I think thatās too simplistic a read of Levineās article. Itās 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-otherās 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 āIf people start to worry about the [FTX]ās 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.ā
FTX is (was?) in the business of trading customersā money in one currency for customersā 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 āmagic beansā that Matt is referencing.
Edit: After writing the above, I read that Nathanās market āBy April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?ā contains āThis includes lending deposits to Alameda on a āfully collateralizedā loan, and Alameda doing things with the deposits.ā 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 donāt know, I wasnāt in a position to say! Matt Levine doesnāt seem particularly impressed with that decision. I would not make confident claims either way at the moment.
I think thatās too simplistic a read of Levineās article. Itās 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-otherās 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 āIf people start to worry about the [FTX]ās 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.ā
FTX is (was?) in the business of trading customersā money in one currency for customersā 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 āmagic beansā that Matt is referencing.
Edit: After writing the above, I read that Nathanās market āBy April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?ā contains āThis includes lending deposits to Alameda on a āfully collateralizedā loan, and Alameda doing things with the deposits.ā 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.
Iāll bet with people at pretty good odds about this. (However, see my edit.)
Possibly with only foresight one could have said that! I donāt know, I wasnāt in a position to say! Matt Levine doesnāt seem particularly impressed with that decision. I would not make confident claims either way at the moment.