There are times I tell myself to post something, and I have a topical idea, but they just don’t seem inspiring. Then this week happens. If I want to have a timely topic, it’s not a reach to figure out what it is. Let’s talk FTX, crypto, smart people, hubristic (it’s a word I looked it up) people, and the rest of us.
As someone with decades of experience, having watched crashes, scams, crashes caused by scams, I didn’t see this one coming. I figured we needed an ‘event’ in crypto, but I didn’t think this is where it would happen. I was an SBF fanboy. I really thought Sam was smart enough not to be dumb. But…shit happens. Again and again and again. My most vivid memory of super smart people blowing up in spite of their intelligence is probably the Long Term Capital Management blow up. I’ve mentioned this one before, smart people being dumb.
So how does stuff like this keep happening? Previous fails being brought up in comparison to the FTX blowup; Enron, Madoff, even Lehman Brothers. Recently I saw a mention of MF Global, which kind of seemed like a good analogy. But when you dig in, is this exactly the same as any of those? No. But that isn’t really the point. The point is that we seem to semi-regularly have these ‘events’ and every time there are countless articles, also by smart people, saying I told you so. Then why do we keep listening to the wrong smart people? Let’s try and unpack at least some of the personal and group thinking that leads us astray over and over.
There’s greed. That one is pretty simple. We want to make money…today. Enron and FTX both encouraged their employees to buy stock in the company. Kind of doubling down on your employer. Enron’s CEO, Ken Lay, campaigned hard for those employees to do this weeks before the collapse of the company. He knew. FTX, from what we’re learning, was most likely supporting the losing trading operation at Alameda Research, an affiliated firm that actually was the reason for FTX to exist in the first place. FTX was created in order to provide a place for Alameda to better access crypto markets as a liquidity provider.
If the overlapping parts of all the stories and rumors are true, the small circle of people running both firms knew that FTX was funneling money into a money hole. And yet this management team told the employees to buy more. Just another source of outside money to feed the beast. Why? Cutting losses is hard. Big reason why Trading is Hard. It hurts. It hurts financially and it hurts emotionally. You need to admit you were wrong. But the hubris of the success that you initially had leads you to believe you’ll be right in the end. Everyone else is wrong.
This same hubris also leads to CEO’s forgetting something that needs to always be remembered; the more successful your company and the more it grows, the more lives you now have in your hands. It’s a real responsibility. Those people are following you and your vision. When you say we’re changing the world, they believe it. When you say buy more stock, they do. And when the plan you’ve masterminded to keep yourself from cutting your losses and losing your sudden found wealth blows up, those people are the ones whose lives are impacted the most. Some will be wounded, some will be broke. All will become just that much more cynical.
So if we’ve seen this repeat itself over and over why do we keep jumping in the pool? Our own greed. Our own FOMO (Fear of Missing Out). If my neighbor is making money I want to make money too. And even in crypto, much of what’s out there is headed for the same fate as those FTT tokens issued on FTX…worthless. When Changpeng “CZ” Zhao, CEO of Binance said he’d sell $2 billion worth of FTT tokens, he was well aware he couldn’t. It’s what’s known as a thin market. The beginning of the end.
A thin market is when there are not a lot of people looking to buy or sell something on a large volume basis. Think of it this way; if last week and the week before houses on your block sold for $500k, you would reasonably expect to be able to sell yours for near the same price, particularly on one of those blocks where all the houses are exactly the same. In a normal situation, where there’s a house or maybe 2 for sale on the block, this is probably a reasonable expectation. But (!), if all of a sudden 19 of the 20 houses on the block went up for sale the same day you probably aren’t getting that $500k. Someone on the block is going to sell their house to the first buyer they can find. And then the rush begins. The rush to be the next seller. Now the prices on the block crater.
Other markets work the same way. There are a lot of people that own Bitcoin and see some value in it. The only value in the FTT token was FTX. And if someone with $2billion worth wants to sell he must know something. At least that would probably be the perception. And now the rush to the exits begins and anything connected to the FTT token, and in turn FTX collapses along with it. I’ve referenced the words of my wise friend before; Lather, rinse, repeat.
So that’s kind of how we got here in a very very general way. The point was not to delve deeply into the collapse of FTX itself, but more why similar events will happen in the future. It’s a combination of factors; individual greed, group greed combined with FOMO and jealousy, and less not acknowledging the past but more always convincing ourselves that this time it’s different. Sure it is. Just like the most recent Halloween movie (#13) was different than the first. But the common theme remained. Everyone has, as I’m so fond of saying, seen the movie before. We still spent over $43 million to see it opening weekend. ‘Nuff said.