds the demand: the price of your asset crashes.

SBF was stuck, and he knew it. That’s why he approached Binance for a potential buyout, which seemed a good idea until Binance looked at FTX’s books.

The original tweet has been removed.

Binance’s tweet spelled “Game Over” for SBF, and he was left with no choice but to apologize, step down as a CEO, and file for bankruptcy.

By the end of that same week, Bloomberg estimated Sam’s current net worth to have dropped from $16 billion to zero. Yes, zero.

But the story didn’t stop there. Investigations continued on Twitter and exposed numerous other fraudulent practices inside FTX and Alameda Research. The most disgusting discovery was about SBF using his customer funds to trade and invest in other companies.

By the way, a big thank you to all the Twitter indie reporters who made the mainstream press look like amateurs. Some of these Twitter detectives didn’t sleep for 30 hours to keep hunting for information (I’m looking at you Genevieve). Others would link to existing threads and complete them with new information. Not to mention, the memes were something else (Hello Concoda).

As my eyes remained glued to the Blue Bird, one question kept repeating itself inside my bald head. “What the fuck were you thinking Sam?”

And then it hit me.

SBF wanted FTX to be a bank

Consider the following thought experiment. We travel back in time a few weeks, and FTX still seems like a legit healthy company. You open an account on the FTX app and buy 2 bitcoins. Now, you’d expect the platform to take your dollars and debit the 2 coins in your digital wallet, right?

They don’t. Instead, they issue an I-Owe-You.

FTX writes in its internal ledger that they owe you 2 bitcoins without crediting them to your account. They either credit a fraction of what you bought or nothing at all — and given what we know about SBF’s trickery, I’d bet on the latter.

You might wonder: “If they don’t actually credit the 2 bitcoins to my account, where does my money go?” Well, your money goes into the capital of FTX, and then SBF and his friends use it to invest in marketing, political endorsements, and buying other companies.

Arguably my favorite meme of the FTX scandal. Pretty accurate as well.

For reference, FTX invested in over 130 companies over its two years of existence. Their idea is once they make profits from their purchases, they can pay whatever they owe you and keep the surplus.

Their strategy sounds pretty smart, except for one detail. The whole thing comes crashing down if all FTX customers decide to withdraw their money at the same time.

People with some financial knowledge would think that what happened to FTX resembles a bank run, and they’re right for a straightforward reason. SBF designed FTX and its other structures to operate like a traditional bank.

When you deposit $1,000 in your bank account, you expect your bank to open a small drawer with your name on it and put 1,000 actual dollars inside. But what they do is deposit $100 in your personal drawer and create an I-Owe-You of $900 in their ledger. So where does your $900 go, then?

It’s boring and headache-inducing, so let’s sum it up in one sentence.

Every time you make a deposit in a bank, they can keep 10% of the money in their reserve and lend the remaining 90% in credit. The official name of this method is Fractional Reserve Banking — and it’s common practice. Another detail to remember is that fractional reserves operate both inside the same bank and across a number of them.

Image by Lukertina Sihombing from Research Gate.

Fractional reserve banking generates up to $10,000 in money owed for each $1,000 deposited. The idea is that people will eventually pay their debt plus a surplus made up of interest rates.

Banks are in the business of dealing promises of future money, so to speak, and their model works exceptionally well as long as they work together and the economy grows.

SBF seems to have wanted to replicate the same system, but he forgot two details. First, traditional banks have to back their loans with verifiable collateral — like real estate, jewelry, art, stocks, and bonds — not some digital coupons you can print as you please (FTT coins). Second, traditional banks developed a shield against liquidity crunches. It’s called the Federal Reserve (or Central Bank), and it bails out banks that get themselves into trouble through massive cash injections.

The said “massive cash injections” are taxpayer money. Every time bankers mess up, it’s you and me who pay for their mistakes — and their annual bonuses as well. You may think the banking game is rigged, and that’s fair. It is rigged, but it’s the best financial game we could come up with for the last 150 years. That’s why we accept its flaws, including the ludicrous bailouts reserved for companies who are “too big to fail.”


SBF fancied himself a good old bailout when he asked for Binance’s help. But Binance said “Nope,” which, as we’ll see next, was a decision in favor of the crypto market.

Free markets are antifragile

Antifragility is a concept coined by mathematician and philosopher Nassim Nicholas Taleb, who describes it as follows.

“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile.

Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”

The easiest way to understand how antifragile systems behave is to compare them with other types of systems.

  • A fragile system is like glass. It breaks after a shock.
  • A resilient system is like rubber. It recovers after an episode of stress.
  • An antifragile system is like a muscle. It grows stronger after being torn in the gym.
Stress response of fragile, resilient, and antifragile systems.

