I broadly agree with the picture and it matches my perception.
That said, I’m also aware of specific people who held significant reservations about SBF and FTX throughout the end of 2021 (though perhaps not in 2022 anymore), based on information that was distinct from the 2018 disputes. This involved things like:
predicting a 10% annual risk of FTX collapsing with FTX investors and the Future Fund (though not customers)FTX investors, the Future Fund, and possibly customers losing all of their money,
[edit: I checked my prediction logs and I actually did predict a 10% annual risk of loss of customer funds in November 2021, though I lowered that to 5% in March 2022. Note that I predicted hacks and investment losses, but not fraud.]
recommending in favor of ‘Future Fund’ and against ‘FTX Future Fund’ or ‘FTX Foundation’ branding, and against further affiliation with SBF,
warnings that FTX was spending its US dollar assets recklessly, including propping up the price of its own tokens by purchasing large amounts of them on open markets (separate from the official buy & burns),
concerns about Sam continuing to employ very risky and reckless business practices throughout 2021.
I think several people had pieces of the puzzle but failed to put them together or realize the significance of it all. E.g. I told a specific person about all of the above issues, but they didn’t have a ‘holy shit’ reaction, and when I later checked with them they had forgotten most of the information I had shared with them.
I also tried to make several further conversations about these concerns happen, but it was pretty hard because many people were often busy and not interested, or worried about the significant risks from sharing sensitive information. Also, with the benefit of hindsight, I clearly didn’t try hard enough.
I also think it was (and I think still is) pretty unclear what, if anything, should’ve been done at the time, so it’s unclear how action-relevant any of this would’ve been.
It’s possible that most of this didn’t reach Will (perhaps partly because many, including myself, perceived him as more of an SBF supporter). I certainly don’t think these worries were as widely disseminated as they should’ve been.
A meta thing that frustrates me here is I haven’t seen much talking about incentive structures. The obvious retort to negative anecdotal evidence is the anecdotal evidence Will cited about people who had previous expressed concerns who continued to affiliate with FTX and the FTXFF, but to me, this evidence is completely meaningless because continuing to affiliate with FTX and FTXFF meant a closer proximity to money. As a corollary, the people who refused to affiliate with them did so at significant personal & professional cost for that two-year period.
Of course you had a hard time voicing these concerns! Everyone’s salaries depended on them not knowing or disseminating this information! (I am not here to accuse anyone of a cover-up, these things usually happen much less perniciously and much more subconsciously)
predicting a 10% annual risk of FTX collapsing with FTX investors and the Future Fund (though not customers) losing all of their money,
Do you know if this person made any money off of this prediction? I know that shorting cryptocurrency is challenging, and maybe the annual fee from taking the short side of a perpetual future would be larger than 10%, not sure, but surely once the FTX balance sheet started circulating that should have increased the odds that the collapse would happen on a short time scale enough for this trade to be profitable?[1]
A 10–15% annual risk was predicted by a bunch of people up until late 2021, but I’m not aware of anyone believing that in late 2022, and Will points out that Metaculus was predicting ~1.3% at the time. I personally updated downwards on the risk because 1) crypto markets crashed, but FTX didn’t, which seems like a positive sign, 2) Sequoia invested, 3) they got a GAAP audit.
I don’t think there was a great implementation of the trade. Shorting FTT on Binance was probably a decent way to do it, but holding funds on Binance for that purpose is risky and costly in itself.
That said, I’m aware that some people (not including myself) closely monitored the balance sheet issue and subsequent FTT liquidations, and withdrew their full balances a couple days before the collapse.
Is a 10-15% annual risk of failure for a two-year-old startup alarming? I thought base rates were higher, which makes me think I’m misunderstanding your comment.
You also mention that the 10% was without loss of costumer funds, but the Metaculus 1.3% was about loss of costumer funds, which seems very different.
10% chance of yearly failure without loss of customer funds seems more than reasonable, even after Sequoia invested, in such a high-variance environment, and not necessarily a red flag.
A 10-15% annual risk of startup failure is not alarming, but a comparable risk of it losing customer funds is. Your comment prompted me to actually check my prediction logs, and I made the following edit to my original comment:
predicting a 10% annual risk of FTX collapsing with FTX investors and the Future Fund (though not customers)FTX investors, the Future Fund, and possibly customers losing all of their money,
[edit: I checked my prediction logs and I actually did predict a 10% annual risk of loss of customer funds in November 2021, though I lowered that to 5% in March 2022. Note that I predicted hacks and investment losses, but not fraud.]
