FTX Crisis. What we know and some forecasts on what will happen next
Tl;dr:
The purpose of the document is to add clarity. It was written quickly and is being updated
Binance, a competitor sold a large stake of FTT, FTX’s native token and implied that FTX was at risk by mentioning a recent crash (LUNA). This looks bad, but given what follows, the accusation was probably legitimate
This started a run on the bank (FTX.com) where depositors attempted to get their money out.
SBF tweeted that FTX.com (not FTX US or Alameda) was beginning the process of being sold to Binance in order to safeguard depositor assets. Binance have since backed out of this and there are credible claims that funds customers deposited for safekeeping were being invested without their consent
FTX.com comprises ~39% of SBF’s assets and will likely be worthless (80%), probably FTX US (60%) will be too and probably Alameda also (85%).
SBF is attempting to raise funds to cover deposits. He will almost certainly fail. ( ~90%)
It is therefore very likely to lead to the loss of deposits which will hurt the lives of 10,000s of people eg here
Regardless, this likely means there will be a lot fewer assets for effective causes
There are some prediction markets below for things that are less clear
We should wait and see what happens
Please flag any issues and we’ll try and correct them
Use your time judiciously but also give yourself space. This probably isn’t worth most people following closely. But equally, this is a significant change to resources and expectations are going to shift a lot. Pressing problems aside, it’s okay to grieve.
Longer version
There are three key entities here (prices according to Bloomberg, so probably wrong):
FTX (The worldwide business) that composes about 39%
FTX.US (FTX’s US arm) a crypto exchange that composes about 13% of SBF’s wealth
Alameda, a hedge fund which composes 46%
Alameda was SBF’s original hedge fund and made markets for FTX. The behaviour of the two was correlated, and Alameda held large positions in FTT, FTX’s token. It seems likely there were deep irregularities in FTX.com’s finances also. Coindesk reported Alameda were in trouble, and some internal documents were leaked. Alameda CEO, Caroline Ellison rebutted.
Binance left/was pushed out of an early funding round of FTX and were paid in FTT, FTX’s native token. It seems like there was bad blood. This week Binance said they were selling their FTT and referenced LUNA a coin that recently crashed. It is common for projects in crypto to fail, so when there is a sense they will, people withdraw their money rapidly. This started a run on FTX. As above, given what follows their accusation was not without merit.
SBF announced that FTX.com, the non-US business, had been agreed in principle to be sold. SBF talks about that here. Binance have now backed out of the deal citing “news reports regarding mishandled customer funds”. SBF is currently trying to raise money to cover these deposits. If he doesn’t many depositors will likely lose their money, which will ruin 1000s of lives. This will also likely lead to fewer resources for effective causes which may ruin far more lives, now and in the future. Both of these outcomes are terrible.
This is hard to hear. It is 95% at this point that there was serious unethical behaviour. I can’t comment on crime because I don’t understand the law, but my (Nathan’s) sense is that these will turn out to be things we think ought to be crimes. This is likely to be really bad for depositors. Many of these are covered in more detail in prediction markets below which will stay accurate (whereas this text will be updated more slowly).
Twitter threads
The thread announcing serious issues.
The most recent thread from Binance.
Claims of immoral activity (transferring users funds to risky assets without their consent) - the Reuters report is here.
SBF’s latest thread (ht Greg Colbourn)
Relevant forecasts
Here is a section of relevant forecasts to try and give people a picture of what might happen.
The other key question is what happens to the FTX Foundation. How much will it spend next year? 66%
Will the FTX Future Fund spend more than $300mn in 2023? 15%
Will the FTX Future Fund spend more than $600mn in 2023? If this is high, then individuals may have more job security.
What will Forbes estimate SBF’s wealth at?
Thoughts on financial details (suggest in comments)
OpenPhil
$3 − 6 Bn 80% CI
Dustin/Cari
$6 − 10 Bn 80% CI
FTX Foundation & Future Fund
Founders Pledge
Final comments
This is gonna get worse before it gets better
In general, it’s probably good to wait before making judgements, but also to seek to have clarity where it affects decisions.
- FTX FAQ by (13 Nov 2022 5:00 UTC; 144 points)
- Sadly, FTX by (17 Nov 2022 14:26 UTC; 134 points)
- Sadly, FTX by (LessWrong; 17 Nov 2022 14:30 UTC; 133 points)
- Grief is a fire sale by (LessWrong; 4 Mar 2024 1:11 UTC; 76 points)
- Consider Applying to the Future Fellowship at MIT by (25 Oct 2022 15:50 UTC; 68 points)
- Sentience Institute 2022 End of Year Summary by (25 Nov 2022 12:28 UTC; 48 points)
- EA & LW Forums Weekly Summary (7th Nov − 13th Nov 22′) by (16 Nov 2022 3:04 UTC; 38 points)
- Consider Applying to the Future Fellowship at MIT by (LessWrong; 25 Oct 2022 15:40 UTC; 29 points)
- 's comment on FTX.com has probably collapsed by (8 Nov 2022 19:36 UTC; 22 points)
- EA & LW Forums Weekly Summary (7th Nov − 13th Nov 22′) by (LessWrong; 16 Nov 2022 3:04 UTC; 19 points)
- Binance is buying FTX.com: How did it happen and what are the implications? by (LessWrong; 8 Nov 2022 17:14 UTC; 16 points)
- 's comment on FTX.com has probably collapsed by (9 Nov 2022 11:50 UTC; 13 points)
- 's comment on Some comments on recent FTX-related events by (11 Nov 2022 17:00 UTC; 12 points)
- 's comment on Jacy’s Quick takes by (13 Nov 2022 11:37 UTC; 10 points)
- What should EA do in response to the FTX crisis? by (10 Nov 2022 18:44 UTC; 9 points)
- 's comment on FTX.com has probably collapsed by (8 Nov 2022 19:48 UTC; 7 points)
- 's comment on FTX.com has probably collapsed by (9 Nov 2022 1:21 UTC; 3 points)
- 's comment on Binance is buying FTX.com: How did it happen and what are the implications? by (LessWrong; 8 Nov 2022 22:00 UTC; 2 points)
While this is all being sorted and we figure out what is next, I would like to emphasize wishes of wellness and care for the many impacted by this.
Note: The original post was edited to clarify the need for compassion and to remove anything resembling “tribalism,” including a comment of thanks, which may be referenced in comments.
[Edit: this was in response to the original version of the parent comment, not the new edited version]
Strong −1, the last line in particular seems deeply inappropriate given the live possibility that these events were caused by large-scale fraud on the part of FTX, and I’m disappointed that so many people endorsed it. (Maybe because the reasons to suspect fraud weren’t flagged in original post?) At a point where the integrity of leading figures in the movement has been called into question, it is particularly important that we hold ourselves to high standards rather than reflexively falling back on tribalist instincts.
