An article that omits any whiff of risk while heaping on the praise is implying that it's safe, or at least implying that there weren't any obvious red flags.
Worse he gave "grants" through one of his foundations to news outlets like Vox, Intercept, ProPublica, and others. Vox did not even put a disclaimer about them having taken money from him in the fluff pieces they put out. They have only started doing so after the implosion of FTX, probably to ward off potential controversy.
Sure, including ones that should have been apparent without any sophisticated analysis:
For example, FTX was giving people 8%/yr 'yield' just for funds deposited there in spite claiming to not invest customer funds.
The claim that his fund earned >$10/billion over two years on a trivial arb with Korean exchange was also an obvious red flag (and asking people with relevant experience would have got an answer that this not a credible claim).
The heavy involvement with and promotion of extremely illiquid and self-made tokens was also pretty suspect, but not unique to FTX. Looking at my messages, I see that I specifically highlighted 'the ftx website lists something called a "3x leveraged shitcoin index token"'
... or the fact that they offered 100x leverage.
Who knows what more would have been found if any investigation or critical questions were applied.
These specific red flags were clear enough for me-- and other people I know, to yank most of their funds from LedgerX when SBF acquired it.
Any journalist writing about SBF/FTX would have had access to much more information that I did. E.g. I didn't see the videos of him obviously tweaking in interviews, nor the easily visible tweets by Ellison about how boring life is when off amphetamines. But someone spending a half hour googling the involved parties would easily have found these additional red-flags.
> The red flags were clear enough for me-- and other people I know...
This seems glaringly obvious to me as well. A basic scrutiny of how the money is made reveals deep flaws. It should be clear to anyone who has money to invest that there is a reason why one investment vehicle pays 8% versus another which pays 2% (CD's).
I don't believe they should lose their money without recourse, but people shouldn't have zero responsibility for their financial decisions. Some risk and educational foundation must be assumed by the individual. It would be nice if regulators and journalists gave a clear picture, but everyone should remember, they likely have no financial stake on their findings.
It's a hard situation: the relative safety of standard investments contributes to bad judgement when people end up in a red in tooth and claw unregulated market. Similar people used to theme parks going to a national park and falling to their death in a waterfall or being gored by buffalo.
Not that I think the safety rails are bad... if you had to be maximally cynical you'd never even bother taking an investment with only 2% yield, it just wouldn't be worth the meta-risk (the risk you misunderstood the risk!).
Probably one of the worst things about the FTX press puffery is the implication that FTX was more regulated or pro-regulation, ... probably causing people to think it was a part of the relatively safe major markets where the risks are usually reasonable and the asset returns tends to be fair relative to the risk.
I filed complaints with the government over the Gemini earn program because they were heavily marketing to retail users with comparisons to savings accounts while, AFAICT, actually consisting of effectively unsecured investments in ponzi schemes ('yield programs') whos risks weren't meaningfully disclosed. Never heard back, now that it's imploded perhaps I should try FOIA-ing any communication resulting from my complaints.
>The claim that his fund earned >$10/billion over two years on a trivial arb with Korean exchange was also an obvious red flag (and asking people with relevant experience would have got an answer that this not a credible claim).
Source? The numbers seems suspiciously high when you consider that the net worth of SBF (who owned most of SBF and FTX) was only $10.5 billion prior to the collapse. Maybe you got this confused with this?
Wikipedia: "In January 2018, Bankman-Fried organized an arbitrage trade, moving up to $25 million per day, to take advantage of the higher price of bitcoin in Japan compared to the price in America.[9][10][2] The company earned about $20 million from the arbitrage opportunity.[11]"
>The heavy involvement with and promotion of extremely illiquid and self-made tokens was also pretty suspect, but not unique to FTX. Looking at my messages, I see that I specifically highlighted 'the ftx website lists something called a "3x leveraged shitcoin index token"'
>... or the fact that they offered 100x leverage.
Are you making these claims from a "it's impossible to offer this product without being a scam" point of view, or "this product is gambling and shouldn't be allowed"?
