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Do you own any crypto-currency?
If so, probably you're now grinding your teeth and/or your heart is racing. If, instead, your eyes are glazing over in confusion, most likely you don't - and, given the events of the last few weeks, you're most likely the richer for it.
It's not often that the net worth of a private individual goes from $16 billion to $0 in the course of a week, but, that seems to be how Sam Bankman-Fried has earned his place in history. Indeed, his fall was so fast that hagiographies of his success are still appearing in print, having been written and sent to press before his fall.
How is that possible? In order to even begin to understand crypto wealth, we need to explore the concepts of wealth and money themselves.
When we think of a classic depiction of wealth, some readers of a certain age might picture the Disney cartoon character Scrooge McDuck, whose most visible financial asset is a giant "Money Bin" full of gold coins and other valuables that he swims around in as if it were a pool of water. When things go awry in the McDuck empire, the bin's level goes down, even being drained on occasion.
Nothing could be further from modern reality: Mr. McDuck's view of
money is classic mercantilism, which prevailed in Europe during the
colonial era. Back then, the thinking was that "wealth" was
literal valuables in your possession. But, come the Industrial
Revolution, advanced nations learned a new way of thinking about and
measuring wealth: productive capacity, or, the ability to create more wealth.
Today, rich people carry a comparatively small amount of their wealth in money or inherently-valuable assets like jewelry or precious metal. This is because, like the contents of the Money Bin, gold just sits there; it doesn't reproduce.
In contrast, an operating business has value because, when run correctly, it produces more wealth over time. This was well known even to the ancients; the Biblical patriarchs were noted for their herds of cattle, businesses that literally multiplied, not for bags of cash.
So, why would anyone want money as such? Simple convenience: if you are a goatherder, you may want to buy something from someone who doesn't want a goat. Or, you may encounter someone who'd like to buy a goat from you, but doesn't happen to own anything that you need.
Money provides a means of exchange: you can sell a goat for money, and then spend that money somewhere else at a later time.
In principle, money can be anything at all, so long as everybody agrees to accept it. Precious metals have been commonly used throughout history, but seashells and even large carved stones can serve the purpose.
Now, to be useful, there are some limitations: on Earth, water wouldn't work as money because there's far too much of it and it's too difficult to move around. Perhaps on the Moon it might work better, or maybe cylinders of oxygen would make good Moon money?
Gold illustrates many ideal monetary virtues: it is very difficult to destroy, relatively difficult to fake, rare enough to be valuable yet not so rare as to be unobtainable, and, a useful amount is readily portable. You can carry a bag of gold coins that can pay for most anything you'd want on a trip; for larger purchases, a pirate-style chest is adequate.
Why, then, don't we use gold anymore in commerce? For one thing, it's readily stolen and hard to trace, just like electronic money.
The first banks originated from jewelers, who'd accept gold on deposit for their customers to keep secure in the vaults. If the owner of the gold needed it, he could write a letter to the jeweler asking for some from his account - these became the first checks. Eventually this evolved into "bank notes" - paper money, authorizing the bearer to receive a set amount of gold.
Now, a banknote is much lighter and more readily hidden than a gold coin, yet, if the bank issuing it is trustworthy, it's worth just as much. Banknotes began to circulate, perhaps for years, between redemptions for actual gold. In theory, each banknote was backed by the appropriate amount of gold in the vault at the bank; in practice, so long as nobody tried to redeem all the banknotes at the same time, a few extra notes wouldn't hurt anything, would they?
So, particularly government-backed banks realized they could issue more notes than they had gold, nobody would notice, and officials of both the bank and the government would become magically richer. This worked fine for years on end - until the next financial panic, when everybody did try to redeem their notes all at once and the banks failed.
Thus we see the first and only significant principle of effective money: people must believe in it.
Today, the dollar in your wallet is backed by "The Full Faith and Credit of the United States." What exactly does that mean? How much faith do you have in the prudence and wisdom of the United States government at this moment?
It doesn't matter how you personally feel about our government; the simple fact that you very well know is, you can go downtown and exchange your dollar for goods of value, yes, even for gold if that's what you want. As long as almost everyone else feels the same way, it's all good.
As we've been discovering over the past few years, though, money that isn't explicitly tied to anything in particular - called "fiat" money - tends to become worth less over time. We call this "inflation."