Several people, including you, told me not to post this initially. To me that felt like “we should not do thing that damage FTX’s chances in an involving situation”. I’m not accusing, just confused—it feels hard to square that with this reply.
My preferences here are that people (and in particular the EA community):
Don’t support (what could potentially be) fraud.
Don’t exacerbate bank runs by making overly strong claims about likelihood of bad outcomes (whether or not there is underlying fraud—either way expectations of collapse can be self-fulfilling).
(Less important) Remain careful about epistemics (e.g. avoid making big claims about impacts on long-term strategy from a state of severe uncertainty).
And then, subject to the constraints above, I’d like people to be as well-informed as possible. I think that these are pretty reasonable preferences and that I’ve behaved consistently with them.
I really take issue with #2 here. Bank run exacerbation saved my friend’s life savings. Expectations of collapse can save your life if, you know, there’s a collapse.
It really seems insanely cruel to say we shouldn’t inform people because it might be bad for FTX (namely in the event of insolvency). Where are our priorities? I’m very glad that my friends did not observe your #2 preference here.
Of course the best way to help FTX against a bank run would have been to deposit your own funds at the first sign of distress. As of writing I think it’s still not too late!
Maybe I’m misunderstanding bank runs, but as I understand it, they happen because
the institution that is holding other people’s money doesn’t have all that money in liquid form
they are unable to give it back if everybody tries to deposit it at once
when this happens, the institution runs out of money and many people, who didn’t withdraw their cash in time, lose all their deposits
I think the reason Richard listed #2 as a preference is that there might still be hope that FTX doesn’t run out of money in the first place and no one loses their deposits.
However, it might be FTX will run out of money either way. In that case, speeding up the bank run will lead some people to get more their money back, but only because they pick it up before other people do. In the end it’s a zero-sum game, because FTX only has a limited amount of liquid currency. If my model is correct, then there is no net benefit in speeding up the bank run.
I would like to be involved in the version of EAs where we look after eachother’s basic wellness even if it’s bad for FTX or other FTX depositors. I think people will find this version of EA more emotionally safe and inspiring.
To me there is just no normative difference between trying to suppress information and actively telling people they should go deposit on FTX when distress occurred (without communicating any risks involved), knowing that there was a good chance they’d get totally boned if they did so. Under your model this would be no net detriment, but it would also just be sociopathic.
Yes the version of EA where people suppress this information, rather than actively promote deposits, is safer. But both are quite cruel and not something I could earnestly suggest to a friend that they devote their lives to.
Hm, yeah I guess my intuition is the opposite. To me, one of the central parts of effective altruism is that it’s impartial, meaning we shouldn’t put some people’s welfare over other’s.
I think in this case it’s particularly important to be impartial, because EA is a group of people that benefitted a lot from FTX, so it seems wrong for us to try to transfer the harms it is now causing onto other people.
(as an aside it also seems quite unusual to apply this impartiality to the finances of EAs. If EAs were going to be financially impartial it seems like we would not really encourage trying to earn money in competitive financially zero sum ways such as a quant finance career or crypto trading)
Aspiring to be impartially altruistic doesn’t mean we should shank eachother. The so-impartial-we-will-harvest-your-organs-and-steal-your-money version of EA has no future as a grassroots movement or even room to grow as far as I can tell.
This community norm strategy works if you determine that retaining socioeconomically normal people doesn’t actually matter and you just want to incubate billionaires, but I guess we have to hope the next billionare is not so (allegedly) impartial towards their users’ welfare.
Seriously, imagine dedicating your life to EA and then finding out you lost your life savings because one group of EAs defrauded you and the other top EAs decided you shouldn’t be alerted about it for as long as possible specifically because it might lead to you reaching safety. Of course none of the in-the-know people decided to put up their own money to defend against bank run, just decided it would be best if you kept doing so.
In that situation I have to say I would just go and never look back.
Personally, when I first saw the news, I really wasn’t expecting fraud.
At this point, the recent news hasn’t been looking good, and it seems like a possibility.
If it comes out there was fraud and the team did illegal activity, then that should clearly be taken seriously.
+1 on both counts, developments today have definitely shifted my guesses for what happened, though I’m overall just pretty confused and uncertain!
I hope CEA are looking at how to protect EA’s reputation from this.
I always thought it was a bad idea for SBF to try to make himself the face of EA.
I strongly expect them to be. This situation is looking a lot like a disaster for EA. The leaders of EA orgs should be taking this very seriously, especialy the main EA orgs.
I’d expect to see a bunch of press releases and blog posts in the next 1-2 weeks or so.
Question, but why is it bad to wish well on people impacted by this? I get it, there’s a whole lot of rumors about fraud, but why is even the very basic norm of wishing well viewed as a bad thing?
I think the comment was edited after this reply and the sentence referred was deleted.
It isn’t.
Sharmake—Erme is correct. The original comment was edited for clarity.
Unendorsed my own comment.
This is true. My original comment has been edited to clarify my intent (as was later mentioned in a reply). The reference to thanks did more to confuse than to support. My apologies for the confusion.
As for the allegations of large-scale fraud: Yes, you’re correct that the situation has evolved several times, hence the numerous rephrases. Though, I am currently uncertain regarding whether fraud actually occurred. That said, I certainly agree that we should hold people to a high standard of ethical conduct.
I am worried and sad for all involved, but I am especially concerned for the wellbeing and prospects of the ~millions of people—often vulnerable retail investors—who may have taken on too much exposure to crypto in general.
Many people like this must be extremely stressed right now. As with many financial meltdowns, some individuals and families will endure severe hardship, such as the breakdown of relationships, the loss of life savings, even the death of loved ones.
I don’t really follow crypto so I know roughly nothing about the role SBF, FTX and Alameda have played in this ecosystem. My impression is that they’ve been ok/good on at least some dimensions of protecting vulnerable investors. But—let’s see how things look, overall, when the dust settles.
At this point, it is very clear that they have not been “good” and it is in fact the exact opposite. It is very likely that billions of dollars of user deposits are now zeroed and the equity investments of all their investors in FTX are likely worth zero as well, and it isn’t because of a mistake but because of wildly irresponsible and most likely fraudulent and criminal actions on behalf of FTX, Alameda, and Sam. They are being investigated by both the SEC , the CFTC and the DOJ; Binance is walking away from any sort of takeover. My heart goes out to the users and the teams of these companies but this is egregious and one of the worst events to transpire within crypto ever.
I sort of suspect that they were not, in fact, exemplary on any definitions of protecting retail investors at any point. The whole point of FTX was to offer leverage to its users! It was the derivatives exchange where you could get margin! This is generally bad for retail! (and then maybe had Alameda trading against you, but hey).
This is all before their exchange suffered huge outflows and it turned out they didn’t have customer funds protected at all. So no, at no point was this good for retail, it was incredibly predatory from beginning to end!
