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There's no way to spin anything that's happened over these past few days positively. Crypto's imploding and there's probably worse to come as money flows out of the space and back into fiat.

 #tether processed ~700M redemptions in last 24h.

No issues.

We keep going.— Paolo Ardoino 🍐 (@paoloardoino) November 10, 2022 

The weird (supposedly) altruistic poster boy was a fraud and Trabucco timed his 'retirement' superbly.

 Over the past few months, I have significantly reduced my role at Alameda. This happened gradually, and has most recently involved a lot of time not really working at all -- and certainly not acting as the company's CEO.— Sam Trabucco (@AlamedaTrabucco) August 24, 2022 

So many people have lost money just because they trusted the wrong person with their funds. Even people working at FTX look to have been screwed over.

 extremely betrayed and just in disbelief that they would do something like this. fucking stings man.— Zane Tackett (@tackettzane) November 10, 2022 

The whole situation's utterly sad and demoralising, only made worse by people that are all too happy to laugh at others for losing money.

I'm all for a bit of humour to get through the dark times, but laughing about the absurdity that led to people losing money is way better than laughing at people for losing money.

Losing money because of a dodgy exchange/broker can happen in any marketplace, as customers of MF Global found out a decade or so back 👇

"I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules."

I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global."

~ Jon Corzine CEO

More on that here 👇

So, what happened at FTX? Matt Levine has a great explanation here that I'll TLDR below. At the heart of it all is FTT... 👇

"FTT (FTX's native token) is kind of like stock in FTX: The higher FTX’s profits are, the higher the price of FTT will be. It is not actually stock in FTX — in fact FTX is a company and has stock and venture capitalists bought it, etc. — but it is a lot like stock in FTX. FTT is a bet on FTX’s future profits."

[If FTX were a bank...] "If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock."

Put simply, this was a key vulnerability for FTX. Think about their relationships as a lender and as an exchange that allows margin trading (lends money they don't necessarily have immediately on hand).

Matt explains below. Points 1-4 are standard business for any broker or exchange. From point 5 onwards is where things become all FTX 👇

  1. You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000.

  2. You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin.

  3. You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral.

  4. Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances.Normal stuff so far. Now onto FTX 👇

  5. You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.”

  6. You say “sure, sounds good,” and hand over all your collateral.

  7. Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars).

  8. Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances.

.....

But then if the value of FTT drops to zero, you have nothing. You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars.

You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?

The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange.

If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.

To be clear, this wasn't a crypto problem. It was a lending problem brought on by an incestuous relationship that's deserved more scrutiny than it received (until recent events) 👇

What next?

Pain and boredom. The days of punting your favourite shitcoins are close to an end. Trading costs are likely to increase, and the overall liquidity pool is likely to shrink.

This isn't the end for crypto. Just as we've seen the focus in tech companies shift from user growth to profit, the same will be true in crypto. Except it'll probably shift from gambling/speculation to transparency, real-world disruption, blockchains and 'what to do to make sure this doesn't happen again'.

We have ideas on both 👇