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FTX’s balance sheet was bad (bloomberg.com)
479 points by latchkey 78 days ago | hide | past | favorite | 470 comments

The thing that this piece really got me thinking about is how many other crypto companies are the same ponzi scheme because they are counting made-up things as assets on their balance sheet.

In other words, suppose I create token SCAMMER, and I say its supply will be capped at 1 million tokens (or 10 million, or 100 million - that's the "nice" thing about crypto, I can kinda choose whatever number I want), and then I'm able to sell 10 of those tokens for $100 each. According to FTX math, I now have $99,999,000 of assets on my balance sheet, but of course if I actually tried to sell a lot of my "kept" tokens I would tank the SCAMMER price.

Even better, and I think what is probably more common in the crypto industry: suppose I get my buddy to create a SUX2BEU token. I tell my buddy I'll by 10 SUX2BEU tokens for $100 each if he buys 10 of my SCAMMER tokens for $100 each. Now suddenly we can both say we have huge assets on our balance sheets! Until, of course, someone decides to pull aside the curtain covering the wizard.

So many ponzi schemes on top of ponzi schemes...

Paul Graham wrote an essay years ago in which he described the moment when he realized that most of the dot-com companies in the late 90's were selling their ads mostly to other dot-com companies, who were buying their ads in turn. It looked like growing revenue for everyone, but once it came time to show a profit, all of it came crashing down...

Ad-supported mobile games seem to work like this too, all their ads are for other free ad-supported mobile games. Also I downloaded a QR code scanning app and every time I tried to scan a QR code it showed me an ad for another QR code scanning app lol.

The whales foot the final bills though. Unlike the vc's money which goes through economical cycles, there will always be suckers for those gacha gambling games

Those whales are something else. That's all I'm going to say.

I will _never_ understand sinking money into a mobile game like that. Blows my mind. Couldn't even be worth the effort.

There are two types of whales. Those who plow an objectively large but relatively (to them) small sum into the game are fine. Those who fell victim to psychological programming to feed every dollar in are not.

Even if it cost a few dollars to me (to equal their $10,000 for example) I just wouldn't do it. Just feels like I'm being taken for a ride... which doesn't feel good haha.

Same way with games I enjoy. I never tend to buy the "skins" or "cosmetics" unless one _really_ clicks with me.

The trick is that you have a big chunk of your social graph in the game

You aren't spending $25 on video game shit, you're spending $25 on a fun skin to show your pals, or upgrades to help your friends beat some boss, or whatever

Once you get on that path, it can lead pretty normal people to some very dark places indeed

At least those people are getting something out of game. Completionists/collectors having their OCD taken advantage of are going to an even darker place.

Ah... I think you've given me the missing puzzle. I will say I don't get sucked into those "one up" wars (I really hate spending money on things I feel are gimmicks) _but_ this makes a lot more sense.

Yeah, sure. Let's go with this. Wanna buy a 250 dollar cash card for Arbys?

That's because the easiest to get new customers for a mobile game are the ones who play similar games but not yet this one. The customers then play the game and buy more in-game currency than was paid for the ads.

> Also I downloaded a QR code scanning app and every time I tried to scan a QR code it showed me an ad for another QR code scanning app lol.

Maybe you've already found a decent app (or realised that your camera has a built-in scanner), but the confusingly-named Barcode Scanner (https://play.google.com/store/apps/details?id=com.google.zxi...) scans QR codes without fuss.

I should have been clearer, it’s more for debugging - so I need to read the content of the code rather than actually opening it. Eg if there’s an app configured for it then scanning with the built in camera just opens that app and never displays the content.

I’m on iOS, tried a few but they all wanted a subscription and were a terrible experience without it. So I wrote simplescan.vercel.app / https://github.com/mcintyre94/simplescan which does the job for me! Though Apple have broken using the camera when you save it to your Home Screen and open it as an app which is annoying.

> I’m on iOS, tried a few but they all wanted a subscription and were a terrible experience without it. So I wrote simplescan.vercel.app / https://github.com/mcintyre94/simplescan which does the job for me! Though Apple have broken using the camera when you save it to your Home Screen and open it as an app which is annoying.

Ah, that explains it! Your usecase explains it, but I'm reasonably assuming Android because recent iOS versions have it built-in.

> recent iOS versions have it built-in

As does Android, just open the Camera app and point to the code.

But aren't startups doing the same thing as PG said nowadays? That is, portfolio companies use each other's products to boost their revenue and user base.

SpaceX just bought a bunch of ads on Twitter.


> According to internal documents viewed by CNBC, SpaceX has spent more than $160,000 on the Twitter ad campaign for Starlink in Australia and Spain so far.

Your definition for "a bunch" is a bit questionable, but good on you for posting the source.

All this without your own definition of a "bunch"!

You got me. I wonder if we did a poll, how much money is "a bunch of money" and how much money is "a bunch of money on ads" for people.

I think if it had been $500k or $1M I would've called it a bunch, but $160k seems low.

You can get a lot of impressions for 160K. You buy them in batches of 1000 using a term called CPM, which is cost per thousand [1]. CPM can be around 10 dollars for a really good segment. I'm sure there there are some adops folks that have a better knowledge than me. So, if CPM is $10, then that gives you around 1.6 million impressions.

[1] That's right M is for a thousand, because M is a thousand using Roman Numerals. You thought you would never have to remember that.

You are correct, though 160k is maybe a couple weeks of paid social budget for a company like starlink.

The statement was actually "a bunch of ads"

I think that's a US English thing. How much is 'a lot of money'? How much is 'a heap of money'?

A bunch fits in a styrofoam beer cooler. A heap fits in the bed of a pickup truck. Anything more than that qualifies as a lot.

For a serious ad campaign 160k is definitely not that big. Especially for a company with a revenue in billions.

I'm no fan of Elon's recent antics but a $160k advertising spend doesn't strike me as a "bunch" for a major corporation.

How much do you think each ad costs that this wouldn't be a bunch?

The main article has this quote:

The ad campaign SpaceX is buying to promote Starlink is called a Twitter “takeover.” When a company buys one of these packages, they typically spend upwards of $250,000 to put their brand on top of the main Twitter timeline for a full day, according to one current and one former Twitter employee who asked to remain unnamed because they were not authorized to speak on behalf of the company.

Which means 160k spent is actually well below typical deal and these deals are pretty normal for Twitter. So one may actually be worried that maybe SpaceX got a deep discount or something.

Okay but how is that still not a bunch of ads? Do you think it's one ad for $160k? Or maybe like many ads? Perhaps it's so many ads we can call it a 'bunch'?

I have no idea how many ads is that. Could be just one ad on the top of the timeline (which obviously would be shown to many people). The point though 160k spend is not a huge deal - actually below what usually happens with ad campaigns on twitter.

Typically 3-6 that are connected together in any stage of ripeness. The Brady one is a notable exception.

In a way, that that is _notable_ today is evidence that the dot-com advertising problem _isn't_ notable today. In 1999 that would be just What You Did, and not really worthy of comment.

It’s a very different scenario.

Just selling to other early-stage startups doesn’t generate much growth/revenue or make you look like a solid business to a sophisticated investor. SaaS/B2B companies that make it big do so because they get huge numbers of small-medium businesses using their platform, not just startups - E.g., Slack, Stripe, Square, Shopify, Canva, Zendesk, Zapier, Segment.

Having other startups using your product is a good early source of product feedback and a strong signal to very early-stage investors, but that alone doesn’t give you the huge growth you need for bigger funding rounds.

It’s very different to the scenario PG was describing in the late 90s; in those days, a startup would be founded, quickly IPO to raise several $million from unsophisticated retail investors, then spend much of it on advertising on Yahoo to drive traffic and artificially push the share price up. Hence when the music stopped in 2000 all that ad spend dried up and Yahoo’s share price crashed.

All those companies I mentioned above are going fine; slowed growth, sure, but they have real businesses with broad customer bases well beyond the startup ecosystem, so they’re all able to continue operating and keep doing OK.

Still, in B2B you typically want to show you have some megacorp logos (in particular due to larger deal size and up-sell potential), are attractive to different industries, et cetera. So this may be a known issue, but it's also considered when assessing startups.

If, at bottom, they are all also accomplishing something, then it's ok that they are using each other's product. If the whole web of startups selling to other startups is not actually accomplishing anything much except burning VC cash, then it is in fact a problem (one which will be resolved soon, I expect).