>I didn't see the videos of him obviously tweaking in interviews
This seems like the prototypical example of stuff that you only notice after the fact because hindsight is 20/20. Can you imagine writing an article that's like "SBF is pretty sus, look at how much he's tweaking in this video"? Or telling your editor you want to investigate SBF/FTX because he looks like he's tweaking?
>nor the easily visible tweets by Ellison about how boring life is when off amphetamines.
If you read the whole tweet in its entirety, you'd realize that
1. she was talking about prescription amphetamines aka Adderall. it's not like she was smoking meth.
2. she was emphatically not talking about being bored, she was talking about how hard it was to get energy/motivation to do any sort of activity, all of which were symptoms of ADHD (see point 1)
Sure, it's fun to dunk on her and the rest of the FTX/Alameda staff now that the whole thing crashed and burned, but if you wrote a piece on this pre-crash you'd end up getting canceled for doubting/making fun of people's mental disorders.
He changed the explanation that they were given-- originally he was telling people Korean exchanges, later the claim changed to Japan. The replacement wasn't particularly credible either (at least not the scale). You can easily find examples of the earlier story on google using the word kimchi: https://www.google.com/search?q=SBF+kimchi
Of course, newly available disclosures show that they hadn't earned anything from the korean trade at all.
If you look at WP history, you'll see that entire article was recently written ( https://en.wikipedia.org/w/index.php?title=Alameda_Research&...) and the WP article for SBF himself only goes back to April 2021. The red flag examples I gave were actually quoted from my contemporary correspondence (warning other people off), so I know none of it is tainted by hindsight. Tainted by cynicism, perhaps, but I think cynicism is well justified in this space.
In later correspondence I see did cite the SBF wikipedia article on Dec 9 2021 ( https://en.wikipedia.org/w/index.php?title=Sam_Bankman-Fried... ) in a message to someone, "can't say that finding his wikipedia page has made me feel any safer about having funds in ledgerx" and noted that participation in forbes 30 under 30 is a "minor red flag (it's almost excursively paid promotion)", and I noted the text '"sleeps four hours per night" at the age of 29 is almost certainly something LARPing as a superman' and I compared it to other cryptocurrency fantasists like Craig Wright claiming to read 2500 books a year.
> Are you making these claims from a "it's impossible to offer this product without being a scam" point of view
Impossible to offer without having an extraordinary implosion risk, at least, if not being an outright scam. There was no disclosure around the risks or how it would be contained. Scamcoin casino competitors have had high profile "insurance funds" with somewhat transparent management as an explicit mechanism to address the extreme risk of these levered products. (I think they are also obviously too risky to do business with, and these are risks that should have been covered in any article discussing FTX!).
There are ways to create leverage without any implosion risk-- e.g. physically delivered options. But that's a different set of products, and one that sells less well to unsophisticated users in part because the investment risk isn't hidden, because the trades need counterparties instead of being against the house, etc.
> This seems like the prototypical example of stuff that you only notice after the fact because hindsight is 20/20.
I specifically set apart the elements that I didn't know about at the time.
My records show that prior to 2022 on at least a dozen occasions I told people that I communicated with that I thought FTX was fraudulent and that I thought SBF was likely a scammer. Quite explicitly, in fact, in 2021 I wrote: "I don't believe SBF money exists. I think he's a scammer. I'd take a non-trivial bet on it. His claimed origins of his money are more obviously false than madoffs'. maybe he's just a front for iran or something, but whatever the case is he didn't make his money the way he said he did." and "I mean SBF is super redflaggy to begin with. I think he's a scammer, not sure exactly the nature of the scam, but his story of where his sudden wealth came from just doesn't compute."
(I would have been more outspoken in public under my name about these concerns, but dealing with one multi-billion dollar lawsuit from a scammer at a time is enough for me! (and, in fact, said as much to friends in private))
So you don't get to chalk my perspective to hindsight, though it's certainly emboldened now by hindsight. :)
Now-- could I have gone to press with an expose on that? No. But it's enough that someone could refrain from gushing on support, or could have investigated more carefully. (Or as I did, pulling funds away from potentially exposed entities!)