Thanks. I’ve changed “exemplary” to “ok/good” for a couple of reasons, partly due to your comment.
I don’t understand the space well enough to properly engage this debate at the moment.
Peter, get back to work ;) (I know I should too!)
Haha, yep.
Strong +1, I imagine this is a very stressful time for all of them! I think they’ve all done an incredibly impressive amount of good already and wish them the best.
EDIT: I made this comment when my understanding of the situation was that FTX had experienced a liquidity crisis due to a bank run, and were going to be acquired by Binance (and customers made whole). I’m now a lot more confused about the situation, and what the appropriate emotional orientation to it/to FTX is.
I think it’s very plausible the reputational damage to EA from this—if it’s as bad as it’s looking to be - will outweigh the good the Future Fund has done tbh
Agreed lots of kudos to the Future Fund people though
Strong +1 from me, too. I’d really like for this to be the dominant message that Sam and his team hear from the community— lots of care and consideration.
Wishing them all the best ❤️
Maybe hold off on this sentiment until we know exactly what they were doing with customer funds? It could age quite badly.
I agree. It seems like FTX collapsed quickly after some truths about their financial situation were revealed. Not to put too fine a point on it, it may turn out that Sam is a con artist. I don’t doubt the sincerity of his commitment to EA causes, but it now seems plausible that, like a problem gambler trying to hide it from his family, the FTX execs piled up shady debts through self-dealing.
SBF has been a friend to EA, but blindly supporting friends while ignoring potential victims is not the kind of hard-nosed truth-seeking that EA values. I’d previously considered him a kind of hero but we may need to rethink that, depending on how things develop.
Also, if SBF is made out to be a con-man this has very bad effects for the perception of EA as well.
‘Made out’ sort of implies he isn’t, I think we should be neutral on that right now.
I just mean “found out to be”
Fair point, I suppose— if it turns out that FTX was doing something extremely dodgy/illegal, I might no longer endorse that sentiment. I appreciate the counterargument :)
That said, I still think it’s important to remember that SBF and his team are real people with real feelings. There are enough people screaming at them on Twitter already.
Extending some grace seems like a good place to start, even if it turns out that they made some less-than-optimal decisions
Overall, the negative speculation in this thread seems undue and too negative.
Without trying to make an affirmative statement about what happened at FTX or saying there wasn’t any other factors, the comments in this thread ignore the reality of leverage and risk management in brokerage trading (which is what FTX effectively was).
It can be completely true that no customer funds were invested or speculated, but that the fund as a whole can still collapse due to the mechanics/dependencies of leveraged trading.
For example, Robinhood, which no one believes was speculating with customer funds, had a huge crisis in Jan 2021, that needed billions of dollars of outside money. This was just due to customer leverage and moderately more instability in stock (and probably bad risk management).
https://www.cnbc.com/2021/02/03/why-investors-were-willing-to-write-robinhood-a-3-billion-check-during-the-gamestop-chaos-.html
Would you be open to stating some probabilities on this topic—for example, your probability that Sam gets convicted of fraud, is conclusively found out to have committed fraud, etcetera?
I ask because I’d potentially be interested in making some financial bets with you!
Yes, and no, can you operationalize some of the most interesting and relevant questions to you?
These might touch on:
Alameda Research
FTX
Legal acceptability of FTX’s collateralization strategy
The fully and honest true answer is sort of no.
I think legality is poorly posed or not well defined. This is hard to explain and I’m finding the current information environment on the EA forum, and really EA, exceptionally poor and this is disappointing and relevant, if elaborating contributes to the noise.
But basically, whether something is actually found illegal will depend on the administration, style of prosecutor, and political and social environment that could vary wildly, along with many other details. For evidence, see what happened to the 2008 financial crisis, where there was almost no criminal prosecution.
More importantly, the moral meaning of the activity versus what is found illegal can be unintuitive or misleading and this seems more important. I seriously distrust whether people here understand the moral meaning of these actions and I would find the aspects of a prediction to be sort of a predictable and distasteful spectacle.
Also, since I’ve never come close to this kind of activity in any sense, I don’t know much and I don’t care much about the actual relevant laws, especially things like jurisdiction e.g. significance of Bahama, which could be pivotal. (This by the way is one example where the meaning of this question is uninteresting.)
I again reiterate my strong belief in the character and decision making of SBF, which is counter to the would be “mood” right now.
The moderation team[1] believes that Charles He has violated a number of Forum norms in the thread below. Because of that and a pattern of previous violations (which led to 3 separate bans in the past — 1, 2, 3), we’re banning Charles He from the Forum for 6 months.
Our Forum norms say that we strongly discourage, and may delete, “unnecessary rudeness or offensiveness” and “behavior that interferes with good discourse” — these are the violations we see in the comments below. We appreciate that Charles has unendorsed some comments and excerpts, but we don’t think this resolves the issue. Moreover, because Charles has violated norms before (and been banned repeatedly), we’re expecting a higher standard of norm-following from Charles.
The norm violations in this thread include:
A serious insult to another user (which has been edited and unendorsed — the previous version was notably worse — but is still unacceptable). This is not appropriate for the Forum.
A number of hostile comments (e.g. 1, 2, 3, 4)
Direct and implied ad hominem attacks based on assumptions that aren’t backed (1, 2)
As I mentioned before, it’s understandable to have strong feelings around this topic, but we expect Forum users to express themselves in a more productive way. Please try to assume good faith and be kind.
You can reach out to the moderation team at forum-moderation@effectivealtruism.org if you have concerns about this decision.
I’m posting this message, but it was written collaboratively by several moderators after a lot of discussion.
Can you just operationalize a few things yourself and attach numbers to them? That sounds easiest.
For example, your odds on whether SBF literally goes to prison within the next 4 years…
(Though I think there are better ways to operationalize)
If you can’t come up with a way to operationalize a prediction on this topic in any straightforwardly falsifiable way then that’s okay I guess, though kind of sad.
Hey, by “sad” are you implying an askance view that I am either being evasive or inadequate?
I think so because you initiated this and won’t provide details of the bets and the tone of other text this: “If you can’t come up with...straightforwardly falsifiable way .”
I would find that derogatory, especially based on my detailed elaboration above, e.g. making me ponder and bet on whether someone I don’t think should be hurt is hurt and forcing me to study the legal details and put up my money to do so.
Separately and additionally, I correctly suspect that asking me to put up the numbers give you a major advantage, and you are attempting to take advantage of perceived emotional errors, by literally taking my money.
The above is plausible, and well, remarkably hostile under the circumstances.
That seems sort of like the perfect example of why someone would object to a prediction market.
I don’t really want to open up the “prediction market” thing, but I will ruthlessly do so, if this is pressed.
If you don’t want to make a single quantifiable prediction on this topic, after making claims about other people’s predictions being “too negative”, yes I consider that both evasive and inadequate.