Yes. Nothing has changed. It's not quite the blind leading the blind but some variety of that idea.

A uses B uses C

C uses A but not B

B uses C

"Ooooo, A uses B I should use them for C!"

I do think of this a bit when I see startups being the main customers of other startup’s products. For e.g. I’ve never in my career at big orgs and small orgs alike had authority to just go and purchase $50/dev/month on productivity tooling for my teams, so I’ve never quite worked out who is paying for these

The lesson drawn, and a good one as an investor, was the YC advice that start-ups should build stuff for other start-ups.

Sell shovels in a gold rush?

Which is a solid plan. Unless, of course, you buy the shovels with futures on potential gold finds and expect the resulting shovel rush to go on forever.

It worked like a charm for AWS.

In what world is AWS a startup?

There is an exact answer to your question, and it has nothing to do with the size of the company: a startup is a company designed to grow fast. Everything we associate with the success of a startup is a byproduct of growth.

With that definition, AWS is a startup. So was the iPhone. Both invented their respective markets, and had to grow quickly to do it. If either of them had needed to raise money from VCs, smart VCs would’ve invested. But they didn’t need to raise capital, since they were already a successful company.

When AWS was starting?

I mean... a little disingenuous. AMZN was a $10-20B publicly traded company at that time. When is it a startup vs a product offering of an established company?

I think it's a bit unfair to characterize every company that is "starting" as a "startup", particularly when the "startup" in question is/was backed by one of the largest companies on the planet. I don't think people think of such companies' endeavors as startups, even when they are starting.

You mean when they separated internal infrastructure of the largest ecommerce in the world to the point when it was possible to sell it in commodified pieces to other businesses?

That is not what happened and is a fake myth origin story. AWS was started from scratch with a small team in south africa. The best description of all the myths and the real thing I've heard is here: https://www.acquired.fm/episodes/amazon-web-services

It sounds good to perpetuate the "but Amazon.com had extra capacity they could sell" but it's not true.

Unfortunately if the only source is this 3 hour podcast, you are going to have trouble convincing anyone.

There are sources, I didn't go through them yet, but they are there. It's pages of unorganized links, but it's something.

The shovel-seller isn't necessarily also a prospector. They do, however, make a lot of money off of prospectors, whether any gold gets ultimately found or not.

But, when the gold rush is over, the shovel-seller may have to do big layoffs.

This is a rich observation, since (anecdotally) it seems like all the initial customers/traction for YC companies is from other YC companies.

Nothing wrong at all, it's good to bootstrap an initial customer base and get some user-feedback, but until the chasm is crossed to "real" customers, one could argue that this is the same case nowadays. So the dotcom time was no better nor worse than right now in terms of startup viability.

IOW reference counting cannot detect circular garbage.

The housing market was the same way in 2008… in fact the entire global financial system is built that way. It’s what they mean when they say there are $60 trillion (or whatever) in derivatives out there, a long chain of the same assets rehypothecated over and over. It works though, mostly

I somewhat disagree with this on the surface. 2008 was a byproduct of banks holding ratings companies (Moody's and Standard and Poor's) hostage. The banks gave completely fraudulent ratings to loans, the ratings companies falsified ratings on packages, and eventually the house of cards came tumbling down when enough people tried to pull their money out.

There is a way to rate and classify derivatives appropriately, you just can't hold the ratings people hostage. I don't think there's a way to do that with crypto.

It was also a function of banks bundling and rebundling junk debt into “synthetic products”; hence the good observation on banks repackaging the same assets in different ways. The same as happened in crypto, in an even more sophisticated way that few people (at least retail investors) can’t really grasp.


The banks weren’t to blame for 2008 any more than were the hoardes of FOMO buyers - in that they were both pretty culpable but neither of them were the real problem.

Lax regulation of the rating agencies was the real smoking gun. I’m not even sure it was ever addressed given all the banker witch hunts that ensued, and will next time too.

Dave Chappelle was on Saturday Night Live this past week and did a bit in the monologue about why we can’t have good regulations. Worth checking out:


(Starts at 8:50)

A lot of those "FOMO Buyers" lied on their mortgage applications and suffered no repercussions. In fact, many of them ended up doing quite well despite crying "Boo Hoo! I lost my house."

The spent their HELOC and never had to pay it back, they took the "first time homebuyers tax credit", and many of them lived in the house they "bought" for a year or two without paying any mortgage payment until the bank finally took it back. They never paid income tax on any forgiven debt, and they never paid income tax on the imputed income from living in a nice house for a couple of years rent-free until the bank finally was able to take possession of it.

You're not describing a Ponzi scheme, you're describing wash trading and fraudulent accounting.

It is surprising that so far there haven’t been any legislation in Europe that prohibits CO2 emissions and energy consumption for crypto mining. Feels like a slum dunk to get it passed and get some nice political credit for it.

Too many loopholes.

I'm not mining, I'm heating my winter swimming pool with this ASIC based heating elements!

Tax any externalities and let the problem solve itself. Yes, you might end up with some heated sidewalks or other conspicuous consumption, but at least you end up with resources that can counter the problem.

Manufacturing these rigs and building infrastructure also results in CO2 emissions.

Why not simply prohibit proof-of-work coins and be done with it? There are so many disadvantages and no benefits, it seems.

Do they need to? At typical EU energy rates, is there a token in the world worth mining?

Yeah, seems like the carbon tax + high energy prices are already working as intended (ie. forcing non-productive energy consumers offline).

Europe doesn't have a large scale crypto mining industry. Energy prices aren't competitive enough there for it to be viable.

Europe's hashrate could disappear overnight and barely anyone would notice.

It would be a good statement and might set off a chain reaction for other countries. At any rate, a country that isn't very dependent on crypto mining would be a good place to start the bans.

> At any rate, a country that isn't very dependent on crypto mining would be a good place to start the bans.

Is there any country that's dependent on crypto mining? I think you may have meant the inverse--a country that crypto mining isn't dependent on (like it was on China... until China banned it a few years ago).

The chain reaction is that other miners get more profitable when EU bans it in their jurisdiction. Then some small countries with cheap energy will invite new miners to come in and tax them.

And an easy solution will be to prohibit exchange of proof-of-work coins, first in Europe and then, maybe ecologically-minded California would join.

Is this relevant? AFAIK, all these crypto tokens run on Ethereum blockchain, which recently switched to proof-of-stake.

people pay in, and that money is spent on (making the project look good|delivering a yield|paying execs|propping up a trading company|whatever) and then the money is not there anymore for withdrawals. That's the essence of a Ponzi scheme and this meets that criterion.

Sure, there's fraudlent accounting, and wash trading, and other bullshit, but that's all just the some and mirrors that allows the ponzi scheme to work.

thats not what a ponzi scheme is.

a ponzi scheme reports a profit, and pays out that profit to early investors. (the payout is actually later investors inflow.)

the only one of the ones you mentioned that is actually a ponzi scheme is the "delivering a yield." its the yield delivery, aka dividend, that makes it a ponzi scheme, not just fraudulently running away with the money. the scheme works because people get paid out regularly, and have no reason to believe their money isnt working for them.


""" You can now earn yield on your crypto purchases and deposits, as well as your fiat balances, in your FTX app! By opting in and participating in staking your supported assets in your FTX account, you’ll be eligible to earn up to 8% APY on your assets. """

How does one provide 8% yield on BTC I have no idea.

To me, FTX is a classic Ponzi scheme according to the most uncontroversial definitions of "Ponzi scheme".

You are wrong. In a ponzi people are often encouraged to reinvest their gains. You only take the money of new investors to pay out early investors if really necessary (that is to maintain the illusion that the money is still there) otherwise you use the money for something else or yourself.

exactly how crypto works.

Just because that is a common feature of ponzi schemes, that alone doesn't make it a ponzi scheme. A ponzi scheme takes some sort of initial investment from new investors and gives that back to old investors in form of "return". Meaning, the system itself doesn't rely on any sort of growth in order to return, only the sign up of new people into the scheme, which is why they can seemingly deliver such reliable returns to early investors. Eventually you run out of new people to sign up, and the entire house of cards falls apart very quickly.

