Crashes, Crypto & Money Disasters

Full Disclosure: The Author [Richard Ronc] has no cryptocurrency holdings.

The last week in the markets have been … interesting to say the least. Volatility is not merely a word that should be used to tell people that something is going bad.  Volatility can also send things the other way … violently, with bone snapping force. We saw that on Thursday – finely enough the Core Price inflation report came in ‘better than expected’ along with unemployment claims showing a potential sign of economic slowdown and as a result … the markets took off.

The S&P was up 4-5%, the Nasdaq … close to 7% in a single session. It seems safe to say, that the first potential signs of inflation ‘Slowing’; the presently Bad situation potentially ‘improving’ brought dry powder from the sidelines into the market, triggering short covering and prompting one of the single biggest daily market moves in the last few decades. For the short term, things could look ‘better’ for the next few weeks. The next major reports are in December so we could see some clear skies …

“… flight leader, Operation Bull-Run is go. you’re cleared to start your run, stay in the canyon and watch for reversal at 4,100 … good luck … Tower Out!”

And just when you think that things are looking up … there is literally a financial disaster unfolding at the exact same time, just around the corner … of course I’m talking about the collapse of FTX.

I mean after all of the issues in the economy and the markets; stimulus spending, interest rates, inflation fears, costs of energy, global oil production … now the crypto world decides to **** the bed again, and FTX got a major case of the gastro-financial flu, because the place looks like a brown crime scene. Ewww. Actually it probably “is” a crime scene.

At this time this situation it literally unfolding and developing in real time, but with so many sources out there already covering this subject, I want to go in another direction. Could or should this disaster spell the end for crypto or this whole debacle something else entirely?

This financial monster was made by man … again

Taking a very quick (and I mean quick) look at some of the commentary about what happened with FTX, and it looks like what you would expect if the dot-com bubble and the Sub-Prime crisis’ had a love child … where no reasonable person can understand how it was allowed to happen, let alone impact so many people in the process.

Here again we get to the fear and greed that is rife in all markets. The Dot-Com bubble was … exactly that … a bubble where anyone and everyone stuck a ‘.com’ at the end of the business name and had venture capital racing to invest, whilst having no business model, knowledge or even the fundamental concepts on how to actually run a profitable business. When you see comments like,

[Bankman-Fried told Reuters that he “disagreed with the characterization” of the transfer, saying: “We had confusing internal labeling and misread it.”]

The Guardian

… the above, its only when things go wrong, such as what we’ve seen that we shake our heads in dismay. We saw this en-masse at the turn of the century, and we’ve seen it again, 20 years later. Frankly just reading this type of comment makes me angry.

The sub-prime crisis, saw junk financial products and relaxed loans being offered to people who couldn’t support them until the debt bubble popped … and took banking as we knew it down with it. Again, even basic financially responsible practices, could have prevented it.

Exchanges like FTX typically make their money from the fees that come with trading transactions. Banks make their money over the long term, from customers that can actually service debt, where debt is actually one of the most powerful financial tools when used responsibly.

When companies, driven by a key people look to extend beyond what their business models can offer, knowingly doing things which are risky … that’s when we end up with crisis level problems. The FTX collapse is just another example, but there are other reasons why the crypto-verse should be put on notice.

Related: Why Open Source [Crypto] is going nowhere … Yet

The Core Crypto Paradox

Crypto has a problem, now more than ever. How do we trust it?

It has to be said that we have to separate the cryptocurrencies and the businesses around them. There is little wrong with cryptocurrencies, aside from which one should ever see widespread adoption. You see, the collapse of FTX, has little to do with FTT, or BTC, or ETH … or any other currency. The problem was with FTX and how it used its client’s money and how it built its house on sand.

The whole idea of decentralized money, in this case truly shows how much faith has to be put into the people using it. FTX was allowed to offer a token out of thin air, get people to value it, and then use it internally whilst having no intrinsic value.

So, imagine any other company being able to do this. Its laughable. It simply wouldn’t be allowed to happen … there are rules to stop it, rules to prevent it.

Crypto – in principle is designed so no one can control or regulate it. and here we have the Core Crypto Paradox. Without control and regulations, crypto is open to abuse and fraud, and these risks will prevent institutions from getting involved, these risks will prevent wide-spread adoption.