If you really believe people are being “too negative” in their speculation, I thought you might be willing to put your money where your mouth is in some way. If you’re not, then you’re not, but it’s got nothing to do with how well defined legality is, the moral meaning of illegality, etcetera.
Edit: I don’t actually really think that a social expectation of financial betting is a good norm (not that betting is bad, just that declining to financial bet is fine). Please interpret “putting your money where your mouth is” as referring to reputational stake from making a concrete prediction on fraud/malfeasance/etcetera.
I don’t really have much to say except pretty much copy and paste my reply, above and point out how wildly hostile this is. No, people are not expected to put up bets for their statements. You are perfectly able to dispute them using arguments.
This is despicable to try to weaponize this practice, partially with the motivation for financial gain, which we both know you are. Your initial comment is absolutely in bad faith.
Separately and additionally, yes, I am exactly willing to take bets once you put up numbers, exactly answering your challenge, which I do not have to do.
I think that putting up probabilities is and should be expected. I think that actual financial betting shouldn’t be expected but is certainly welcome.
If I was going to dispute the first thing I would do is ask for probabilities. It seems weird to try to argue with you about whether your predictions are wrong if I don’t even know what they are. For all I know we have the same predictions and just a different view of other posters’ predictions.
I literally explained why I don’t want to give probabilities. I like, literally spent my time writing out a good faith reply to you, assuming a good faith comment.
Since you actively disagree, and you actively want to make a bet on this, you are perfectly able to do the work to set probabilities and I can take them.
As we both know, the construction of the probabilities, is entirely distinct from willing to put up money for the beliefs.
No, don’t try to walk this back, you know what you did. Give the probabilities.
Because you so indicated how interested you are, please proceed by operationalizing this and putting up numbers. I will take bets on either side.
In one year we can make a thread that asks EA forum users to vote on whether they believe >90% odds that SBF fraudulently handled funds (that is, in a way that was directly contradictory to public representation of handling funds) in a way that costed FTX.com customers >1bn in losses.
If a majority of users (whose accounts existed since yesterday, to prevent shenanigans) vote yes, then the bet resolves YES. Otherwise NO.
Which side of 50⁄50 do you want?
Hey, no? Because EA forum votes is literally nothing no one cares about, and which I explicitly said in my top thread are bad, and you’re deliberating using this as a ploy to get me to refuse? How about 50⁄50 on an actual real world event?
Also, as mentioned, beginning the “prediction market thing”, can you tell me, like not as a real name thing, but do you have like an an account on a prediction market? Are you associated with the grantees on their prediction market projects?
The real world event would be “FTX committed fraud that caused >1bn loss of user funds”. But if it’s a bet somebody has to arbitrate the outcome, you know?
I just picked EA forum users as an arbitator since like, that’s the venue here. But if you have any other picks for arbitrator that would be fine. You can pick yourself but I’m not sure I’d agree to that bet. Likewise I assumed you wouldn’t go for it if I picked me. And if it’s the 2 of us well then we might tie.
> but do you have like an an account on a prediction market
Multiple
> Are you associated with the grantees on their prediction market projects?
I am not sure that I understand this question. I have myself recieved a grant to work on a prediction market project.
“FTX committed fraud that caused >1bn loss of user funds”
We, and really, every prediction person here, know that’s not an adequate operationalization.
You’ve been asked 4 times already to give an operationalization and number for me to take, which we both know you are fully able to do.
I suspect you are an FTX grantee. Since you are using EA money (well until you decide it’s not convenient to call it this) do you mind sharing who you are or what your project is?
I’m sorry but I really don’t understand why you think it’s not adequate. “Fraud” is quite well-defined, and “loss of user funds” is also quite well-defined.
I would offer odds on like, criminal prosecution results, but that will take such a long time to resolve that I don’t think it makes an attractive bet. As you point out there are also jurisdictional questions.
Is “SBF lied about the safety of user funds on FTX.com″ better to you?
“FTX used user funds to make risky investments”?
“SBF mislead users about the backing of their FTX.com accounts”?
“Such a long time”? One of your first comments suggested a 4 year term.
“lied” “fraud”, are inadequate because they are inflammatory , loaded terms, which you don’t expect me to agree on, and this feature is being used as a wedge, for rhetorical reasons. I will take a bet like “found guilty for X/paid a fine of X”, which are actual events that happen.
For the fifth time, you fail to give a concrete bet.
The real product of this interaction for you is not a bet, but a remarkably hostile attempt at aggression and embarrassing someone with different beliefs than you.This is what all your EA rhetoric really masks. It’s sad that Sam might have surrounded himself with people like you.Edit: Deleted part is bad and has malice.
As an aside it is surprising to me that I seem at all to you like the type of person Sam might have been surrounded with. I don’t think anyone remotely insider-y has ever even slightly felt that way about me.
[ EDITED: You probably downvoted me because my comment about this person sounded like something else that was highly offensive, complaining about improper selection into EA is different. ]
:-(
I will have to insist on trusted escrow for any bets between us...
The reason that for that experience is because I don’t really think about you at all.There’s basically billions of people on Earth that could be EAs, and the idea that this process selected and funded your kind instead of others is more troubling.Edit: This was a bad comment with malice.
OK whatevs, which side of 50⁄50 do you want? And by what date? (and for that matter what X? Fraud???)
That said I really dunno why you don’t like “FTX used user funds to make risky investments” or “FTX speculated using user funds” etc. Is there nobody we might mutually trust to neutrally trust to resolve such a thing?
You still haven’t given an operationalization and at this point, we both know why.
I’ll take a bet when Nuno or someone with a real name comes along.
We seem to have very different ideas of what “operationalization” means...
How about “By April, will evidence come out that FTX gambled deposits rather than keeping it in reserves?” ? There’s already a literal prediction market up on that one!
We could do “SBF found guilty of literally anything / pays a fine of over 1M for literally any reason, by 2024” ? If that’s not operationalization I really have to give up here.
I do have a real name by the way!!
BTW I am assuming you are willing to bet in the thousands. If not, I really don’t consider that a bad thing, but lmk please!
I’ll announce here that I’ll take positive, will resolve affirmatively, 50⁄50 on both of those, under the protest that “gambling” actually means “any collateralization strategy that failed”.I’ll announce, for 50⁄50, I’ll take positive, will result affirmatively on:
By April 2023, will evidence come out that FTX gambled deposits rather than keeping it in reserves?”,
Under the protest that “gambling” actually means “any collateralization strategy involving FTT that failed”.
For 50⁄50, I’ll take negative, will not resolve affirmatively on:
“SBF found guilty of literally anything / pays a fine of over 1M for literally any reason, by Jan 1, 2024”.
As explained in my top level comment, this is sort of not very interesting.