Every self printed clown bucks scheme is a standalone Ponzi by definition. Early gamblers buy first batch of clown bucks, then hype the price, then next group of gambles buy slightly more expensive clown bucks, then hype, then then buy, in a loop, and each new buyer funnels his money onto enriching early gamblers. The only difference is that FTX has at least 3 Ponzis running - FTT, SRM, MAPS. We can call it a Ponzi CDO of sorts :) but it's still a Ponzi. Sure, they did some exchanging on the side, some investing or donating, but the main business was printing and selling clown bucks.

>Early gamblers buy first batch of clown bucks, then hype the price, then next group of gambles buy slightly more expensive clown bucks, then hype, then then buy, in a loop

That is not a ponzi scheme. The selling of the asset to the next sucker, and the price going up, and each person in line getting to shave some profit off the next person is not a ponzi scheme. (It's also exactly how non dividend end paying stocks work. The stock is only worth what the next person is willing to pay.) Youve described a pump and dump.

A ponzi scheme has a mechanism to give a fraudulent "RETURN" to investors that HOLD. That is the definition.

None of the clow bucks are claiming that the underlying product is producing its own profit, the only value is the holding of the asset itself.

Everyone is now using ponzi to mean any sort of scheme including ponzi, pump and dump, etc. But thats not what the word ponzi actually means. And when you say things like "by definition" we need to stick to the actual definition.

That’s a common problem when dealing with illiquid assets and not a characteristic of just crypto. For example a VC firm buys 10% shares of a company valued $1B at their latest round. Then the market tanks but no one really knows what these shares are worth because they are not trading anywhere so you don’t have a price to mark them. As a result you mark them in your books with the latest round price at $100m even though they might be worth much much less.

This is different. In the case of the VC who bought shares in the startup, they at least have the price they paid for the shares.

In the case of crypto companies who create their own tokens and then use them as collateral, they never actually paid anything for the tokens they own. There's not even a cost basis. It's entirely made up.

Not only is what the crypto companies doing much worse, but it is rare for VCs to leverage their investments in companies. It's not like their fund is levering up 2:1 and buying companies, like a PE fund does, because in the case of VCs their investments are usually not producing cash flow. But in the case of some of these crypto companies, they were levering up using collateral of tokens they made up that they never paid anything for.

It's much, much worse than anything recently seen in finance. CDOs were bad in 2008, but at least the mortgages were a secured claim on a physical asset that someone actually paid something for.

Classic illiquid asset problem.

Don't know the "real" price because it's infrequently (or never) traded.

But are we really talking about "assets" here?

Good luck finding a solid definition of that term that excludes them without excluding a whole class of other, more traditionally recognized stuff.

Tokens, etc. are easiest to think of as securities (aka stock) generally, albeit securities in a more abstract thing than a company.

It feels like you're stretching here. If I cut squares of paper and call them Ponzi Coins and then mark them in my books as 100 Million in assets, well, I'm stretching that definition. I've also created more "assets" than the average crypto coin. Maybe it's as simple as adding a word, fake. The coins are fake assets. Otherwise, the words lose all meaning in the context of finance (assets and liabilities).

Except many are tradable on a market, just like securities and other assets.

Also; stock in private companies is often not tradeable at all, but no accountant is going to call those fake.

There are multiple ways of plausibly pricing assets.

None are generally accepted that would let someone just make up a ridiculous valuation and stand up to any scrutiny, but people can always do what they want until the auditors show up anyway.

At the very least, a bank can look at stock in a private company, and before accepting it as collateral, demand to see cash flow and income statements, and perform its own valuations based on revenue, earnings (if they exist), debt to equity ratios, and things of that nature. With a token, pretty sure the analysis on that level becomes "so you just made these up?"

Now, whether or not this is how banks act in practice is another question. It is, perhaps, how they should act if they're being conservative, but it is likely that others will swoop in and often enough grab that interest for themselves. And in the rate environment we've been in until very recently, those are likely the banks that have managed to survive in many cases.

How about various forms of IP? They're just intangible rights. They give you a certain monopoly, which is one (admittedly odd perhaps) way of describing a cryptocurrency (or anything encrypted when only you have the key).

The fundamentals for your ponzi coins are so bad they might as well be worth zero, so why would that insignificant value difference matter anyway?

IP is valued on it's ability to generate revenue. This is why the patent on swinging sideways in a playground is worthless, but the patent on the telephone was extremely valuable.

Crypto tokens are unable to generate revenue.

It boggles my mind that lenders aren't all wise to this nonsense, and severely mark down these assets, if not completely refuse to allow them as collateral. I suppose that at least many banks got very hard up over the last 10 years of next to zero interest (next to on one side or other of it depending on where in the world they operate), so they were probably more willing than usual to lend money for the chance at getting a return on it. Curious to see which banks are getting hit hardest for exposure to FTX loans -- that hasn't been something I've been hearing much about yet.

Company have valuation would be based on recorded revenue, profit or at least growth rate. When buying a stake in a company, there is a whole legal framework and due diligence. Crypto token just have the bunch of wash trades to support theirs valuation and no transparency.

Although, according to Matt Levine who writes Money Matters, that can sometimes be a feature instead of a bug whereby private firms are better able to ride bad market conditions than public firms are.

In some cases you could see it being positive not having your stock price drop everytime the Fed announces a new rate increase or jump everytime they don't (or etc etc with other events) if your primary goal is to continue at a steady pace to achieve some goal.

Small note: it’s Cliff Asness from AQR who came up with the illiquidity “premium,” though Levine does report it a lot. This matters a bit bc AQR is a large hedge fund that trades in liquids and therefore is marked frequently… there’s a bit of self-serving bias here (although may still be true).

No. You can’t just make up the book value of your assets. You need some sort of justification, and these are, for public companies, strictly regulated.

> …and not a characteristic of just crypto

That’s a rather fine and unimportant distinction.

It is characteristic of crypto, just not only crypto.

And, in the case of crypto, the asset never represents anything but itself.

Oh yes.

> in the case of crypto, the asset never represents anything but itself.

This is the foul taste of all crypto "assets". They are not assets because they have no intrinsic value for anything.

The nearest real economy analogy is the art market, which is hopelessly inflated, utterly riddled with fraud, and with very little intrinsic value.

But you can hang a painting on a wall and look at it. Even if it is a fake it still looks good on the wall.

Crypto has none of that. All it has is the scam, the fake, the hope of a bigger fool.

Shame on us for letting this happen. It gives a bad name to geeks in general and cryptography specifically.

The art market has value because the illiquid-but-existing market lets you do tax evasion through fractional gifts.

Crypto doesn't have the same properties, but if a crypto token isn't a security then you can get some other tax benefits via wash sales.

Well I mean there are asset-backed cryptocurrencies too, also ones backed by fiat currency.

One thing to note is that this is distinctly the differentiator of AMMs (automated market makers), Uniswap for example.

Here are the docs for V1 (V3 is different, but the core pieces remain) https://docs.uniswap.org/protocol/V1/introduction.

V2 docs have fun diagrams if that is useful for you https://docs.uniswap.org/protocol/V2/concepts/protocol-overv...

It's quite interesting, and essentially what happens is that a pairing pool is created, ETH <> Shtcoin for example. So now for that shtcoin to have "value" it needs to be liquid within the pool, ie can go into ETH. The cost of the coin is determined mathematically based on the ratio each side of the pool.

See also: Basecamp valuation tops $100,000,000,000 after bold VC investment (2015), https://archive.is/A0Wb1

> In other words, suppose I create token SCAMMER, and I say its supply will be capped at 1 million tokens (or 10 million, or 100 million - that's the "nice" thing about crypto, I can kinda choose whatever number I want), and then I'm able to sell 10 of those tokens for $100 each. According to FTX math, I now have $99,999,000 of assets on my balance sheet, but of course if I actually tried to sell a lot of my "kept" tokens I would tank the SCAMMER price.

Anybody can do that, true. What you also need is credibility and willingness to destroy that. Look at Fried Bankman, he had had tons of pedigree and knew what ears to wisper too. He apparently wasn't saying anything smart and yet people believed him. He was even rude and playing videgames during meetings and yet people believed him. It's easy and yet it isn't. I think scammers have qualities normal people don't have and when all those line up we get a super bankrun like what happened in this case.