> she was talking about prescription amphetamines aka Adderall.
If you've been around people on Adderall and don't recognize that it can easily compromise judgement and result in mania, then I dunno what to say other than congrats on your good fortune. Cryptocurrency is rife with stimulant abusers, however, many of which are on prescriptions yet engage in obviously unwise, reckless, or at least irritating behavior as a result.
That kind of message from executive staff is a serious red flag, if not directly showing abuse, and least demonstrating a significant lapse in judgement in choosing to make public such an obviously concerning message. Could you imagine how the public would respond to an equivalent tweet being put out by the CEO of Fidelity?
There aren't just two options "write a critical piece on thin indications" or "write a gushing promotion piece". The obvious thing to do when there are weak indications of concern is to just say nothing, or to do serious critical research-- had any been done they would most likely have turned up even more reportable information, or at least more negative indication that supported keeping distance. ... or to at least find some random naysayer to quote saying it's suspicious and they're uncomfortable with it.
That sounds more along the lines of "all crypto is a scam" than something that you can write a news story about. I'm not going to deny it isn't shady (I don't use them for that reason), but at best the only thing you can write for this is something like
"the exchange has drawn criticism for being domiciled in the Bahamas and not being audited"
but that might be tough. To my knowledge there wasn't significant criticism around before the crash (unlike with Tether, for instance). People seemed to be largely okay with the state of affairs, or the people who weren't okay and went to Coinbase/Gemini/Kraken.
Between that tweet (completely bereft of detail) from SBF (who is now a confirmed fraud...), and the FTX bankruptcy filing, I think there's a simple explanation for it.
1. Only some of the silos/firms in the silos have been audited. The auditor, thus, has no idea if there are unrecorded liabilities (SBF didn't exactly keep notes about where the money was supposed to be) between different firms in the silo.
2. The WRS silo (FTX US, FTX US Derivatives, etc) has been audited by a real accounting firm. The auditor for the Dotcom Silo (FTX.com, other exchanges, etc) was Prager Metis[1], the "First-ever CPA firm to officialy open its Metaverse headquarters in the metaverse platform Decentraland." I have doubts that this one was a through GAAP audit.
3. There were no audits at all for the Alameda/Ventures silos.
4. Crypto crashed earlier this year, which probably wiped out most of the stupid investments FTX made. It's possible that they may been only half-a-billion-in-the-hole in 2021, as opposed to ten-billion-in-the-hole.
[2] “I don’t know anything about FTX,” said Jerry Eitel, the partner emeritus and chief metaverse officer at Prager Metis. “I’m retired,” Eitel added, before disconnecting on the phone. (Eitel is a one-time CoinDesk contributor.) The head of Prager Metis’ audit practice could not be reached for comment.
I completely agree that the audit, to the extent that there was one, must have been pretty crummy. But that they technically had one meant there wasn't a clear "this is an unaudited financial company" red flag.
AFAIK that was limited to the first $10k in deposits, so it seemed plausible as a some sort of customer acquisition cost. Also, 8% was around the going rate for decentralized lending protocols, so it only seemed high in comparison to FDIC protected savings accounts.
> AFAIK that was limited to the first $10k in deposits, so it seemed plausible as a some sort of customer acquisition cost
$800 per year per customer? Ehh. Also, above $10k and up to $10m it was 5%/yr... which I think breaks that explanation as no one is going to argue that a half million dollars a year is a reasonable customer acquisition cost! :)
> going rate for decentralized lending protocols,
Don't use euphemisms here, the term is ponzi schemes. These yield programs were across the board ponzi schemes with no substantial source of income other than the deposits of other users.
(and don't let the fact that Bitcoin critics have called it a ponzi scheme in the past confuse you: Bitcoin has never promised a yield, it doesn't need a source of income. The fact that bogus criticism uses a word doesn't make it less legitimate where it applies.)
