Bankman-Fried: From the crypto king to the tech bubble’s king of losers

Yet for all the potboiler twists, surprising revelations and painful Twitter threads, it’s a fall from grace with an unmistakable ring of familiarity.

The whirlwind week that began with two crypto CEOs tweeting barbs ended with the bankruptcy of FTX, one of the largest and most prominent crypto exchanges, along with those owned by nearly 130 other companies. The business was desperately trying to make up for the $8 billion shortfall, with the specifics of its failure – now under multiple investigations – yet to emerge.

This much is clear: Like Enron, WorldCom and Lehman Brothers before it, a heady brew of easy money, wishful thinking and promoted innovation led to an implosion that was as remarkable for its inevitability as its spectacle, once The tide has gone out. While the details were different for each, they all escalated and were put down, with many examples of arrogance, regulatory weakness and the realities of the economic cycle.

“We have an industry that was really built primarily on FOMO and easy money, and now that governments around the world are raising interest rates and it restricts easy money, you survive on FOMO,” Hillary Allen, a law professor at American University in Washington. “It’s not that attractive anymore.”

While the fault isn’t in short supply, the arc of FTX’s fortunes is at its core a garden-variety result of Federal Reserve policy. FTX, along with crypto itself and many other market gimmicks, flourished as tech fads and special purpose acquisition companies stayed home from meme stocks as the COVID-19 pandemic forced the Federal Reserve to cut interest rates. and prompted to leave. them there for two years.

Now, against the Fed’s most aggressive tightening cycle in four decades, volatile empires are evaporating as fast as the liquidity supporting them. The demise of FTX is certainly a disaster, unique in many respects, with the potential to ignite billions of dollars in paper money and trading profits. But FTX’s failure is far less extraordinary when considered after 11 grueling months of wrecking and asset-bubbling history in technology stocks.

The FTX scandal has notable parallels with that of Enron. The two were led by a messiah in Bankman-Fried and Jeff Skilling, who dazzled believers with feats of technical magic. Both bathed in near-universal adoration from the press and the financial establishment. Both seem to have made fundamental financial mistakes in trying to keep the party going. The crypto exchange reportedly allowed its balance sheet to rest precariously on a token tied to its own fortune, hearing of Enron’s use of its own stock to run its financing structure.

Finally, a bleak expectation that rising markets would hide mismanagement or outright fraud became the hallmark of a once-flourishing enterprise. When Bankman-Fried resigned from her position as CEO of FTX.com on Friday, she was replaced by John J. Ray III – The former chairman and president of Enron left in the early 2000s to pick up the pieces of its bust.

The boom-overbuild-bust cycle is familiar to the Bokeh Capital Partners chief Investment Officer Kim Forrest. He said this is happening throughout the economy at the moment, but the tech industry is the posterchild. Where is crypto in that metaphor? “ground Zero.”

“I was a software engineer in the late ’90s, I saw the excesses of, ‘Wow they’re hiring a lot of people,'” Forrest said. “These companies were not productive in hiring too much, not getting enough output and not showing a return on capital.”

For its part, FTX had raised nearly $4 billion in funding across its network of affiliated companies, which included Alameda Research, Bankman-Fried, a trading house co-founded by FTX Ventures, and a separate exchange for US investors.

While more spectacular, the collapse of FTX shares much with the story of what has gone wrong in the markets and technology in the era of the pandemic. Apart from its obvious similarities with fellow crypto casualties Three Arrows Capital, Terra Ecosystem and Celsius Network, its demise was fueled by the complacency and belief in its own talents that are hallmarks of the woes currently plaguing Meta Inc and Twitter Inc.

As for the bubbles, it was prophesied somewhat enthusiastically. As with meme stocks, the cryptocurrency craze has been derided by securities industry veterans almost from the moment it began, with the pitch of criticism rising as bitcoin’s price soared in 2020. Charlie Munger once said he admired the Chinese for banning it, while Black Swan author Nassim Nicholas Taleb compared bitcoin to a “tumor”.

They then came off as cranks. Now those predictions are coming true as the Fed tightens the screws. Meme stocks are little more than a sideshow, save for occasional pops from the likes of AMC Entertainment Holdings and GameStop Corp. Highly speculative growth stocks declined, dragging Cathy Wood’s Arc Innovation exchange-traded fund — one of the highest-fliers in the pandemic era — to its lowest level since 2020.

A bull market covers a lot of sins, only to be bare by one turn of the cycle. History is littered with such examples, perhaps none more famous than the demise of Bernard Madoff’s giant Ponzi scheme, which ran side-by-side for at least 15 years before the equity markets collapsed in 2008, allowing clients to withdraw more. Had to look for

“You need some degree of volatility in the financial markets because that will prevent the system from building up and taking profits,” said Michael O’Rourke, chief market strategist at JonTrading. “Madoff was only exposed because of the global financial crisis.”

Even with regulation seemingly on the horizon for the crypto industry, the off-shore location of many crypto firms (FTX included) has tied their hands to authorities like the Securities and Exchange Commission. SEC Commissioner Hester M. Peirce said questions related to the lack of jurisdictional clarity are “partly our fault”, as investors and businesses have “repeatedly asked the watchdog to provide more clarity on how Where is our jurisdiction and we have not done that.”

As a result, the financial playground of crypto has been allowed to flourish with limited oversight. “There is not an overall digital asset regime that is accepted globally, and that creates a massive opportunity,” said Jay Wilson, investment director at London-based venture capital firm AlbionVC.

The cost to Bokeh Forest is clear: It will happen again. That said, the players and details will be different, but the human psychology will be the same.

“People don’t change. People just don’t change,” Forrest said. “As much as we’d like to think we learned from the past – we may have learned not to invest in WorldCom, but we don’t know not to look for another.”

The text of this story is published from a wire agency feed without any modification.