Can you turn your dollars into gold? Sure you can, at the rate of around $1,756 per ounce.
But as recently as two years ago, one ounce of gold cost around $1,270. In terms of gold, your dollar is now worth 2/3 what it was back then.
Now, prices for different things fluctuate all over the place, but we've all noticed they've generally gone up. Is there anything at all that is cheaper now than when Donald Trump was in office? No, there is not.
Are you making more money? Perhaps you are, but are you making 50% more than 4 years ago? Likely not - so, in effect your pay has been cut, since even if you're making more dollars, each dollar buys less.
Why is this? Because, like the banks of old that printed more
banknotes than they had actual gold in the vaults, our government has
chosen to spend trillions of dollars that didn't exist, while the
economy itself has been shrinking. With too many dollars and too
little production, each dollar has effectively less value. This
makes the price of everything else go up.
By deficit spending, our government doesn't take money from you as it does in taxes, but it takes real value away just the same. And there's not a darn thing you can do to stop them - no, while "vote Republican" may lead to inflation being lower, every year your dollar is worth less no matter who's in office.
Which brings us to crypto.
Having money as a medium of exchange is absolutely necessary to a modern economy; we cannot do without it. If money does not have a relatively stable value, however, it becomes a lot less useful. The economy will become a contorted game of hot potato, as people try to get rid of their money as quickly as possible before it loses even more value. In addition to wiping out any incentive to make long-term investments in such necessary capital goods as oil wells, this leads to foolish and short-sighted decisions that don't benefit anyone.
For many decades, some have argued for a return to the gold standard, most famously Ron Paul. But gold has its drawbacks too.
No, we don't want government just to magically create as much money as politicians want to spend and destroy its value through inflation, and requiring currency to be backed by gold would certainly prevent that.
The trouble is, we do want a growing economy, and that requires an
ever-increasing amount of money to meet increased needs. When
America was on the gold standard, there were times when there
physically wasn't enough money around and people had to resort to
barter until a gold strike increased the supply of gold and thus of
money. Once upon a time, solving this problem by requiring the
government to use our abundant supplies of silver to create a nearly unlimited
supply of coinage was a major party platform plank of the Democrats.
Yes, even back then, they wanted to inflate your money out of
existence, but at least they were more honest about it, and presumably
silver coins would always be worth something.
Having the value of money being set by the luck of gold miners may be better than having it be set by by corrupt politicians, but not by much. So, the engineers behind crypto tried to use what they viewed as a mathematical law of increase to create a currency whose amount was ever-increasing but in an inherently limited way: "money" that is mathematically generated by computer.
It is far, far beyond the scope of this article to explain the mathematical algorithms behind crypto, but, the basic idea is that there is a publicly-known mathematical algorithm that can be used to generate a unique computer code that "is" crypto-money. Anybody can run the computer program to generate their own code and thus "print" their own money - but, the algorithm is not an easy one. It takes a lot of computer time, electricity, servers, etc., all of which cost real money. Yes, it's profitable, but not by much.
This is what's referred to as crypto "mining" - companies with whole racks of servers doing arcane math to "create" crypto "money," or, people using their home computers to generate it in small amounts.
The original theory was that Moore's Law would lead to increases in computer power over time, so, the algorithm had to get tougher over time but not too tough. Unfortunately, setting this up accurately would require knowledge of the future that nobody has. So, while it was once feasible to "mine" bitcoins on your home computer, it isn't anymore - Moore's Law has not kept up with what the algorithm expected, which is why today bitcoins are worth far more than when they were first released.
Thus, other cryptocurrencies have been invented, with different algorithms based on different expectations, assumptions, premises, and requirements... or, so we're told. Unless you have a PhD in arcane mathematics, you really have no idea what's going on with the generation of whatever cryptocurrency you might be looking at. Elected officials and government regulators don't either, which brings us to Sam Bankman-Fried.
Let us make clear here and now that, no, we do not understand all the truth behind Mr. Bankman-Fried, FTX, FTT, Alameda Research, or the various other related interlocking companies and cryptocurrencies he created. Nobody does - and that's the point.