I think artwork also works this way. I have 10 piece of art drawn by Mr. Artist. My friend buys a piece for 1 million dollars, I now have ~9 million dollars of "assets".

These shenanigans have been going on for a long time in wealthy groups.

And then you donate the art to a foundation or charity and pocket a fat tax credit, thus avoiding the problem of having to actually find a sucker to pay $1 million. Some jurisdictions have cracked down on this, but for a long time it was a popular way to game the system.

That's why you see all kinds of fintechs trying to push art investment into the masses nowdays. They want the stupid money.

If you made a coin that was actually called ScamCoin people would buy it, because they would believe they could sell it to someone else for a profit.

DogeCoin was supposed to be a parody and people actually bought it.

Also my phone does not flag DogeCoin as a misspelled word.

Anyone who invests in this stuff is either really dumb, or morally impaired yet smart enough to exploit people who are really dumb.

As someone who has made a bit of money in crypto, there's no reason I can't be really dumb and morally impaired, but lucky. I will note that moral impairment and intelligence are not highly correlated as far as I know.

This isn't a ponzi scheme as others have pointed out.

This is well understood and goes on all the time in NFTs, it's usually called wash trading.

People in crypto know this is happening. The reason they still speculate is because it's hard to predict when it will collapse, and some people think they have an edge predicting that sort of thing.

>> So many ponzi schemes on top of ponzi schemes...

Isn't this what happened with Quadriga exchange?

The regulator said Thursday that Vancouver-based Quadriga's late founder Gerald Cotten committed fraud by opening accounts under aliases and crediting himself with fictitious currency and crypto asset balances, which he traded with unsuspecting clients.

On Thursday, the OSC attributed about $115 million of the $169 million clients lost to Cotten's "fraudulent" trading.

Another $28 million was lost when Cotten used client assets on three external crypto asset trading platforms without authorization or disclosure.

The OSC said he also misappropriated millions in client assets to fund his "lavish" lifestyle and because he was in sole control of the company ever since 2016, he "ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records."


That's just regular theft/embezzlement, not a ponzi.

You don't even need a buddy for that. Just make another anonymous address to buy your token from yourself. Or a dozen, it doesn't matter.

It's shitcoins all the way down.

I often joke that crypto has been run by gold bugs who were forced to "smoke the whole pack" on fiat currencies. So a lot of crypto is a nihilistic homage to federal reserve systems.

In that way, "DeFi" feels the same about the finance industry.

It was no secret that SBF hated traditional finance. And so I assume he refused to learn anything from it. But what he ended up creating was almost a hilarious parody of the financial system.

That's at least how I can square the circle about how someone who could criticize Lehman Brothers for letting themselves get overleveraged on shady asset classes could literally have negative 8 billion dollars in "Hidden, poorly internally labeled ‘fiat@’ account" and then publicly go to Twitter to say they have a "liquidity problem".

SBF (and like half the people at Alameda) worked at Jane Street or other big name financial firms. They weren't ignorant of traditional finance.

I can't look at their balance sheet and conclude that they were anything but ignorant of traditional finance. He seemed completely unaware of duration risk, and it seems like they have never talked to an accountant or anyone who has even the slightest clue about what a balance sheet should remotely look like.

SBF worked at Jane Street, but he must have been there in a capacity that insulated him from this sort of knowledge. At large firms such as that there are very specialized roles that juniors typically start within, where the visibility is fairly limited.

You think this is ignorance? I know very little about finance or the technology of finance but this is pretty clearly fraud and criminal behavior.

My only question is was he able to pay for his private jets or residences in FTT? He seemed pretty convincing to a lot of people so it would be interesting to see if everything was paid in his own made up currency.

I don't think ignorance and fraud are mutually exclusive. I think he has put both on display to a pretty significant degree, personally.

I presume his walking around money was from loans from banks based on his equity in FTX. This seems to be like the standard thing that the super rich whose wealth is tied up in tech stock do these days.

He was handed billions in USD by VCs. I'm sure he stashed a lot of that in a Vanguard mutual fund while he made a show of operating his perpetual motion machine.

> I can't look at their balance sheet and conclude that they were anything but ignorant of traditional finance. He seemed completely unaware of duration

SBF is notorious for advocating expected-result decision-making with risk entirely disregarded, and essentially saying if you aren’t in the high risk range where the median (rather than expected) result is break even or worse, you are usually being too cautious; he's not ignorant of risk, just deliberately contemptuous towards it being a negative factor in decisions.

Turns out, when you chase Gambler’s Ruin that hard...

Or he thought he could get away with it and grow fast enough where it wouldn't burn him.

They knew this balance sheet was bullshit. They were just trying to cover up the $10 billion "loan" they gave alameda after it blew up in the spring. I agree that alameda made mistakes that traditional funds wouldn't, but the balance sheet isn't one of them.

The FTX disaster was not due to incompetence nor ignorance but to fraud.

I think SBF’s public and, AFAICT, honest belief in expected value optimization without regard to risk played a fairly central role in every step of the fraud, and that it constitutes a very specific form of incompetence.

That's an extremely charitable interpretation of the events, in my opinion. Misappropriating custodial funds is not ever acceptable when you are running an exchange, no matter how good your EV looks like.

And I'm not buying into his whole effective altruism thing. What I think is that SBF had a strong desire to make money, ethics be damned, but had a troubled conscience. Effective altruism gave him moral comfort and helped him rationalize his actions.

> That's an extremely charitable interpretation of the events, in my opinion.

Only because you seem to be reading into it a positive moral judgement that I did not, in any way, express.

> Misappropriating custodial funds is not ever acceptable when you are running an exchange, no matter how good your EV looks like.

I didn’t say it was.

> And I'm not buying into his whole effective altruism thing.

SBF doesn’t just advocate that method of decision-making in the context of EA, he advocates fairly consistently for financial and other decision-making.

It seems I read too much in your comment. I can agree with labeling his method of decision-making as incompetent but I believe what happened at FTX goes beyond that and I just hope he doesn't get away with it by playing that card.

> worked at Jane Street or other big name financial firms. They weren't ignorant of traditional finance

I was an options market maker. That taught me a lot about options but little about finance. The latter comes from curiosity and initiative, up to and including reading history books. Given SBF was post book or whatever, the ignorance isn’t surprising.

Did you read comments Caroline made on her blog/tumblr?

Not sure of the timeline but she was asking why not double down on a 50/50 bet every time (if you lose) - you can earn "infinite" money but lose only your bet.

I am not sure working somewhere means you are an expert in it. It's incredible these people managed to create a company size of FTX.

>Not sure of the timeline but she was asking why not double down on a 50/50 bet every time (if you lose) - you can earn "infinite" money but lose only your bet.

I'm pretty sure you're referring to this tweet


In which case she wasn't the person asking the question. Somebody else was asking it, and she was unequivocally saying that it wouldn't work.

From one of the screenshots in that post, Ellison says:

> (I'm not an expert on traditional finance but my impression is that it's a lot more boring; largely brokers will just try and have margin requirements conservative enough that it's very unlikely for you to actually lose all your money.)

This person was managing all that money.

Mind pointing out what specifically what made you think the quote was outrageous/interesting?

Every phrase was fascinating and revealing:

1. "I'm not an expert on traditional finance"


2. "it's a lot more boring"

So I knew this guy who used to game the customs at New Delhi airport. Back in the day he would fly over to Singapore, buy some expensive electronics, and try to get it past customs without paying duty - he was a "mule."

There was one particular customs agent who knew this guy and would catch him. The mule would pick flights during that agent's shift - told me that it was boring otherwise.

These kids were getting a kick out of risky trades.

3. "conservative enough that it's very unlikely for you to actually lose all your money."

This tells me they knew what they were up to and they didn't really care - it was part of the game.

The whole saga is fascinating. Can't wait for the book/movie combo to come out.

>1. "I'm not an expert on traditional finance"


And is that a problem? "traditional finance" is a sprawling subject. There are literally four year degrees on "finance". Yet, jane street hires (a "traditional finance" trading firm) regularly hires people with only mathematics degrees to trade for them. Other hedge funds/trading firms do the same as well.

> 2. "it's a lot more boring"

>There was one particular customs agent who knew this guy and would catch him. The mule would pick flights during that agent's shift - told me that it was boring otherwise.

>These kids were getting a kick out of risky trades.

