Crypto markets, EA funding and optics

SaraAzubuike14 Jul 2022 15:46 UTC
144 points
24 comments4 min readEA link

TLDR:

SBF has been giving lots of money to EA. He admits it’s a massively speculative bubble. Crypto crash hurts the most vulnerable, because poor uneducated people put lots of money into it (Krugman). Crypto is currently small, but should be regulated and has potential contagion effects (BIS). EA as a whole is getting loose with it’s money due to large crypto flows (MacAskill). An inevitable crypto crash leads to either a) bad optics leading to less interest in EA or b) lots of dead projects.

Recommendations:

- We should fund more projects that have the potential to quickly adjust their funding if it were to dry up (i.e. less diversity in project funding).

Is anyone concerned about the crypto market and 1) it’s optics for EA 2) it’s effect for EA funding?

A lot of EA funding is now coming from FTX, especially longtermism funding.

But Sam Bankman Fried has admitted that some cryptocurrencies like Bitcoin are a massively speculative bubble:

SBF: You start with a company that builds a box…Maybe for now actually ignore what it does or pretend it does literally nothing…So far what we’ve described is the world’s dumbest ETF…And then you say, alright, well, you’ve got this box…anyone who goes, takes some money, puts in the box, each day they’re gonna airdrop, you know, 1% of the X token pro rata amongst everyone who’s put money in the box…and they’re like ‘10X’ that’s insane…So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Matt: (27:13) I think of myself as like a fairly cynical person. And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.

At the same time, Paul Krugman has this really nice NYT piece about how crypto brings us back to an era where we had lots of bank runs:

As a number of analysts have pointed out, stablecoins may seem high-tech and futuristic, but what they most resemble are 19th-century banks, specifically U.S. banks during the “free banking” era before the Civil War, when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

In the past, he’s also mentioned that the people affected by a crypto downturn are the poor and uneducated:

crypto-investors differ from those who typically put money in risky assets, like stocks. Stock market investors tend to be college-educated white people, with 77% of college graduates and 65% of white people owning stocks, per the most recent Gallup research. In contrast, 44% of those invested in cryptocurrency are non-white and 55% don’t have a college degree, per a survey by NORC.

Sam Bankman-Fried, despite calling for greater regulation, has been hiring ex-CFTC employees, including a former acting chair of the agency.

See also this BIS paper on potential contagion of cryptocurrency markets into the broader economy and the need for regulation.

“crypto exchanges”…provide platforms on which participants can trade and store cryptocurrencies and remain largely unregulated to date, essentially forming a “shadow crypto financial system”.5 Compared to existing regulated exchanges for “traditional” financial assets, the regulatory and supervisory oversight of crypto exchanges – encompassing consumer protection, market integrity, trading, disclosure, prudential and addressing anti-money laundering (AML), combatting the financing of terrorism (CFT) – remains patchy at best.6 Moreover, these new crypto exchanges offer very different products from existing regulated exchanges and have mushroomed over the past years, supported by strong customer demand.

Institutional investors, such as hedge funds and other asset managers, are becoming an increasingly important source of revenue for crypto exchanges. These investors account for a rising share of trading volume and assets under management (Graph 8). One implication of this trend are adjustments to the services provided by crypto exchanges. Margin financing, which some crypto exchanges offer to fund the execution of investors trades, is likely to gain in importance. Another implication is rising expectations regarding the creditworthiness of crypto exchanges, given their growing importance as counterparties. This could require crypto exchanges to strengthen their liquidity positions and loss- absorbing capacity, thereby spurring consolidation among the industry – a trend observed among exchanges of more traditional assets as well.

What’s more, EA seems to be adjusting to its current funding situation with the assumption that these pools of cash will be a new norm (Will MacAskill):

Effective altruism has done very well at raising potential funding[3] for our top causes. This was true two years ago: GiveWell was moving hundreds of millions of dollars per year; Open Philanthropy had potential assets of $14 billion from Dustin Moskovitz and Cari Tuna. But the last two years have changed the situation considerably, even compared to that. The primary update comes from the success of FTX: Sam Bankman-Fried has an estimated net worth of $24 billion (though bear in mind the difficulty of valuing crypto assets, and their volatility), and intends to give essentially all of it away. The other EA-aligned FTX early employees add considerably to that total.[4]

One has to recall that the subprime crisis from Ben Bernanke’s memoir:

I had come to believe that, during the housing boom, the FOMC had spent too much time debating whether rising house prices reflected a bubble and too little time thinking about the consequences, if a bubble did exist, of its bursting spectacularly. More attention to the worst-case scenario might have left us better prepared to respond to what actually happened.

Or again, in a separate book, Bernanke and Tim Geithner:

Still, at the time, the subprime mortgage market did not look like a threat to burn down the financial system. Subprime mortgages made up less than one seventh of all outstanding mortgages in the United States. And the defaults and delinquencies that triggered the crisis were mostly concentrated in subprime mortgages with adjustable interest rates, which accounted for less than one twelfth of all mortgages. Straightforward calculations suggested that even if every subprime mortgage holder defaulted, the losses would be modest and easily absorbed by the capital buffers of most major banks and other creditors. What such calculations missed—what almost everyone missed—was the way mortgages were poised to become a vector of panic throughout the financial system.

I see the main way this could go poorly as

  1. crypto markets crash → SBF gets bad reputation → spillover to EA getting bad reputation → lower long term buy-in for EA causes /​ community

  2. FTX /​ others engage in more spending based on crypto wealth and guaranteed funding → new projects get started → crypto markets crash → funding evaporates → lots of good projects that have to be ended

Recommendations?:

- We should fund more projects that have the potential to quickly adjust their funding if it were to dry up (i.e. less diversity in project funding).

I’ve seen very little talked about this, and yet I’m beginning to become very concerned.

SaraAzubuike14 Jul 2022 15:46 UTC
144 points
24 comments4 min readEA link