A lot of professional and amateur investors did see it. They’re all the ones who didn’t put their money anywhere near FTX. This was mostly not specifically FTX, but distrust (or worse) of the general topic of crypto-based financial services. There was never a business plan that made any sense—no actual customers happily paying for something that would exist in good times and lean, at least not in the amounts they were pulling out of it for personal/philanthropic/gambling reasons. And the lack of oversight is going to allow a significant portion of such companies steal or lie rather than cleanly closing up shop when things get tough.
This bankruptcy means that many organizations now suddenly have much less money than they expected
This is far bigger than just FTX and EA. It’s the story of EVERY major economic downturn, especially after an insane boom. Nobody is as rich as they thought they were. Future revenue expectations and asset values (which are an abstraction over future revenues) have plunged, while prices have gone up significantly.
There was never a business plan that made any sense—no actual customers happily paying for something that would exist in good times and lean, at least not in the amounts they were pulling out of it for personal/philanthropic/gambling reasons.
Why isn’t “people put money into the exchange and we let them trade it back and forth while taking a cut on each transaction” a plausible business model?
It’s a plausible business model, for a much smaller business than SBF was counting on. Honestly, if he’d run it for 10 years, getting through at least one bust cycle, before starting to use the capital for EA and personal investments, it might have worked. Or it might have lost out to a flashier, scammier version that customers liked more in the boom times.
It’s a plausible business model, but I assumed it’s not FTX’s business model (even before the event), because if it were so, FTX would have tried to acquire BitLicense from New York, like Coinbase did. The same applies to Binance and other exchanges uninterested in BitLicense.
I see many people saying things like “centralized cryptocurrency exchange is obviously dangerous, I told you so”, but I disagree. Yes, cryptocurrency allows you to self-custody, and option to self-custody is its main innovation, but it is an option: you don’t need to take it, and it does have significant convenience cost. I think the right lesson is something like “unregulated centralized cryptocurrency exchange has been historically dangerous”. It has been a while since BitLicense was introduced in 2015, and I think it proved to be a good regulatory framework so far.
If it was just that (which is the situation Open Philanthropy and other funders are in) I’d agree this was expected with a downturn. Some things that would have made sense to fund no longer do, some projects get wound down.
But that’s not what happened with the FTX Future Fund’s grants. Committed grants aren’t going to be paid out, and and people are generally trying to avoid spending any additional money from grants that were already paid out. Organizations that thought they had a year of funding confirmed now have no money, and are scrambling to find other funding.
It was a bigger run-up boom than usual, and a bigger drop when it happened. A lot of EA charities were hit extra-hard because SBF concentrated the boom into a single point of failure, which failed spectacularly. SBF made it a much sharper bust by failing to stop the grants much earlier, when it started to look like the risk was coming (he instead used customer funds to make more, riskier bets, and perhaps to prop up his other interests). But there was no path where that funding actually occurred.
If you think this is different from other businesses and personal finance, I’d have you take it up with the tens of thousands laid off in the last few weeks, and the millions who are worried about it and are seeing much worse prospects in the coming years.
A lot of professional and amateur investors did see it. They’re all the ones who didn’t put their money anywhere near FTX. This was mostly not specifically FTX, but distrust (or worse) of the general topic of crypto-based financial services. There was never a business plan that made any sense—no actual customers happily paying for something that would exist in good times and lean, at least not in the amounts they were pulling out of it for personal/philanthropic/gambling reasons. And the lack of oversight is going to allow a significant portion of such companies steal or lie rather than cleanly closing up shop when things get tough.
This is far bigger than just FTX and EA. It’s the story of EVERY major economic downturn, especially after an insane boom. Nobody is as rich as they thought they were. Future revenue expectations and asset values (which are an abstraction over future revenues) have plunged, while prices have gone up significantly.
Why isn’t “people put money into the exchange and we let them trade it back and forth while taking a cut on each transaction” a plausible business model?
It’s a plausible business model, for a much smaller business than SBF was counting on. Honestly, if he’d run it for 10 years, getting through at least one bust cycle, before starting to use the capital for EA and personal investments, it might have worked. Or it might have lost out to a flashier, scammier version that customers liked more in the boom times.
It’s a plausible business model, but I assumed it’s not FTX’s business model (even before the event), because if it were so, FTX would have tried to acquire BitLicense from New York, like Coinbase did. The same applies to Binance and other exchanges uninterested in BitLicense.
I see many people saying things like “centralized cryptocurrency exchange is obviously dangerous, I told you so”, but I disagree. Yes, cryptocurrency allows you to self-custody, and option to self-custody is its main innovation, but it is an option: you don’t need to take it, and it does have significant convenience cost. I think the right lesson is something like “unregulated centralized cryptocurrency exchange has been historically dangerous”. It has been a while since BitLicense was introduced in 2015, and I think it proved to be a good regulatory framework so far.
I don’t know anything about this, but it looks like FTX US was applying for a “trust charter”? And this is what Coinbase has https://cointelegraph.com/news/ftx-us-applies-for-trust-charter-in-new-york
If it was just that (which is the situation Open Philanthropy and other funders are in) I’d agree this was expected with a downturn. Some things that would have made sense to fund no longer do, some projects get wound down.
But that’s not what happened with the FTX Future Fund’s grants. Committed grants aren’t going to be paid out, and and people are generally trying to avoid spending any additional money from grants that were already paid out. Organizations that thought they had a year of funding confirmed now have no money, and are scrambling to find other funding.
It was a bigger run-up boom than usual, and a bigger drop when it happened. A lot of EA charities were hit extra-hard because SBF concentrated the boom into a single point of failure, which failed spectacularly. SBF made it a much sharper bust by failing to stop the grants much earlier, when it started to look like the risk was coming (he instead used customer funds to make more, riskier bets, and perhaps to prop up his other interests). But there was no path where that funding actually occurred.
If you think this is different from other businesses and personal finance, I’d have you take it up with the tens of thousands laid off in the last few weeks, and the millions who are worried about it and are seeing much worse prospects in the coming years.