Don't you think you're reading a little too much into this? Someone calls traditional finance boring so they must be some sort of adrenaline junkie?

>3. "conservative enough that it's very unlikely for you to actually lose all your money."

>This tells me they knew what they were up to and they didn't really care - it was part of the game.

In some ways traditional finance's margin requirements are more conservative. Regulation T specifies that for stocks, initial margin is 50% (ie. if you buy $100 worth of stocks, you need to pay for $50 out of your own pocket), and maintenance margin is 25%. A quick search says that FTX's margins are 10% and 5% respectively. However, in other ways traditional finance's margin requirements are looser. Because they expect that the lender is a legal entity they can go after, they're much more lenient when it comes to liquidating customer's accounts. That's how lenders got burned on Archegos, because Archegos were giving excuses, the lenders believed them (also, liquidating your customer is rude and they don't want to lose their business), and didn't liquidate them. Crypto on the other hand is far more conservative in this regard, because they basically assume that the only assets you have are the assets in your account. To that end, crypto exchanges (including FTX) have margin monitoring 24/7 and will automatically liquidate customer accounts when they dip too low. So to get back to your original point, they do care, and it's something they thought long and hard about.

FTX and crypto were background noise for me. Clearly you appear to know more about these things than I do.

I look forward to seeing how this plays out, especially for Lewis' book.

You are right, I misread. My apologies.

Still the whole blog and her various public interviews are wild. I know we are operating with the benefit of hindsight but I find her very unconvincing - for example when asked about math in her job she said she doesn't use any really, except maybe elementary school math. That you only need to be able to take some risk (laughs awkwardly).

Rookie mistake! The trick is to double your betting amount every time you lose the 50/50, until you win, and then return back to your regular bet. That’s how you turn a profit. (/s)

> read comments Caroline made on her blog/tumblr? Isn't that the Martingale strategy?

> It's incredible these people managed to create a company size of FTX.

Didn't they got hundreds of millions in play money from their network (school friends). This worked while everything was going up and new cash was coming in.

>This worked while everything was going up

"Never confuse being long in a bull market with genius."

--John Bogle

Being an entry level staffer is not the same as running a n-Billion dollar business. The higher you rise, the more important the role of governance, compliance, and risk management becomes. If you shortcut this you will miss an important part of "job experience"

Makes me wonder what’s going on at Jane Street. How sure are we they’re above board?

Maybe you should spend a moment researching rather than using some nebulous transitive property of "if they hired this person, they must also be a scam."

Jane St is a prop trading firm - the only money they have to lose is their own.

I work in the trading industry. These people had short tenures at JS, especially Ellison. They weren't seasoned senior traders making big decisions. JS, unlike Alameda, has been in the business for 20+ years and have been very profitable for most of their existence.

It would be worrisome if most of Alameda was full of ex-JS traders, who had been there for 7+ years.

One of the biggest financial frauds of this century has just been perpetrated by two young people that used to work for them, the questioning related to "how did Jane Street hire these people" is perfectly logical.

Well the interview process is more or less "are you good at probability puzzles and games somewhat related to trading."

A plausible story to me is that they were good at whatever they screen for in the interview and then at Jane Street they made a bunch of money. Then they attributed too much of that to themselves and not enough to whatever institutional processes and risk frameworks they benefited from. They bring themselves but not those processes to their own trading firm, and then boom!

I worked on quant buy side for a long time and you dont just automatically come out of these places knowing one secret to making money trading. equally smart on paper people might be working on message passing, risk management, data analysis, special projects, also trading, simulator, database, and might spend 5 years in-house and not come away from the experience with knowledge which by itself represented major alpha.

for me just knowing how to setup a quant trading firm, how to choose prime brokers, how to find and select vendors, leased lines, how to setup paper work, cap intro relationships, exchange memberships, FIX certs, are of equal value as alpha tricks, and really I dont even see a lot of evidence that the Almeda / FTX people were particularly well-seasoned in any respect.

The founder of EA got SBF in. That's another can of worms but that guy apparently changed his last name from Crouch to McAuskil or whatever...

How would Will MacAskill have enough sway to get SBF in Jane Street? Also, why would that matter? I have absolutely no reason to believe SBF couldn't pass their interviews.

Did they work in the risk management back office at JS?

The Societe Generale guy that managed to lose 5 billion euros for the bank through "breach of trust and forgery" (to quote wikipedia [1]) didn't work in the risk management department. I don't think that was any consolation for the bank's stakeholders.

[1] https://en.wikipedia.org/wiki/J%C3%A9r%C3%B4me_Kerviel

Actually he had worked in compliance, and then they moved him to front office. Extremely dangerous. Not recommended.

But the point is you can't infer anything about Jane Street risk controls from people who didn't have that role.

> Jane Street risk controls from people who didn't have that role.

I'm talking about the Jane Street risk control people not being able to filter out two of the biggest fraudsters of this century. Yes, I know that, technically, the Jane Street risk control people most probably only focus on the risky stuff that might bring their house down, and, as such, they most probably wash their hands when it comes to the deeds of their former employees, but I was under the impression that when those sort of shops hire someone there's also a general screening for "is this a guy/lady that is going to swindle billions of dollars in the near future"?

And, to be honest, I guess that's what the cachet of people like SBF was, especially in a very deregulated and wild market like crypto is. More exactly "normal" people would have thought along the lines of: "this guy has worked for Jane Street -> I've read Jane Street are cool, honest people, so they must have done some vetting of their employees -> SBF most probably won't run with my money".

More generally speaking, as you most probably well know, the whole house of finance is built on trust and trust alone. That goes for crypto, that goes for traders like JS, that goes for boring money market funds, that goes for the FED itself (probably with trust decreasing from Fed -> to MMFs -> to traders -> to crypto).

When such swindlers like SBF and Caroline Ellison both happen to have worked at any one entity that's part of that chain of trust that I mentioned, then said entity can't just wash its hand saying "well, we checked out on them, they were fine when they used to work for us", it doesn't work like that. People will start asking themselves: "Are there other swindlers now working for JS that JS has failed to catch during its vetting process? If yes, do they risk bringing the whole JS house down?".

Not sure what you think risk control does, but they don't strap traders into the brainwave reader to filter out people with evil souls.

Well, then we're going to have SBFs and Kervels going well into the future. Kervel was 5 billion, SBF is, what, 10 to 15 billion, going by the same progression in 5 years' or 10 years' time the next guy is going to swindle 30 billion or so.

All the while the IBs and the algo traders and all those fancy financial shops will keep saying: "how could we have known? We're not mind-readers! These are not our people!". Madness.

Also, by "JS risk control" people I was not only thinking about the spreadsheet guys. I hope to the gods of Mammon that there still is some sense of "is this guy trustful? Does he belong in this trust-based industry?" active inside of those firms, and, no, I don't expect the spreadsheet guys from credit risk to be in charge of it.

If you're telling me that "no, there's no such department in any of those institutions! Any crook can get hired as long as he passes the technical interview" then I think the industry has a whole has a big f.ing problem.

GP is living in minority report world

Alameda was supposedly a prop trading firm too.

FTX is the one who lost their customers' money.

Jane St is fully above board and has no such associated firm managing customer money.

> Jane St is a prop trading firm - the only money they have to lose is their own.

Unless they use leverage, which they all do. Then, they can easily lose their lenders (or options buyers, etc.) lots of money.

It's not about losing other people's money only. What I'm worried about is: are extremely over-leveraged and able to get the returns they have by doing tax and regulatory dodges that their competitors aren't participating in? Did SBF learn how to operate in the financial world from seeing how Jane Street operates?

They are a high frequency market maker. They are not a hedge fund.

They make money from the pennies in the spread, many many many times over. They are not making over-leveraged big bets.

I encourage you to talk to anyone who works in market-making finance.

Being a market maker doesn't exempt a firm from blowing itself up. See Knight Capital.

Knight Capital was traded (so taking other people's money).

Let's also try not to conflate "blowing up" with actual fraud. Traders are free to lose all of their own money, and doing so is not fraud

Knight was the largest market maker on NASDAQ and NYSE at the time they blew up so if you're going to use "they're just a market maker" as a defense for JS you can't dismiss Knight as "oh, not THAT kind of market maker." And Knight was known for plenty of shady activity like front running and spoofing.

Knight did not blow up due to fraud, so they were not "below board." Losing money is not against the law.