What appears to have happened, and is alleged by others far more knowledgeable than we, is really quite simple: Mr. Bankman-Fried said he'd created a new cryptocurrency, FTT; an exchange to trade it on; and a research company to study how to profit thereby. Since new cryptocurrencies are being created all the time, nothing seemed odd about this. As Mr. Bankman-Fried has degrees from MIT, surely he knows what he's doing? People started investing real money into his exchange to buy FTT cryptocurrency, thus, apparently, setting a value for FTT just as stock market investors set values for stocks.
But stocks represent actual ownership of something underlying that is real, a company that's at least trying to do something profitable. Owning a cryptocurrency is no different than owning a dollar bill: the paper itself is worthless, its only value is if someone else agrees that it has value.
For a while, lots of wise people around the world agreed that FTT had value, so it did... and, since Mr. Bankman-Fried controlled it, just like any other central banker or government, he could create as much of it as he liked and become an instant billionaire.
Until the bubble burst, when everybody realized that actually there was nothing real underlying FTTs, they were in fact worthless. Poof! Everything vanished in a flash, except for the relative handful of real assets Mr. Bankman-Fried had purchased with his fake money, such as his multi-million-dollar penthouse in the Bahamas.
By trying to escape the financial mismanagement of the Fed and US government, supposedly savvy investors instead placed themselves at the mercy of the chicanery of one apparently very smart - everyone says so! - fellow that's never done anything in the real world.
Is government-backed fiat money a perfect answer to the need for a
medium of exchange and store of value? No. But so far,
crypto has turned out to be even worse. The US government may be
corrupt, incompetent, and stupid, but at least it exists.
We noted earlier that assets which were supposed to have been worth
$16 billion dropped to $0 value in the course of a week. As the
wreckage
settled, it turns out that the $16 billion wasn't the total value, it
was merely the value of Mr. Bankman-Fried's personal share - which he
has indeed lost, but many
supposedly-savvy investors lost great sums of money along with him,
and they aren't particularly happy. Even new professional
management has no
real idea of how much money was lost, whether it be real or fake.
In addition to claiming to have conjured value out of thin air, Mr. Bankman-Fried's true contribution to the welfare of mankind was his concept of "effective altruism." Like the Gates Foundation, FTX made charitable giving a central piece of the boss' public image and FTX's. The company website states that it was "founded with the goal of donating to the world's most effective charities." One of Mr. Gates' founding principles was that his foundation's grants should show actual societal value instead of the mere feel-goodism that underlies so many government programs.
The FTX bankruptcy subjects these charities to what is called "clawback", on the grounds that the money "given" to them did not belong to the giver. Nonprofits can fight clawback claims as happened in the aftermath of the Bernie Madoff Ponzi scheme, when the trustee sought to reclaim millions of dollars from prominent national charities that had invested with Mr. Madoff; sometimes they win, and sometimes they lose.
It seems that FTX, like Bernie Madoff and Harvey Weinstein, sought
to
insulate itself from criticism through conspicuous Good Works.
Mr. Bankman-Fried
has asserted that he never intentionally deceived anyone and that all
his donations were made in good faith. Having noted that there
was so
little real value behind billions and billions of dollars of "assets"
which were sold on the basis of having been backed by real money,
we've been wondering why we don't see Feds descending on him while
bearing
handcuffs and orange jumpsuits. How come none of our regulatory
agencies who supposedly exist to protect investors noticed that there
was no there in FTX?
As so often, the "Hunter Biden" explanation holds. Before the crash, CNBC reported:
Bankman-Fried has reportedly invested around $40 million in political action committees and campaigns this year in the runup to midterm elections, with most of that money going to Democratic candidates. The FTX CEO has been the driving force behind the Protect Our Future PAC, which has raised more than $28 million thus far - and could move the needle in upcoming House races.
After the election,the New York Post explained the absence of prosecution:
The shambolic 30-year-old whiz kid, once said to have been worth $16 billion, had spent $10 million helping get Biden elected in 2020.
Given that a few tens of millions worth of donations getting a Democrat elected president buys immunity from a FBI which accuses parents who question CRT at school board meetings of "domestic terrorism," we wonder even more just why the Democrats trashed such a big-time donor as Harvey Weinstein.
If Mr. Bankman-Fried's investment of imaginary money into real Democrats succeeds in keeping him out of jail, he'll have executed one of the most successful scams of all time: even after his bankruptcy, his inevitable sale of his True Story to Hollywood, book publishers, and talk shows, will end up with him richer than any of us will ever be. And he already knows all the right people!