However, by the time that regulations, rules and frameworks are designed, passed and put into place, then crypto currency becomes no different to any other form of money … except for the exorbitant energy usage to run it.

For the vast majority of the public, the collapse of FTX and other situations like it previously will go largely un-noticed, and with a crypto capitalisation less than $1T at the time of writing, it will barely show up as a blip in the financial markets. In fact, the overall significance I believe will barely show up in the overall markets as anything more than background noise.

This alone begs the question … 14 years after the birth of bitcoin … what have crypto currencies and blockchains actually given us? I dare say the average person wouldn’t be able to give you an answer!

That is very telling!

Related: Why you should not trade Crypto

Where is the real value? There isn’t any!

Perhaps the scariest things around this whole story is just how quickly it all unravelled which raises the question of the company’s value and … how it was allowed to be valued.

The first dominoes were tapped on the 2nd of November, when it was reported [Coindesk] that Alameda had close to $4B in FTT whilst another $1.1B was in circulation. 5 days later another exchange made public comment about selling its holdings, and the open twitter conversation started the bank run.

The next day on the 8th, a non-binding purchase deal was put on the table, which didn’t last the day. By the 9th FTX was no longer processing transactions, by the 10th FTX was seeking capital to stay solvent and by the 11th, FTX was filing for bankruptcy.

The whole company … using a crypto token as collateral went under after the first warning flare went up … in 9 days.

9 days!

The one time, second largest crypto exchange crashed, burned and took peoples money with it, in just over a week!

The entire idea of a ‘real’ tangible company from any of the major market sectors doing that is frankly laughable nowadays. There would have to be something real under the company. A product, a service, machinery, assets, cash, gold, … something of value, perhaps property or land against which banks offer secured loans, perhaps a business model or a mathematical proof which investors could actually invest and bank on!

However, once the bank run started and the value of FTT started to go down, so did the company. So whether you’re a HODL’r, a believer or someone who puts $100 into each coin, and waiting for the price to skyrocket before fishing out your cold wallet to cash out, the question has to be; ‘how can any sort of institution now ever seriously consider taking crypto currencies or crypto holdings into account?’

When a token can collapse in as little as 9 days, why on earth would anyone expect anyone else to take them seriously?

Related: Why is it so hard to start a business?

Is ‘This’ the end of crypto?

Pfft, not likely. I’ve mentioned previously that I don’t think crypto is going anywhere, neither forward nor backward. but cryptocurrencies are still a small fish in a very big pond of finance barely in the order of $1 Trillion in Market cap, and the potential to go to the moon again at a moments notice is just too lucrative for the average person to give up on.

Even with over 9,200 coins being tracked – most of which likely worthless, they’re are far bigger problems on the horizon. Inflation is still bad. China’s fundamentals are in question, Europe is putting on a brave face, while telling everybody that the energy crisis isn’t as bad as it thought, whilst being the canary in the coal mine for the rest of the world economically.

But what has taken place, what is still unfolding with FTX has nothing to do with Cryptocurrencies or blockchains. Just like so many manmade disasters … we’re left with two things. The first is that it was preventable. You don’t need a doctorate in economics to know that if it feels wrong, then it probably is. I myself actually have a rule … if it doesn’t feel right … back off immediately.

The second is the fallout. At one time FTX was the second biggest exchange in town. If you can imagine a small percentage coming from each and every transaction it processed, then FTX was the metaphorical shovel salesman in the middle of the gold rush, before it went to go **** things up.

When things go wrong, its usually not the system that’s the problem. Its usually the people. Sometimes there is a limitation as to how well things can go; the problems come up when people push the boundaries beyond safety, becoming exposed to risk, using leverage.

Is this the end of crypto? Hardly, although the violation of trust and principle failures of unregulated decentralized finance should be the last word on the whole asset class.

No … FTX won’t be the end of digital assets, there are many other arguments that are far more valid when it comes to crypto currencies lack of value. FTX is just another criminally mismanaged company to go bust, taking investors with it for human reasons. It isn’t the first, and won’t be the last.

Related: Could Crypto Show its darker side

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