Furthermore, Jane St only trades their own capital - ie. not capital deposited by customers in an exchange and not capital provided by selling ownership stakes of itself on a public market. This is a clear distinction from Knight.

It's as if some guy just had a bunch of money, traded it and made some more money, hired a bunch of people to keep trading it, and it has made a ton of great returns and people are asking: is this a scam?

Who would it be scamming? The only suckers are this guy.

Finally this question is no longer considered fringe.

This is what I have been thinking. This whole thing has soured in my mind: Jane Street, Effective Altruism. Crypto, VCs, Silicon Valley culture in general I already assumed are scummy.

> Effective Altruism

The practical version of Effective Altruism for most people is essentially "if you're well off, you should donate a chunk of your income to buying anti-malaria bed nets/deworming medicine/direct cash transfers for the global poor". I don't see how that could "sour" in your mind, seems like a fairly unreservedly good thing.

I want to point out that there are real people [1] being helped by Effective Altruism right now. Telling them "sorry, can't help you any more, some rich asshole in the US just committed a scam, and he claimed he wanted to help you too" just seems incredibly petty and cruel to me.

[1] - This is also a group that traditionally doesn't receive much attention either.

This is why so many people find EA annoying. People donated to malaria causes well before EA was a thing, but of course now, without EA, there's nothing.

I find it very annoying. Why I’ rely on the benevolence of a few rich people when you can do the same much more effectively with proper taxation and wealth redistribution.

> proper taxation and wealth redistribution

All the mainstream political suggestions for taxation/wealth distribution focus on correcting wealth inequalities within a rich nation. Very few (if any) suggest redistributing from wealthy western nations to the global poor.

Neither does EA, they just suggest rich people donate sometimes...

I don’t think upper-middle class programmers were donating much before EA.

Obviously AMF has been around before EA, the big difference is the additional amount of money it’s been able to deploy. I personally know many people (including me!) who started donating significantly because of EA.

"if you're well off, you should donate a chunk of your income to buying anti-malaria bed nets/deworming medicine/direct cash transfers for the global poor" (c)

Isn't it against EA ethos? Helping some people right now, right here? I read some posts about this movement, and from them it seemed like EAs are more interested in the far off stuff - developing benevolent AI, transumanism, space travel, gene vaults, terraforming, Mars colonisation etc. (there is nothing wrong with these activities). Because helping people right now is "just" altruism, not effective altruism.

The longtermist EAs do suggest that, but by dollar donated, the more traditional global health stuff is still a large chunk of what EA do.

> I read some posts about this movement, and from them it seemed like EAs are more interested in the far off stuff

You can’t really use that as a metric to judge the movement, since there’s only so much one can write about “donate money to AMF”, but you can write pages and pages about the far off stuff.

You got it. That is the correct line to follow. Sequoia in particular must be heavily investigated.

None of those things are Silicon Valley. Can't blame Santa Clara County for none of this.

Jane Street - NYC

EA - Berkeley

Crypto - the Bahamas or something?

