I think thatâs too simplistic a read of Levineâs article. Itâs 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-otherâs 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 âIf people start to worry about the [FTX]âs 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.â
FTX is (was?) in the business of trading customersâ money in one currency for customersâ 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 âmagic beansâ that Matt is referencing.
Edit: After writing the above, I read that Nathanâs market âBy April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?â contains âThis includes lending deposits to Alameda on a âfully collateralizedâ loan, and Alameda doing things with the deposits.â 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 donât know, I wasnât in a position to say! Matt Levine doesnât seem particularly impressed with that decision. I would not make confident claims either way at the moment.
I think thatâs too simplistic a read of Levineâs article. Itâs 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-otherâs 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 âIf people start to worry about the [FTX]âs 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.â
FTX is (was?) in the business of trading customersâ money in one currency for customersâ 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 âmagic beansâ that Matt is referencing.
Edit: After writing the above, I read that Nathanâs market âBy April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?â contains âThis includes lending deposits to Alameda on a âfully collateralizedâ loan, and Alameda doing things with the deposits.â 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.
Iâll bet with people at pretty good odds about this. (However, see my edit.)
Possibly with only foresight one could have said that! I donât know, I wasnât in a position to say! Matt Levine doesnât seem particularly impressed with that decision. I would not make confident claims either way at the moment.