Is the better reference class “two-year old startups” or “companies supposedly worth over $10B” or “startups with over a billion invested”? I assume a 100 percent investor loss would be rare, on an annualized basis, in the latter two—but was included in the original claim. Most two-year startups don’t have nearly the amount of investor money on board that FTX did.
Optics would be great on that one—an EA has insight that there’s a good chance of FTX collapse (based on not generally-known info / rumors?), goes out and shorts SamCoins to profit on the collapse! Recall that any FTX collapse would gut the FTT token at least, so there would still be big customer losses.
Gutting the FTT token is customers losing money because of their investing, not customer losses via FTX loss of custodial funds or token, though, isn’t it?
That’s correct. That being said, wasn’t part of the value proposition of FTT that it gave you discounts on FTX? To that extent, it was somewhat like a partial gift certificate for future services. That’s still not loss of deposited funds, of course.
In any event, the public would not look kindly on a charitable movement accepting nine figures in donations from a company despite having strong semi-inside-knowledge reasons to believe said company was about to collapse in this manner. I was somewhat surprised to see encouragement to disclose information about anyone who traded on that kind of semi-insider knowledge.
Based on some of the follow-up questions, I decided to share this specific example of my thinking at the time (which didn’t prevent me from losing some of my savings in the bankruptcy):
Do you recall what your conception of a possible customer loss resulting “from bankruptcy” was, and in particular whether it was (at least largely) limited to “monies lent out for margin trading”? Although I haven’t done any research, if user accounts had been appropriately segregated and safeguarded, FTX’s creditors (in a hypothetical “normal” bankruptcy scenario) shouldn’t have been able to make claims against them. There might have been an exception for those involved in margin trading
I recall feeling most worried about hacks resulting in loss of customer funds, including funds not lent out for margin trading. I was also worried about risky investments or trades resulting in depleting cash reservers that could be used to make up for hacking losses.
I don’t think I ever generated the thought “customer monies need to be segregated, and they might not be”, primarily because at the time I wasn’t familiar with financial regulations.
E.g. in 2023 I ran across an article written in ~2018 that commented an SIPC payout in a case of a broker co-mingling customer funds with an associated trading firm. If I had read that article in 2021, I would have probably suspected FTX of doing this.
I broadly agree with the picture and it matches my perception.
That said, I’m also aware of specific people who held significant reservations about SBF and FTX throughout the end of 2021 (though perhaps not in 2022 anymore), based on information that was distinct from the 2018 disputes. This involved things like:
predicting a 10% annual risk of FTX collapsing with
FTX investors and the Future Fund (though not customers)FTX investors, the Future Fund, and possibly customers losing all of their money,[edit: I checked my prediction logs and I actually did predict a 10% annual risk of loss of customer funds in November 2021, though I lowered that to 5% in March 2022. Note that I predicted hacks and investment losses, but not fraud.]
recommending in favor of ‘Future Fund’ and against ‘FTX Future Fund’ or ‘FTX Foundation’ branding, and against further affiliation with SBF,
warnings that FTX was spending its US dollar assets recklessly, including propping up the price of its own tokens by purchasing large amounts of them on open markets (separate from the official buy & burns),
concerns about Sam continuing to employ very risky and reckless business practices throughout 2021.
I think several people had pieces of the puzzle but failed to put them together or realize the significance of it all. E.g. I told a specific person about all of the above issues, but they didn’t have a ‘holy shit’ reaction, and when I later checked with them they had forgotten most of the information I had shared with them.
I also tried to make several further conversations about these concerns happen, but it was pretty hard because many people were often busy and not interested, or worried about the significant risks from sharing sensitive information. Also, with the benefit of hindsight, I clearly didn’t try hard enough.
I also think it was (and I think still is) pretty unclear what, if anything, should’ve been done at the time, so it’s unclear how action-relevant any of this would’ve been.
It’s possible that most of this didn’t reach Will (perhaps partly because many, including myself, perceived him as more of an SBF supporter). I certainly don’t think these worries were as widely disseminated as they should’ve been.
A meta thing that frustrates me here is I haven’t seen much talking about incentive structures. The obvious retort to negative anecdotal evidence is the anecdotal evidence Will cited about people who had previous expressed concerns who continued to affiliate with FTX and the FTXFF, but to me, this evidence is completely meaningless because continuing to affiliate with FTX and FTXFF meant a closer proximity to money. As a corollary, the people who refused to affiliate with them did so at significant personal & professional cost for that two-year period.