(As mentioned, starting the “prediction market thing”). As a deeper comment, this shows the defect of prediction markets itself—that this truly adds value in limited ways, that is abusable and culture dependent, often making itself redundant, especially if competent discourse is available. This directs arguments, theories, discourse and through limited channels that are stilted and performative, in a general sense, inadequate sort of like how social media is.
Cool, what size bet? And, after we figure that out, any thoughts on an escrow?
Also, thanks for taking a position on both. We are on the same side of 50⁄50 for the “gambled deposits” question, though. I wish we could come up with something we disagree on that might also resolve sooner, I’ll think on it…
Maybe we disagree on just how big FTX’s financial hole is? Could we bet on “as of today, FTX liabilities—FTX liabilites >= 4bn”? I’d go positive on that one.
Dunno… Really can’t tell what you believe. You commented that folks are being too negative yet seem to also think that FTX “gambled” user deposits, which sounds pretty negative to me (though we can disagree about whether it was good to have done this). Oh wellz.
It’s hard to say, 4B is the ask but 8B was mentioned as a figure too. They could mean the ability to deploy some latent funds in some complex way. Honestly, this doesn’t seem that meaningful.
The crux here is what “collateralization” or “gambling”.
Boiled down, I believe that you can’t absolutely prevent all failures, not even real brokerages can.
Instead, you have a sliding scale of risk that has probabilities of failure, and none of these are truly zero risk unless you basically not have a business at all. Given this, it’s not clear to me that a failure indicates “gambling”.
A major consideration is that the norms of crypto are insane—like actually hard to communicate to normal people and sound normal. FTX’s main business is basically clients trading leveraged sh*t coins, which is absolutely crazy for 99.9% of people. Collateralizing with FTT was the issue, but it’s unclear if the current exchanges would survive a similar run on their tokens—should they shut down now? Are their CEOs guilty now?
People literally believed Tether might unpeg several in the last year, which is crazy, like thinking the USD might crash. It’s still a mystery how the main fiat instrument in crypto has value.
As I type this, I think people think USDD is literally unpegging?
So hanging this on one person’s neck is pretty unfair if he just pushed the “risk slider” a bit farther than other people, in this surreal space, where “NFTs” were a primary product. There’s other issues that undermined him that aren’t his fault, but explaining this to EAs would just make everyone sad.
If that sounds like mumbo jumbo and insanity with extra steps, well it might be, but is actually how sort of how capitalism and finance actually work. This literally happened with Bear Sterns and caused the 2008 crash.
To “resolve” the above, and what is “true”, I think what is used here is “social constructionism”, like Foucault, as opposed to the “rationalist” “positivist” view.
Relevant to our bet, as I mentioned, I’m not sure how this is resolved or communicated by me or you winning money in a bet. Also, I’m pretty sure that the social/political/legal things are going to drive this far more than the actual “crime” or “not crime”. I’m sort of worried but I’ll go through with it.
What I think: I think that FTX was insolvent such that even if FTT price was steady, user funds were not fully backed. That is, they literally bet the money on a speculative investment and lost it, and this caused a multibillion dollar financial hole. It is also possible that some or all of the assets—liabilities deficit was caused by a hack that happened months ago that they did not report.
As far as I can tell, you don’t think this. Well, if you really don’t think that, and it turns out you were wrong, then I’d like you to update. I think probabilities are a good way to enforce that, that is my actual good-faith belief. Of course I’m also always looking for profitable trades.
Is there any bet you’d take, that doesn’t rely on a legal system (which I agree adds a lot of confounders, not to mention delay), on the above claim? Could we bet on “By April 2023, evidence arises that FTX user funds were not even 95% backed before Binance’s FTT selloff?” Or maybe we could bet on Nuno’s belief on the backing?
BTW your chart is USDD not USDC. Idk what USDD is.
Also I’ve now spent like wayyy too much time chatting about this on here. Making a bet would involve further chatting. So FYI the most likely outcome is that I wake up tomorrow and pretend it was all just a dream. Sorry to disappoint and thanks for indulging me a bit in the end.
Yes you are right, I disagree. I think this collapse happened because of the FTT “attack” (or honestly, huge vulnerability) and Alameda was forced to defend. Without this depletion, SBF or FTX could cover these funds in a routine sense and we wouldn’t hear about this.
This was very crisp and helpful, yes, you are correct, we definitely disagree here, I don’t think there was a major gaping hole like a major speculation or hack that was being concealed.
Thank you for thinking about this! I agree with this bet! With the addition that includes any major selloff/attack on FTT (it’s possible Binance actually was in the minority of sales on this week’s events). I will accept this bet very happily at 50⁄50 that no such evidence will merge that is substantiated (e.g. not a rumor).
(This can still be hard to operationalize, because the forensics or seeing what happened can be difficult, especially if FTX is restructured in some way. E.g., it could have happened but we don’t hear about it. This is to your disadvantage.)
I will only accept bets on escrow, so we’re both clear that it’s active. I will honor any bets discussed, if you want, and you can leave it or not mention it again, if you don’t want to take them.
You are extremely thoughtful and helpful. Have a good night! Thank you and sorry again.
Wait...(the experience of actually putting real money seemed appalling and sort of scary, so I was looking through your profile to see if I would wiggle out of it.)
You’re Agrippa! The guy with very short timelines, is Berkeley adjacent and knows that cool DxE person.
No, I do care about you! I respect you quite a bit. I was wrong and I retract what I said before in at least a few comments, and I apologize for my behavior. I upvoted every comment in this chain of yours. Also, I’ll be happy to take any negative repercussions.
For the bet, I’ll do $500? Is that acceptable or do you want more? Can we give money to a trusted person, do you know of someone in real life?
Hey, just to be clear, note that “pays a fine” — this reads to me as SBF personally paying a fine versus FTX or Alameda, that’s quite a big difference IMO and that favors me. Also, Jan 1st 2024 I assume is the date.
😳 That’s nice of you, thanks.
I’m actually not a guy though I don’t take any offense to the assumption, given my username.
Maybe Nuno would escrow for us.
I’m probably down for $500, would need to talk to my partner about going much higher anyway. If you are in the US we might not need escrow since suing eachother is an option, if we went >5k that would be worth it.
Re SBF vs FTX/Alameda paying: Yeah I meant SBF personally. I agree it’s a big difference. Jan 1st is the date but I also don’t know how fast this stuff ever goes and researching it sounds annoying.
Given that you think it’s likely FTX “gambled” user funds I am really not sure we disagree on anything interesting to begin with :-[
Maybe you think it’s only 70% likely and I think it’s a lot more than that?
I’ll escrow with Nuno at any time, you can reach out to me by PM or Nuno can reach out to me.
I think this is true, but sort of productive to clarify this.
I’m >90% sure FTT was collateralized in a way that had “a major role” in FTX’s collapse, but like, I’m not sure exactly what that means in a causal way, and how severe it is in a moral sense. Financial engineering is complicated and I don’t know much about it.
