The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet
Notably, if this is true it seems to possibly be a bit at odds with some of SBF’s now-deleted tweets from Monday, in which he said that “FTX has enough to cover all client holdings. We don’t invest client assets (even in Treasuries).”
I think that’s too simplistic a read of Levine’s article. It’s hard to summarize as good a writer as Matt Levine, but I will try:
Many exchanges took customer deposits and invested them speculatively, like a bank would do. FTX did not do that.[1]
FTX offered leveraged financial products. When doing so, you are loaning people money. Fortunately, you are loaning some people Bitcoins secured by $s and other people $s secured by Bitcoin. So you loan them each-other’s money. This is entirely expected.
The surprising thing is that FTX had a bunch of loans out in $s and Bitcoin secured by FTT. The problem with that is that “If people start to worry about the [FTX]’s financial health, [FTT] will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that [FTT] will go down, etc. It is a death spiral.”
FTX is (was?) in the business of trading customers’ money in one currency for customers’ money in other currency. With the benefit of hindsight[2] we can say that they should not have allowed a large chunk of the money they ended up with to be FTT. That is the “magic beans” that Matt is referencing.
Edit: After writing the above, I read that Nathan’s market “By April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?” contains “This includes lending deposits to Alameda on a ‘fully collateralized’ loan, and Alameda doing things with the deposits.” I would bet for a yes resolution on that market. However, I would note: Alameda was playing within the same structure as any other depositor. FTX allowed people to make leveraged bets on FTT, and Alameda took them up on it.
Possibly with only foresight one could have said that! I don’t know, I wasn’t in a position to say! Matt Levine doesn’t seem particularly impressed with that decision. I would not make confident claims either way at the moment.
Matt Levine has a new article about this. Quoting from it:
Notably, if this is true it seems to possibly be a bit at odds with some of SBF’s now-deleted tweets from Monday, in which he said that “FTX has enough to cover all client holdings. We don’t invest client assets (even in Treasuries).”
I think that’s too simplistic a read of Levine’s article. It’s hard to summarize as good a writer as Matt Levine, but I will try:
Many exchanges took customer deposits and invested them speculatively, like a bank would do. FTX did not do that.[1]
FTX offered leveraged financial products. When doing so, you are loaning people money. Fortunately, you are loaning some people Bitcoins secured by $s and other people $s secured by Bitcoin. So you loan them each-other’s money. This is entirely expected.
The surprising thing is that FTX had a bunch of loans out in $s and Bitcoin secured by FTT. The problem with that is that “If people start to worry about the [FTX]’s financial health, [FTT] will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that [FTT] will go down, etc. It is a death spiral.”
FTX is (was?) in the business of trading customers’ money in one currency for customers’ money in other currency. With the benefit of hindsight[2] we can say that they should not have allowed a large chunk of the money they ended up with to be FTT. That is the “magic beans” that Matt is referencing.
Edit: After writing the above, I read that Nathan’s market “By April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?” contains “This includes lending deposits to Alameda on a ‘fully collateralized’ loan, and Alameda doing things with the deposits.” I would bet for a yes resolution on that market. However, I would note: Alameda was playing within the same structure as any other depositor. FTX allowed people to make leveraged bets on FTT, and Alameda took them up on it.
I’ll bet with people at pretty good odds about this. (However, see my edit.)
Possibly with only foresight one could have said that! I don’t know, I wasn’t in a position to say! Matt Levine doesn’t seem particularly impressed with that decision. I would not make confident claims either way at the moment.