Antifragility is intrinsic to “everything that has changed with time.” This includes culture, tech innovation, restaurants, revolutions, book sales, cuisine, economic success, and even the shape of your muscles. These systems benefit from shocks and randomness in very different ways, but they all share a particular property — they have to pay a price for their antifragility.

The same principle applies to the free market in general and financial institutions in particular. In his book, Taleb uses restaurants as a broad example to highlight this idea and concludes with an easter egg referring to the 2008 crash.

“Restaurants are fragile. They compete with each other. But the collective of local restaurants is antifragile for that very reason.

Had restaurants been individually robust, hence immortal, the overall business would be either stagnant or weak and would deliver nothing better than cafeteria food — and I mean Soviet-style cafeteria food.

Further, it [the overall business] would be marred with systemic shortages, with once in a while a complete crisis and government bailout.”

Now let’s imagine we had the same setup with financial institutions.

We’d witness a bunch of independent banks competing against each other to provide the best possible services. If one of these banks fails, it will die and exit the competition. Customers and investors will suffer, but the overall market will learn from the dead bank’s mistakes and rebuild into a better version.

This idea resides at the core philosophy of a free market. It’s what Bitcoin and other cryptocurrencies stand for — or at least, that’s what they say when criticizing the traditional banking system.

The traditional banking system is fragile because its components never die. Every time a bank fails, the Federal Reserve steps in and saves the day with a big fat cheque made of taxpayer money. This makes it hard for the banking system to evolve. If you don’t let the banking cells die and be replaced with better ones, your financial system as a whole will never become robust, let alone antifragile.

Further, the interdependence of banks (centralization) makes it so that a mistake from one bank can sink the entire fleet — and this brings us to the ultimate travesty SBF made with FTX.

FTX is out of the crypto gene pool

FTX was supposed to be a decentralized structure, independent from others. But the super-star scammer invested in more than 130 crypto companies and tied them together, creating a fragile structure that resembles the traditional banking system. It was as if FTX was saying: “We exist because traditional centralized banks are bad. But we’ll behave exactly like the centralized banking system, except we’ll be good.”

Further, FTX had bailed out several companies that would’ve failed otherwise, including BlockFi and Voyager Digital.

In a sense, FTX wanted to be both a conglomerate of crypto banks and a Federal Reserve at the same time. SBF wanted to centralize the crypto market and create a monopoly. And like every monopoly, FTX wanted to be in bed with as many powerful people as possible, which explains why SBF put so much effort into seducing politicians and celebrities.

The worst part? People best qualified to see the inconsistency in SBF’s plan praised him. Financial experts, prestigious newspapers, and hardcore crypto fans applauded FTX. When you see billions of dollars pouring in, it’s hard to remain sane and realize that FTX was acting against its very own nature.

Then, somehow, these same people act shocked when they realize FTX’s fall has triggered a domino effect. Some even argue the resulting damage can wipe out the crypto market altogether, which is wrong for a simple reason.

The death of a cell, or a bunch of cells, is not the same thing as the death of the whole body.

Despite its relatively significant scale, FTX remains one business, and now it’s out of the game. It succumbed to the “natural selection” of the free market because it was unfit.

What happens next?

A new challenger will show up, and then another, and another. Many will fail, but with each failure, the crypto economy will figure out better solutions and evolve into a fitter version of itself.

Free markets are antifragile because they are made of fragile components that compete against each other — and internal competition breeds evolution. Factor in constructive feedback and you get evolution that serves the customers, not only the investors.

The fitness of the crypto market depends on what the customers want — and FTX has shown that customers don’t enjoy getting scammed very much. So charlatans and con artists get eliminated — sometimes they get eliminated fast and sometimes slowly, very slowly.

This doesn’t mean that crypto is immune to collapse. Just like biological species, the crypto economy as a whole can go extinct. Antifragility doesn’t grant you immortality. But a couple more decades of evolution may be enough for us humans to figure out how to best handle money — be it a bitcoin standard, a better version of traditional banking, a switch back to gold, or something else that’s yet to be born.

In the meantime, keep your bullshit detector on. Stay skeptical of every finance-related argument that crosses your feed, starting with this article. And don’t shy away from the conversation regardless of how well you think you understand finance.

Dialogue is where we all meet to build a better future. So listen to others, ask questions, and share your thoughts. And whenever you start to believe that you can’t reach a common ground with the opposing view, remember that we all agree on one thing:

Sam Bankman-Fried is a fraud.

- I'm not a financial advisor.
- I'm not sponsored by anyone.
- Nassim Nicholas Taleb is already mad at me for using his ideas
against his personal opinions. He'll be fine though.
- I write disclaimers in code boxes because the text looks kinda cool.
- Thank you for reading.


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