Robinhood allowed leverage, but I don’t think that had anything to do with the crisis.
Not wishing ill for people—particularly when harm (whether intentional or unintentional) occurs—is a central component of being compassionate. It is necessary to consider both those who have caused harm and those who are harmed, hence the phrasing of my original comment.
I share your sentiment, but I do think the choice of who to center in those messages matters. To use a sort of absurd example, if QUALY the lightbulb was caught robbing a bank, it would come across as tone deaf to say “I would like to emphasize my wishes of wellness and care for QUALY, their bank robber crew, and the many others impacted by this.”
There’s a lot we don’t know at this point. Was FTX’s downfall the result of unfortunate luck? poor judgement? bad practices? Especially without knowing more, I’d be wary of messages that center care for Sam and the FTX team over care for the retail investors and customers who may end up facing the worst hardship as a result of these events.
I agree that who we center matters. Thanks for the feedback! It helped me to clarify the original message.
I think most people reading this thread should totally ignore this story for at least 2 weeks. Meantime: get back to work.
For >90% of readers, I suspect:
It’s not action relevant right now.
It’s very distracting.
It would be better to just read a sober update on the situation in a couple of weeks from now, after dust has settled.
I think this is true even of most people who have a bunch of crypto and/or are FTX customers, but that’s more debatable and depends on exposure.
These are the standard problems with following almost any BREAKING NEWS story (e.g. an election night, a stock market event, an ongoing tragedy).
Agree, but still find it hard to stop watching? You are glued to your screen and this is unhelpful. This is an opportunity to practice the skill of ignoring stuff that isn’t action-relevant, and allocating your attention effectively.
Not actively trading crypto or related assets? Just ignore this story for a while, and get back to work.
Added 2022-11-09 2200 GMT:
If I had a good friend who has a lot of crypto and who may be concerned about losing more than they can afford to lose, I would call them.
Given what I’m seeing online, the situation looks grim for people with big exposure to crypto in general, and those with deposits at FTX in particular.
(To repeat what I said in other comments on this post: I don’t follow crypto closely. My takes are not investment advice.)
Peter—I have mixed feelings about your advice, which is well-expressed and reasonable.
I agree that, typically, it’s prudent not to get caught up in news stories that involve high uncertainty, many rumors, and unclear long-term impact.
However, a crucial issue for the EA movement is whether there will be a big public relations blowback against EA from the FTX difficulties. If there’s significant risk of this blowback, EA leadership better develop a pro-active plan for dealing with the PR crisis—and quick.
The FTX crisis is a Very Big Deal in crypto—one of the worst crises ever. Worldwide, about 300 million people own crypto. Most of them have seen dramatic losses in the value of their tokens recently. On paper, at least, they have lost a couple of hundred billion dollars in the last couple of days. Most investors are down at least 20% this week because of this crisis. Even if prices recover, we will never forget how massive this drop has been.
Sam Bankman-Fried (SBF) himself has allegedly lost about 94% of his net worth this week, down from $15 billion to under $1 billion. (I don’t give much credence to these estimates, but it’s pretty clear the losses have been very large).
Millions of crypto investors are furious. They blame the FTX leadership, especially SBF. And some of them are blaming FTX’s difficulties on SBF’s utilitarianism, e.g. tweeting things like ‘never trust a utilitarian with your money’.
This could all blow over. The financial contagion from FTX might be contained. Crypto prices might recover soon. Binance dominating the crypto exchange space might become the new normal. Other billionaires might step up to fill any funding gap (once the asset markets recover in a year, or two, or five).
But I think it would be prudent for EA leadership to treat this FTX crisis as a potentially serious PR crisis for EA—and not just a massive financial crisis for EA funding. SBF’s close association with EA creates some potential PR risk for the EA movement, especially among crypto investors.
It all depends on how mainstream media spins the FTX story. The next couple of weeks will be critical. If crypto news, financial news, and/or mainstream news starts blaming SBF personally for these difficulties, or uncovers evidence of financial wrong-doing, or links the FTX crisis someone to utilitarian moral reasoning and/or EA, that could be really bad for our movement.
I have no idea what the optimal PR response would be. I’m not a PR expert. But PR crisis management experts do exist, and I would strongly urge EA leadership to consult some of them. Soon.
This FTX crisis might not be an existential risk to EA, but it might be a global catastrophic risk at both the financial and the public relations levels. And we have learned to take GCRs seriously, haven’t we?
PS let me be clear: I have a lot of respect for SBF; I don’t have any real idea what happened with FTX; I’m not assigning any blame; and I hope the crisis can be resolved with minimal damage to investors and the crypto industry.
I’ve been talking to key people a fair bit since yesterday, broadly pushing the line and level of concern that you suggest. My current take is that the “pro-active plan” work is happening quickly and with appropriate investment.
Peter—thanks very much for your quick reply. That’s reassuring to hear!
Vitalik EA takeaway thread
Hmm, I don’t really buy this. I think at Lightcone I am likely to delay any major expenses for a few weeks and make decisions assuming a decent chance we will have a substantial funding crunch. We have a number of very large expenses coming up, and ignoring this would I think cause us to make substantially worse choices.
Yep, I would emphasise “most” in my post above.
My guess is that if we talked about specifically who should follow this, we’d end up agreeing that >90% of readers of this thread should largely ignore for now. I vaguely recall that some 5000 people read the forum every week.
I do think that one person from each major EA org should be following along, and providing regular updates to their team for reasons of morale and (e.g.) suggestions on how to approach social media and the enquiries from journalists that we might expect to receive.
I also think that one person (from CEA) should be point person on this and put together a small team to support them, consult stakeholders, etc, if necessary.
FWIW I called around a bit last night and my understanding is that there is a very competent “point person”, and I am satisfied that they and the small group supporting them will help the community navigate this in a good/excellent way over the next days and weeks.
Back to work (nearly) everyone! :)
I’m in a similar boat. This has caused me to delay some sizeable spending decisions for 1-2 weeks.
I think the information is pretty useful to a handful of people, though I imagine that for most readers, it’s not decision-relevant on a short timescale.
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Back to earning the give I guess, I’ll see you guys at the McKinsey office
Or better yet, at Y Combinator.
Yeah while we’re here, can we focus more on start ups than high paying jobs this time https://forum.effectivealtruism.org/posts/JXDi8tL6uoKPhg4uw/earning-to-give-should-have-focused-more-on-entrepreneurship
I haven’t made this point publicly yet but as a throwaway comment I’ll say that early on it was clear to me over a decade ago we should be incubating billionaires, though I also got pwned by the earn-to-give meme for a while after that.
Sounds like a job for Founders Pledge.
Right now, they focus on persuading entrepreneurs to donate their exit profits to effective charities. But what about the reverse: convincing EAs to become entrepreneurs?