Of course you had a hard time voicing these concerns! Everyone’s salaries depended on them not knowing or disseminating this information! (I am not here to accuse anyone of a cover-up, these things usually happen much less perniciously and much more subconsciously)
Do you know if this person made any money off of this prediction? I know that shorting cryptocurrency is challenging, and maybe the annual fee from taking the short side of a perpetual future would be larger than 10%, not sure, but surely once the FTX balance sheet started circulating that should have increased the odds that the collapse would happen on a short time scale enough for this trade to be profitable?[1]
I feel like I asked you this before but I forgot the answer, sorry.
I don’t think so, because:
A 10–15% annual risk was predicted by a bunch of people up until late 2021, but I’m not aware of anyone believing that in late 2022, and Will points out that Metaculus was predicting ~1.3% at the time. I personally updated downwards on the risk because 1) crypto markets crashed, but FTX didn’t, which seems like a positive sign, 2) Sequoia invested, 3) they got a GAAP audit.
I don’t think there was a great implementation of the trade. Shorting FTT on Binance was probably a decent way to do it, but holding funds on Binance for that purpose is risky and costly in itself.
That said, I’m aware that some people (not including myself) closely monitored the balance sheet issue and subsequent FTT liquidations, and withdrew their full balances a couple days before the collapse.
Is a 10-15% annual risk of failure for a two-year-old startup alarming? I thought base rates were higher, which makes me think I’m misunderstanding your comment.
You also mention that the 10% was without loss of costumer funds, but the Metaculus 1.3% was about loss of costumer funds, which seems very different.
10% chance of yearly failure without loss of customer funds seems more than reasonable, even after Sequoia invested, in such a high-variance environment, and not necessarily a red flag.
A 10-15% annual risk of startup failure is not alarming, but a comparable risk of it losing customer funds is. Your comment prompted me to actually check my prediction logs, and I made the following edit to my original comment:
Is the better reference class “two-year old startups” or “companies supposedly worth over $10B” or “startups with over a billion invested”? I assume a 100 percent investor loss would be rare, on an annualized basis, in the latter two—but was included in the original claim. Most two-year startups don’t have nearly the amount of investor money on board that FTX did.
Thanks! That’s helpful. In particular, I wasn’t tracking the 2021 versus 2022 thing.
(See my edit)
Optics would be great on that one—an EA has insight that there’s a good chance of FTX collapse (based on not generally-known info / rumors?), goes out and shorts SamCoins to profit on the collapse! Recall that any FTX collapse would gut the FTT token at least, so there would still be big customer losses.
Gutting the FTT token is customers losing money because of their investing, not customer losses via FTX loss of custodial funds or token, though, isn’t it?
That’s correct. That being said, wasn’t part of the value proposition of FTT that it gave you discounts on FTX? To that extent, it was somewhat like a partial gift certificate for future services. That’s still not loss of deposited funds, of course.
In any event, the public would not look kindly on a charitable movement accepting nine figures in donations from a company despite having strong semi-inside-knowledge reasons to believe said company was about to collapse in this manner. I was somewhat surprised to see encouragement to disclose information about anyone who traded on that kind of semi-insider knowledge.
Based on some of the follow-up questions, I decided to share this specific example of my thinking at the time (which didn’t prevent me from losing some of my savings in the bankruptcy):
Do you recall what your conception of a possible customer loss resulting “from bankruptcy” was, and in particular whether it was (at least largely) limited to “monies lent out for margin trading”? Although I haven’t done any research, if user accounts had been appropriately segregated and safeguarded, FTX’s creditors (in a hypothetical “normal” bankruptcy scenario) shouldn’t have been able to make claims against them. There might have been an exception for those involved in margin trading
I recall feeling most worried about hacks resulting in loss of customer funds, including funds not lent out for margin trading. I was also worried about risky investments or trades resulting in depleting cash reservers that could be used to make up for hacking losses.
I don’t think I ever generated the thought “customer monies need to be segregated, and they might not be”, primarily because at the time I wasn’t familiar with financial regulations.
E.g. in 2023 I ran across an article written in ~2018 that commented an SIPC payout in a case of a broker co-mingling customer funds with an associated trading firm. If I had read that article in 2021, I would have probably suspected FTX of doing this.