VCs - Palo Alto

Palo Alto is literally in Santa Clara Country....

```Palo Alto (/ˌpæloʊ ˈæltoʊ/; Spanish for "tall stick") is a charter city in the northwestern corner of Santa Clara County, California, United States, in the San Francisco Bay Area``` - https://en.wikipedia.org/wiki/Palo_Alto,_California

Perhaps not ignorant but maybe inexperienced for the roles and responsibilities they assumed at their new company? This is from a piece about Caroline Ellison the CEO at Alameda:

>"Before joining Alameda as a trader in March 2018, Ellison spent 19 months as a junior trader at Jane Street after graduating from Stanford University with a bachelor's degree in mathematics in 2016. In a podcast two years ago, Ellison explained that Jane Street was her first job out of college. A diehard mathematician and Harry Potter fan born of two economists, Ellison she hadn't wanted to go into trading but "just didn't really know what to do" with her life.

> "She was persuaded to join Alameda by SBF, who also previously worked for Jane Street. When she quit Jane Street, Ellison said she felt bad for staying such a short amount of time. However, this feeling quickly dissipated when she arrived at Alameda and discovered that she had "kind of more trading experience than a lot of Alameda traders," anyway."[1]

And similarly for Constance Wang the FTX CEO/COO:

>"Constance Wang joined FTX as chief operating officer in the Bahamas in 2019. Initially, she was chief operating officer (COO) of FTX's crypto derivatives exchange. In January 2022 she was promoted as CEO of FTX digital markets, with responsibility for the Bahamas HQ. An org chart published by the Information puts her one level below Sam Bankman-Fried.

>This looks like a big job. All the more so because Wang is only a few years into her career. Before she joined FTX, most of her time had been spent at Credit Suisse in Singapore.

>Wang wasn't an MD at Credit Suisse. She wasn't even a director or associate director. She was an analyst and she worked at the bank for two years, first in KYC in the private bank and then in APAC risk and controls. It was her first job out of university.

"Admittedly, Wang didn't go straight from Credit Suisse to FTX - there was an eight-month detour to Huobi Global, a crypto exchange in Singapore first. However, the fact that this was sufficient to land her a job in her late 20s running 'institutional clients servicing and operational procedure,' at a fund with $1bn of revenues last year, looks slightly questionable."[2]

[1] https://www.efinancialcareers.com/news/2022/11/caroline-elli...

[2] https://www.efinancialcareers.com/news/2022/11/constance-wan...

You can’t make this stuff up. This would make an amazingly funny movie.

It’s only a matter of time, Michael Lewis has been shadowing SBF for months now.


Lewis supposedly compared SBF to Luke Skywalker fighting Darth Vader CZ. He was probably writing a Flash Boys style hagiography. He'll have to rework the material now.

We've somehow managed to recreate the 2000 and 2008 recessions simultaneously

prop trading firm and a sell side firm or an exchange are not structured the same way. its like calling zebra and deer and giraffes the same animal.

do you mean they were knowingly manipulative of those who actually were ignorant of traditional finance, as a business plan of sorts?

Both SBF and the other person were glorified interns and got position based upon their parents network.

Doubt it, unless you have evidence otherwise. Jane St (unlike customer-facing finance firms, like Goldman Sachs) does not really engage in this style of nepotism hiring that I know of.

More likely is that the child of prominent academics might actually be more intelligent than average themselves and certainly provided more opportunity to flourish.

Youre all over this thread defending Jane Street.

> Jane St (unlike customer-facing finance firms, like Goldman Sachs) does not really engage in this style of nepotism hiring that I know of.

Wow i'm sold.

Because it's a comment thread I find interesting, I made 4 or so comments related to Jane St, 2 of which are replying to people replying to me.

I promise you I have no affiliations with JS whatsoever, just think that there is lots of sloppy reasoning going on in this thread.

> I promise you I have no affiliations with JS whatsoever

Makes your claim unconvincing though. At least if you had worked there you might be in a position to make a claim either way.

Well I went to a major feeder school and know a lot of people hired by JS.

The class of people hired by firms like Goldman Sachs is obviously nepotistic in nature and very different from the class that JS hires.

A substantial portion of the GS mix is athletes & what I would call traditional Northeast elites, Jane St hired mostly out of the top physics, CS & applied math classes I was in.

Beyond that, having parents who are prominent professors is nothing special at these schools and definitely would not give you pull at these institutions. Finally, Jane St has no incentive to engage in this sort of hiring because they are not customer/client facing.

Hahahah its the funniest thing I ever read. Some people are so doggedly invested in the believing myth of meritocracy. Yeah right a private firms hiring is totally meritocratic.

Cultivating relationships with influential people makes sense for an investment bank. Jane Street is a market maker, what exactly would they gain from it?

Could you detail SBF's experience that would have opened doors to him at Jane St without nepotism? I ask because I can't find any evidence to show how he was able to get into that position. Thanks for the guidance and I look forward to your reply.

He went to MIT and interned there.

I'm confused as to what you are asking - Jane St certainly hires plenty of people out of college not for nepotism reasons.

The fact that he did not have a prior job before college is not evidence he was hired for nepotism.

Let me guess - he also got into MIT through nepotism as well.

His parents are professors at Stanford. So yeah, of course he did.

Gotcha and thanks for being upfront about your reasoning.

I'll let others decide on whether they find that reasoning convincing!

You "got" a different poster, though.

What was his GPA at MIT? Did his parents jobs get his exams marked higher?

Can't tell if you are being earnest but as someone who majored in CS at a HYPSM, I can tell you there is literally no chance that this occured.

I know kids who definitely got in because of parents money, but it certainly did not impact their grading.

I would exclude MIT from that list, but the rest of those schools basically have a huge reputation for grade inflation -- i.e., once you get in, you won't be given a bad GPA because you're paying so much. Grading people legitimately based on competence would piss of the parents/donors too much. Curious to hear your take on this.

My impression is that grade inflation is definitely a thing, I am not so sure that it is for the reasons you suggest (pissing off parents/donors/people paying for degree).

What grade inflation really means is that for many, if not all, majors at a school like Harvard, you can take a path of classes that will end up with you completing your major and having a high GPA.

That said, there are certainly classes that will be much less nice to you when grading and have a self-selected group of students. My guess is that if JS has enough people from, say, Harvard, they will know the difference between a student who took hard upper level courses to complete their major vs. just the simple basics.

In terms of why this grade inflation is so prevalent, one reason I think is that faculty want to have students in their courses/run a "superstar" course, and students select classes with the easiest grading policy. Schools like MIT (and Princeton as well) specifically combat this and so are known for grade deflation.

I was being sarcastic because I'm pretty sure it would not impact it in anyway.

Does it matter? He did an undergraduate physics degree, the only time his name appears on Scholar is in a book of his mom or a letter from one of their colleagues, and when it was over he promptly went to some quant company that gobbles up these graduates by the busload (and spits them out again). The least important part in all of this is the grades, or possibly even what undergraduate he did.

Most of JS's trading interns and new graduate hires, are STEM grads at HYPSM schools. SBF going to MIT gave him a big leg up.

From what I've heard about Jane Street interviews from people who interviewed there for intern and new grad positions, they involve solving mathematical puzzles about probability, statistics, and betting. I know multiple people who were invited to onsite interviews, including in one case for a trading position, who were in progress on math and computer science degrees, and had no specific finance knowledge. I also know people who have done trading internships at other firms with no finance experience.

It seems entirely reasonable to me that Jane Street would consider a Bachelor's degree from MIT in math or computer science, being clever, and a prior internship at Jane Street as qualification to work at Jane Street.

He was there for only three years, and at least ignorant about the finer points.

His point, I believe, it that it's traditional finance using crypto to do their usual thing. Pump and dump.

That’s not what traditional finance does…

Where do you suppose the term comes from?

Ok fine that’s not what jane street does.

Fair enough, I know very little about Jane Street other than where they are located and that I'd never qualify to work there.

(They're not located on Jane St)

>It was no secret that SBF hated traditional finance.

That is quite odd. FTX was the very definition of traditional finance (with or without whatever regulations you may think is required). Maybe he was bullshitting you too?

Crypto is now infested with Wall Streeters and VCs trying to convert it into some grotesque form of the old system they are familiar with and failing catastrophically. In a few years decentralized DEXs will all but replace the centralized exchanges.

This is the great thing about this whole event.

It's a grotesque level of criminal fraud, but unlike when that happens in traditional finance, there will be no bailout. These fraudsters will get wiped out and there is no one to appeal to who can save them.

These fraudsters and others will get wiped out. That's the bummer about this whole event.

You may feel that the others were too greedy and naive, and therefore deserve what they get. Perhaps. But they're still getting wiped out, and they didn't participate in the fraud. (Unless you consider all of crypto to be a fraud...)

Sometimes, the best way to train children to avoid putting their hand in the fire is not to be overbearing and make certain they never get burned, but to let them make that mistake and get burned a little so they viscerally understand the consequences of doing such a dangerous thing. If you never let them get a little burned, then they might get terribly burned when you're not around to pull them out.

Losing tons of money is not the end of the world, even if it can feel like it. It might just mean you have to swallow your pride and go work at Walmart or McDonalds for a while to build yourself back up. Millions of people live that life every day.

Stay humble. Stack sats.

There are a lot of people who already work at McDonalds or Walmart that watched FTX's super bowl commercial and knew about the "whole crypto thing" that, too, are wiped out.

I'm enjoying this shit as much as anybody but unsophisticated people are certainly feeling this right now.

>Unless you consider all of crypto to be a fraud

This seems to become clearer every day.

Canadian taxpayers will, one way or another, bail out the teacher's pension fund that invested in FTX


It’s a pension fund with a lot of VC deals, and a rather profitable one at that. It can easily eat $95 million in losses.

Oh, don’t be a daft. First, they gambled a fraction of a percent of their portfolio into FTX. Second, the OTPF is one of the best-managed, most-successful funds: they will never be in a position to require bailing out. Your claim is, to be precise, horseshit.

> It was no secret that SBF hated traditional finance.

Uh? The guy worked in traditional finance for a few years and was pushing for more regulations on cryptocurrency. His parents were compliance lawyers. He donated tons of money to the democratic party to push for regulations. He ran a centralized exchange. This does not exactly scream DeFi... He was just an opportunist who saw crypto as a means to get rich quick and apparently, getting rich from trading fees was not quick enough for him.

There are a lot of "gold bugs" types in crypto but they mostly self-custody BTC and stay away from shitcoins and day trading.

> The guy worked in traditional finance for a few years and was pushing for more regulations on cryptocurrency.

He was definitely not pushing for bank supervisors examining the books of Crypto exchanges.

FTX could not withstand a bank supervisor momentarily glancing at their books from a distance.

> I often joke that crypto has been run by gold bugs

You're not wrong. Crypto is the natural evolution of the gold bug.

Gold bugs funamentally don't understand the finance system. The gold standard was never about fully backing your currency with a global commodity (fun fact: the US dollar was never 100% backed by gold reserves). A gold standard is actually just a peg, a promise by the government to exchange dollars for gold (and vice versa) at a fixed rate. And you don't technically need any gold for that.