Feels like it was a mistake to tell people to change their strategy if it can be reversed by a single donor having issues. All the emphasis on “we’re not funding constrained” may have done long term harm by reducing future donations from a wider pool of people.
It’s not just a single donor, tech stocks have been down across the board in 2022.
The question of to what extent more effective altruists should return to earning to give during the last year as the value of companies like Meta and FTX has declined has me pondering whether that’s worthwhile, given how nobody in EA seems to know how to spend well way more money per year on multiple EA causes.
I’ve been meaning to write a post about how there has been a lot of mixed messaging about what to do about AI alignment. There has been an increased urgency to onboard new talent, and launch and expand projects, yet there is an apparently growing consensus that almost everything everyone is doing is either pointless or making things worse. Setbacks the clean meat industry faces have been mounting during the last couple years. There aren’t clear or obvious ways to make significant progress on overcoming those setbacks mainly by throwing more money at them in some way.
I’m not as familiar with how much room for more funding before diminishing marginal returns are hit for other priority areas for EA. I expect that other than a few clear-cut cases like maybe some of Givewell’s top recommended charities, there isn’t a strong sense of how to spend well more money per year than a lot of causes are already receiving from the EA community.
It’s one thing for smaller numbers of people returning to give to know the best targets for increased marginal funding that might fall through after the decline of FTX. It seems like it might be shortsighted to send droves of people rushing back into earning to give when there wouldn’t be any consensus for what interventions they should earning to give to.
FYI that this comment appeared in the The Economist’s last edition.
I wonder if it has something to do with interest rates. While the rates were low, the situation was “people constrained” and funding was plentiful. Now that the rates are high, capital becomes more of an issue.
Both low interest rates and high valuations for more speculative financial assets are a reflection of more demand for financial assets than supply. They are both functions of the overall level of savings in the economy, which is the source of demand for financial assets. Demographics, globalization, and inequality drove a 40 year boom in the aggregate level of savings that peaked during the pandemic. This era is now over, largely because of changes in demographics and globalization, but also because of a need for more physical investment in the real economy (energy, housing, etc). This physical investment will need to come from the more limited pool of aggregate savings, leaving less for financial assets. I have written several longer papers on this if you would like to discuss further.
Yeah good point, would be interested to hear from people who understand this stuff
A quick note from a moderator (me) about discussions about recent events related to FTX:
It’s really important for us to be able to discuss all perspectives on the situation with an open mind and without censoring any perspectives.
And also:
Our discussion norms are still important — we won’t suspend them for this topic.
It’s a stressful topic for many involved, so people might react more emotionally than they usually do.
The situation seems very unclear and likely to evolve, so I expect that we’ll see conclusions made from partial information that will turn out to be false fairly soon.
That’s ok (errors happen), but…
We should be aware that this is the case, caveat statements appropriately, avoid deferring or updating too much, and be prepared to say “I was wrong here.”
So I’d like to remind everyone:
Please don’t downvote comments simply or primarily because you disagree with them (that’s what “disagree-voting” is for!). You can downvote if you think a comment is particularly low-quality, actively harmful, or seriously breaks discussion norms (if it’s the latter, consider flagging it to the moderation team).
Please keep an open and generous mind. Most people are saying what they’re saying in the comments because they genuinely believe it and want to share their opinion — don’t assume that someone is misrepresenting anything deliberately unless you have good reason to believe it, and respond kindly and collaboratively.
The moderation team will be keeping an eye on these discussions — as we do with all discussions — and we plan to enforce the norms as usual. To be clear, however, we will not be censoring any particular perspective on the topic.
Just a note from someone who is an FTX customer.
I moved some of my crypto holding to FTX because I trusted them and Sam and wanted the profits from my crypto holdings to go to EA/FTX Future Fund. FTX have always told me my funds would be secured, I did not trade leveraged funds, so I’m the only rightful owner of that crypto and FTX has likely been using it to make money on leveraged instruments. This seems like fraud, and the optics of this for the EA community, and the already difficult optics of lontermism, seem to me like they will be very bad.
I’m priviliged, my holdings in FTX were 2% of my net worth (I enjoy following crypto) so I’ll be fine, but many will not.
Rather than further praising or critiquing the FTX/Alameda team, I want to flag my concern that the broader community, including myself, made a big mistake in the “too much money” discourse and subsequent push away from earning to give (ETG) and fundraising. People have discussed Open Philanthropy and FTX funding in a way that gives the impression that tens of billions are locked in for effective altruism, despite many EA nonprofits still insisting on their significant room for more funding. (There has been some pushback, and my impression that the “too much money” discourse has been more prevalent may not be representative.)
I’ve often heard the marginal ETG amount, at which point a normal EA employee should be ambivalent between EA employment and donating $X per year, at well above $1,000,000, and I see many working on megaproject ideas designed to absorb as much funding as possible. I think many would say that these choices make sense in a community with >$30 billion in funding, but not one with <$5 billion in funding, just as ballparks to put numbers on things. I think many of us are in fortunate positions to pivot quickly and safely, but for many, especially from underprivileged backgrounds, this collapse in funding would be a complete disenchantment. For some, it already has been. I hope we’ll be more cautious, skeptical, and humble in the future.
[Edit 2022-11-10: This comment started with “I’m grateful for and impressed by all the FTX/Alameda team has done, and”, which I intended as an extension of compassion in a tense situation and an acknowledgment that the people at FTX and Alameda have done great things for the less fortunate (e.g., their grants to date, choosing to earn to give in the first place), regardless of the current situation and any possible fraud or other serious misbehavior. I still think this is important, true, and often neglected in crisis, but it distracts from the point of this comment, so I’ve cut it from the top and noted that here. Everyone involved and affected has my deepest sympathy.]
Obviously this is very breaking news, but depending on the ultimate facts, I would be nervous about the risk of a clawback action if I were an organization that had received funding from an FTX-aligned source in the past few years. It’s been a while since I took bankruptcy law, but the trustee can have pretty significant clawback powers when the debtor was actually insolvent at the time of transfer and the transfer was not for value. Of course, we do not know at this juncture whether the insolvency is of recent origin or existed for a while before this week.
I would also consider deferring any sizable donations to an organization I thought might be at risk for a crippling clawback, stick those monies in a DAF or similar entity for the time being, and ask the DAF to slowly regrant to the at-risk organization over time depending on the circumstances until it became clear there was no clawback risk. If a charitable organization is subject to a large clawback, it might be more efficient to move the charity’s operations to a new charity (paying FMV for any assets, of course). In that case, it would be better to have not given money to the exposed charity as that money would end up in the hands of FTX’s creditors. For instance, a number of charities had to pay clawbacks in the Madoff scandal despite not having committed any wrongdoing—despite the name, there does not have to be any evil intent to have been involved in a fraudulent conveyance.
None of this is intended to be in the least bit authoritative—it is merely a suggestion to stop and assess risk before taking certain significant actions in the short run.