Yes, 8% only seems high in comparison to companies that are ran by adults that don't evaporate with your money every few years.
No financial company in the world that isn't a fraud is going to pay me a $800/year for parking $10,000 in their bank account, once all risks are taken into account.
The first six months of this year it was possible! All that would be needed would be a parent company that creates child LLC’s, one per customer, and then purchases $10,000 of I Series bonds using the child LLC tax ids.
The rate was 9.6% so you would have been pocketing a 1.6% spread on the customer deposits.
he had some twitter thread two years ago where he was talking about betting five times [what the gambler’s formulation of the kelly criterion would suggest], which is bug fuck insane and would’ve had me shorting him immediately if i’d been aware of it and could’ve figured out how to short him. he was 100% going to zero and it wasn’t even going to take long.
might’ve even happened at that point and he was just stealing customer money to cover it up.
not that i’d expect journalists to have been able to work it out; anybody who can understand kelly’s paper is making more money some place else.
Only after the collapse a friend pointed out that thread, where he’s arguing 10x Kelly makes sense because when you win such a crazy long shot bet you’ll have enough money to change the world and money doesn’t actually have a diminishing utility ever.
Regardless of his other arguments, it never makes sense to bet more than Kelly, because you move into _diminishing_ expected value… while also taking on more risk! You can do less than Kelly if you want to diminish your expected value, but at least that also comes with less risk.
> he’s arguing 10x Kelly makes sense because when you win such a crazy long shot bet you’ll have enough money to change the world and money doesn’t actually have a diminishing utility ever.
right he also had a thing in there where i think he was conflating the log utility in kelly with human’s tendency to have a logarithmic view of the utility of money.
they’re not actually connected, they’re just both the words “log utility”.
I think that thread is being widely misinterpreted. Kelly betting applies to repeated bets. At the start of the thread he makes it clear he's talking about a one-off. In that situation, EV really does scale linearly with bet size, so if you have any edge you should just go big.
You can argue that there is no such thing as a one-off bet, because there will always be more bets on other things for someone who isn't ruined, but that's the explicit assumption for that thread.
and i'm fine with that. i don't believe it exists, especially for a business/fund like his, where even making that claim is its own sort of hilarity, but i'm fine with that for the purposes of the thread and this response:
> Kelly betting applies to repeated bets. ... In that situation, EV really does scale linearly with bet size, so if you have any edge you should just go big.
in which case you don't spend any time talking about how you're going to bet "X times kelly". you don't deny that kelly applies, and then compute some >1 multiple of kelly and defend that number by saying kelly doesn't apply. there's no fixed multiple of what you get out of the gambler's formulation that makes any kind of sense if you've abandoned the initial premise.
i suspect the only good, coherent defense of what he was saying on twitter is something like "he had articulate arguments but didn't present them because of twitter limitations"
It is a classic example of everyone being wrong, everyone wants to feel superior a see a particular thing with that exchange, and thus take away that which makes them feel smart.
Anyway - anyone who has ever run any money knows you use a fraction of kelly, which if you have a brain makes you wonder why it is optimal to use a fraction of the optimal amount - which should make you realise that kelly is loaded with stupid assumptions and is basically useless beyond a philosophical construct.
yeah, pretty much every one of the [not particularly large number of] positive pieces I read on him screamed "compulsive gambler", including the VC hagiography that talked in depth about his interpretations of utilitarianism and devoted a paragraph to wondering if there was anything in life he actually enjoyed.
not to mention the Matt Levine interview where Matt tells him he's basically describing yield farming as a Ponzi scheme and he concedes that's valid and doesn't even try to construct a counterargument for where the value comes from...
He did have a counter argument - 'the market values the box' - pure capitalism.
The scary thing is he understood that the box inherently is nothing of any value, except that the market has placed a value on it - yet still bought into lots of boxes that the market said had value till they didnt have and value. The gambler once again.