Yet gold bugs harp on about gold reserves and that's the least important part of the gold standard. Either way you have a trust issue. FDR famously performed a sovereign debt devaluation, for example.

Likewise, my experience with crypto people is they too (generally, not always) don't understand why the TradFi system is the way it is. Worse, they seem to use wilful ignorance of that as a badge of honor (while muttering something about "disruption").

So gold bugs who (rationally or irrationally) hate TradFi find a natural home with similarly minded Crypto Andys.

I think you're debating a strawman, though. Sure, there are delusional / ignorant goldbugs who make stupid arguments, but you can find that in pretty much any domain. There are also reasonable people, including heterodox economists, who understand the history of currencies and monetary systems, and still advocate for a return to pegged currencies or for precious metals as a part of a diversified portfolio. You don't have to agree with them, but ad hominems are probably unnecessary.

I mean, it's not even that fringe is you consider that Central Banks sure hoard a lot of gold specifically because they see it as useful in certain (bad) economic scenarios.

>the US dollar was never 100% backed by gold reserves

The dollar was created by the coinage act in 1792, with dollars being made of the equivalent amount of silver or gold. To me this seems like practically same thing as being 100% backed by gold reserves.

If we're talking about paper dollars or originally "Demand Notes" from 1861 onward that would be the case as they were put in place because the government was broke trying to fund the Civil War,[1] and had to issue currency on credit[2] (about $1.5b additional in todays dollars, for comparison there's about $51b total in 2021).

>A gold standard is actually just a peg, a promise by the government to exchange dollars for gold (and vice versa) at a fixed rate. And you don't technically need any gold for that.

Wouldn't you need enough reserves to allow anyone who attempted to exchange their dollars for gold to do so? Fractional banking and bank runs seem like a rough analog.



Regarding gold/silver backing - yes, if they let you actually do that redemption or exchange. Something that has historically been suspended or banned multiple times. Including by FDR in 1933, and Nixon when the US exited the gold standard entirely.


Like Tether, if you can’t actually redeem it for what it’s nominally backed by, is it really backed by it?

If I remember right Nixon's exit from the gold standard was at least pitched to the public as a temporary measure, and his team was slightly surprised at how little effect it had in terms of causing panic.

I think to some extent we've been riding that initial wave of trust and backing. The alternative I suppose is we've figured out how to manage things correctly and no longer need a peg, but the lead up to the end of Bretton woods sounds ominously familiar to the 2000s. CBDCs seem like the only thing that could potentially fill a similar role.

"However, from 1950 to 1969, as Germany and Japan recovered, the US share of the world's economic output dropped significantly, from 35% to 27%. Furthermore, a negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s...The American public believed the government was rescuing them from price gougers and from a foreign-caused exchange crisis."[1]


Most gold bugs I've interacted with are more interested in replicating commodity money (i.e. gold coins for trade) than gold standard (i.e. dollars backed by gold).

Gold standard is dumb for reasons you say. Commodity money is by design supposed to be 100% backed, as the gold is actually inside the money and the face value is the weight gold inside it.

There is a reason why there has never existed a society in which the majority of transactions were done by people exchanging gold or silver coins kept in little leather pouches. It's just too impractical.

- problems with availability - in most traditional societies, there just weren't enough coins to meet transaction demand, and so people transacted based on credit or other informal ledgers.

- problems with theft

- problems with weight

- problems with people shaving some of the metal off

- problems with counterfeits -- not actually easy to test the percentage of gold in your coin

- problems with credit markets. Credit markets need to move money around quickly and efficiently, and be able to raise large sums. That's not compatible with socks filled with gold buried under your rose bush. The money needs to be available in the credit markets so it can be efficiently deployed, moved around, etc.

So from the beginning, gold was used for specialized purposes -- e.g. to settle international trade or large payments, rather than as a primary means of payment.

There is no way to get around this. The moment you introduce gold, merchants will start borrowing gold by selling Bills of Exchange -- effectively promises to pay gold. These bills of exchange will be more valuable if they are bearer instruments, and so the merchant will make them bearer instruments (to allow raising more money). Then you get a market in which people are buying and selling bills of exchange at a discount. Now you have a discount rate and a money market, and all you are missing is a financial crisis in which a large bank steps to staff their discount window when the smaller traders are forced to close their own. All of a sudden, you are back to credit-based money, as the Bills of Exchange are themselves used to settle more trade than the gold coins. It's just a lot easier to carry a piece of paper that says "X promises to pay 1000 gold coins next year" then it is to actually lug 1000 gold coins around.

The ease of convenience, the needs of merchants to tap capital markets, will ultimately subvert whatever metallic standard you come up with. Then, financial crises will drag in the government to start regulating and centralizing the capital markets.

What you describe has a lot of merit but it also explains the move from silver currency to gold. Gold has a lot of interesting properties from the point of view of coinage and an instrument of value:

1. Up until the fairly recently (ie the last century) it was the densest element anyone could get in quantity. This was not true for silver so silver currency could (and was) debased (like you say). This was more difficult with gold as doing so would lower the density;

2. Gold has a relatively uncommon appearance. There are very few substances that could imitate its look. Iron pyrite (aka "fool's gold") is the common one but it's not as dense and is harder. It's also why people would bite into gold coins to verify it;

3. Shaving or cutting coins was actually more of a feature than a bug. Consider "pieces of eight" [1].

Previous metals as a basis for coinage were more important than perhaps you're giving it credit for. Ultimately what happened was that the coins themselves because a store of value and the metal content became less important as counterfeiting coins wasn't typically trivial. This of course was what ultimately led to paper money.

[1]: https://www.kingmanyachtcenter.com/sea-history-what-is-a-pie...

I've never stated commodity money should replace all other form of exchange. In fact per above, you list a system where both credit and commodity money exist in parallel with one another.

>It's just a lot easier to carry a piece of paper that says "X promises to pay 1000 gold coins next year" then it is to actually lug 1000 gold coins around.

Not sure if you've ever carried around a gold coin, or ~$1800 (the value of 1 oz gold coin). But the amount of space it would take up, within factor of 2.

~1.8 cubic inches for the gold and 1.2 cubic inches for the bills. So maybe 50% worse space wise for the gold, but in any case not enough to make carrying gold much more burdensome than cash. Sadly you can no longer obtain large (~$1000) bills as they have been eliminated pretty much worldwide.

> I've never stated commodity money should replace all other form of exchange. In fact per above, you list a system where both credit and commodity money exist in parallel with one another.

Perhaps I wasn't clear, but the phenomenon I'm describing is one in which the credit market grows to become more important than the metallic market and eventually destroys it, because in order for the bank trying to calm the crisis to credibly maintain that discount window open, it will need the power to create money in unlimited amounts (not actually to create it, but to convince investors that it can create it).

So what happens is that when credit markets are in their early stages, they go through violent disruptions every few decades that get more and more intense as the credit markets grow, and at some point, the survival of the economy as a whole is at risk, and sometime before that happens the government says "enough. We need an elastic money supply that can guarantee that bills remain discounted no matter what. We have to put an end to the cascading failures due to panics/manias in the credit market." That's when the metallic market is replaced with fiat.

So while you often hear how every fiat currency fails, you don't often hear how every metallic currency is replaced by fiat, and I'm trying to describe this process -- that functioning currency markets inevitably give rise to credit markets, and it's the credit markets that are required for capital investment and economic growth, not the currency markets. Thus the need for stable credit markets is inevitably what drives the abandonment of metallic or any other kind of inelastic money -- of which bitcoin is an example.

This is not to say that inelastic goods can't survive as a tradeables. Stamps even survive as tradeables. So do paintings. But they don't survive as currencies in an industrial economy that requires a large, steady flow of capital investment.

FYI, Historically, it has been really common to debase currency by diluting or reducing the precious metal content of coins.


Valid, although once the gold is in my hands it's kind of hard to debase it. Of course the weakness is that it may be impractical to check it is debased every time you receive it (although it is practical for large transactions).

Each money has its own weakness. One of the big weaknesses with fiat and gold-backed money is that it can be debased even while it is in your personal possession.

> It was no secret that SBF hated traditional finance.

To point out: that’s part of the narrative SBF was selling. I wouldn’t take it literally. There’s a certain kind of person who can/will say anything, and seem sincere, just to get you to part with your money.

let me square it for you:

he is a fraud

I hope the years ahead and the investigations that fill them produce a picture of a cartoonish mustache twirling villain. It would, as you’ve pointed out, make it so easy to understand. I expect something more nuanced and layered filled with self deception and good intentions might emerge. The sort of thing which reminds us that risk is not just that if gleefully explored possibility but also the sort of risk to be managed and mitigated … a dull retrograde conservatism rendered gauche by decades of SV VC survivorship bias. Time may tell.

The HN rules stipulate I should give constructive feedback so let me give you some.

Please write less pompously and more to the point.

What does the expression "smoke the whole pack" mean?

I Googled but there are no real results. Thanks!

A father catches his young son sneaking a cigarette. To teach him a lesson, he says, "You want to be a smoker, huh? Well go ahead, smoke this whole pack!" He makes him smoke all of them, the boy gets horribly sick from it, and never wants to smoke again.

Essentially it's a metaphor for forcing someone to go all-in on something they wanted just a little taste of.

I think it refers to the old punishment for a kid caught smoking. You catch a kid smoking a cigarette and then sit there and force them to smoke one after another until the whole pack is done. They get really really sick.

So the analogy is take something you like and then force it on you 24x7x365 until you hate every moment of it.

I assume this is a reference to catching a child smoking a cigarette, and to punish them, and put them off doing it again, the parent forces them to smoke the whole pack of cigarettes one after another.

This (in theory) makes them feel sick and develop an aversion to the cigarettes.

here is the problem in the a nutshell, SBF hired fraud scammers, several bad actors from poker scams where part of SBFs crew...indicating that something other than skill level was the factor in hiring.

> In that way, "DeFi" feels the same about the finance industry.

How? DeFi protocols are behaving predictably and not pausing user withdrawals or hiding billion dollar black holes in their balances.

Sometimes they do.




Remember, programs are proofs of themselves, but that doesn't mean they provably do what you thought they did.

Depends where you look. Solend and Uniswap have different risks, to use comparison AAPL and some new hot unknown tech stock have different risks. Uniswap does not have code to pause withdrawals, does not have a DAO or governance structure to change the contract.

Risk profile in Uniswap and established DeFi protocol is more transparent than FTX. You cannot verify and audit a CEX, you have to trust they are doing things right, or trust the third parties who audit them. If you are skeptical of Binance or Tether audits then you understand the want for open source DeFi.

Yeah, the predictably get exploited, and lose everyone's money.

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