What happens if the money was donated to a charity that is subject to clawbacks, but the charity then spent the money? Do they try to claw it back from the suppliers or employees or whoever? Can it trigger a cascade of bankruptcies?
Employers, suppliers, etc. should be safe. Although the underlying law is complex, at a high level a clawback is possible when (as Wikipedia describes “constructive fraud”) the transfer “took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.” If I sell my labor (or widgets) to Charity X and receive a fair market wage or price in return, then the transfer took place for reasonably equivalent value and all creditors can generally pound sand.
It can get more complex, though. Let’s say I am a supplier of products to a charity and let them pay me 90 days after delivery, or maybe they are late in making payments. I’m now a creditor, and if the charity is insolvent, then paying back my loan could lead to a clawback because it’s seen as the charity favoring me over other creditors. That’s why vendors often demand cash on delivery to supply financially distressed companies. It’s possible for payments to employees to become problematic—if you’re insolvent and hand out certain bonuses, you can expect some extra scrutiny as to whether the business received reasonably equivalent value in exchange.
To underscore the complexity this stuff can reach, Irving Picard and his firm have spent something like $1 billion in legal fees and over a decade going after money for net losers in the Madoff scheme using similar theories.
Jesus. I hope it doesn’t come to that in this case.
Matt Levine seems to agree. Some quotes from his article:
Here’s a non-paywalled link
Another Bloomberg article to add context [original; non-paywalled].
(As an outsider, setting FTX+Alameda=$2 seems crazy low? But asset breakdown here seems useful)
Hypothetically, let’s just say I own a business, Andromeda Research, with $500 million of assets and about 8 billion of outstanding liabilities? How much would you pay to acquire this concern? Perhaps $1 might seem quite a lot, in context?
I am confused by the claim that FTX’s collapse ⇒ Alameda = fuck all, I thought it had about $10B in non FTT assets. But thanks for sharing!
The original rumour was that Alameda would have net negative assets if FTT coin collapsed. Though there’s a chance it’s actually OK.
Useful context, thanks for sharing
Binance:
Which and which?
Edit: Really confused by the downvotes. I haven’t found updated news sources on this.
See here re US agency investigations.
Is it kosher to discuss CZ’s allegation that SBF was utilizing a fractional reserve scheme despite SBF’s claims to the contrary, and that this undeclared leverage may have contributed to the current situation?
Sure. Certainly I don’t understand how assets can both have been covered but then they needed to be bought out by binance.
Potentially held in less liquid forms? So it could be difficult to get the money out fast enough.
If so, why not just point to the wallets and say “the money is here but it’s just gonna be slow to access”?
Yeah, it’s naive when people readily believe things that could easily be verified but aren’t. That’s why I’m a proponent of what this Lw user calls adversarial epistemology.
That’s a fractional reserve scheme—they said they were carrying it all in untouched accounts.
Is there any way that could possibly be true, given the events of the last few days?
I assume not, no.
Wild guess they were covered at least partially by ftt token (ftx crypto token), which declined significantly in value (especially when CZ sold $500 million). How could anyone afford to pay interest on deposits while also fully covering the deposits? (Noncrypto banks have FDIC insurance) (Also as already mentioned some FTX assets were illiquid)
It seems clear this morning anyone who received FTX-aligned monies is on notice that those monies may be (to make up a term) morally tainted in some fashion. Without attempting to fully delineate moral taint or establish that it exists, I submit that monies generated through fraudulent business practices that caused financial harm to identifiable victims would qualify. And gambling with customer deposits that you had promised not to gamble with would qualify in my book.
In that case, there’s an argument that the monies transferred out of the business (including through insiders or their foundations) should be treated as equitably belonging to the victims, as opposed to belonging to anyone who received the transfers without giving reasonable equivalent value. (Although I am using some legal metaphors, I am attempting to ask a moral rather than legal question in this comment.)
I am wondering how the community feels about the argument that—under some factual scenarios that are looking increasingly likely—some FTX-aligned monies should be returned to the victims under such a theory, irrespective of whether a clawback can legally happen. My initial reaction is that there are some circumstances under which that would need to happen because the monies were never properly the transferor’s to grant away.
To use a more concrete analogy, suppose that my grandmother gives me a car, and I later learn that it was stolen. Do I have a moral obligation to return the car? I would submit that I have such an obligation in some circumstances and not others.
I think anyone who provided reasonably equivalent value for funds received does not need to worry about taint. Next, I suggest that the taint dissipates if a transferee spends or irrevocably commits the transferred funds in good faith and without actual or constructive knowledge of the moral taint. I am not sure whether I think there is also a requirement that the transferee would not have spent or committed the monies absent the donation.
Most fundamentally, I submit that there has to be a sufficient causal and temporal nexus between the source of the taint and the specific monies for the monies to be tainted. So it would generally be morally OK to keep donations from (say) Harvey Weinstein, because his crimes were independent of the genesis of any funds he donated. Also, if the monies were clean at the time of transfer, I would submit that the transferor’s subsequent actions could not taint them. So if FTX was clean until the end, then any transfers it irrevocably committed to charity prior to the onset of any fraud would generally be untainted in my book. They might cause an optics/PR problem, but that’s another story.
All that is to say, however, that there’s a good chance there is significant money out there whose origin story is analogous to Grandma stealing a car and giving it to me under circumstances where I should give the car back.
Thanks to Nathan et al for this useful post. It’s still pretty unclear what exactly happened, why it happened, what happens next, and what the implications are for FTX, Future Fund, and EA.
It is clear (as of c. 2:45 pm mountain time, Nov 8) that the FTX/Binance situation caused a sharp and dramatic drop in crypto asset prices today (ranging from −10 to −25% for major tokens).
For anybody heavily invested in crypto (like me), I would just encourage patience, a long-term perspective, and an epistemically humble, wait-and-see attitude (rather than blind panic-selling, or over-optimistic buying-the-dip). Investor psychology means many retail investors over-react to news, and sharp drops tend to be followed by recoveries.
Also, the confluence of crypto volatility and US election day makes this an especially uncertain, emotional, and worrisome time.
Overall, the FTX situation in the last couple of days may be one of the momentously negative developments for EA funding that we’ve ever seen. But, this is a complicated story, it’s still unfolding, and nobody seems to quite know what’s happening, so it’s worth following new developments, without catastrophizing too hard.
My 2 cents: Holding is status quo bias. In any situation buying OR selling is better, but you never know which. What you can manage is your risk exposure.
So I’d suggest for people who have significant parts of their wealth in crypto to sell to make sure they can’t get wiped out and for people who are under-invested by their assessment to buy.
An easy heuristic is to think about what proportion of you wealth you want to have in crypto and work towards that. I suggest buying / selling on a schedule or with limit orders to reduce variance.
Milli—Active buying and selling can make sense—but capital gains taxes make the picture a lot more complicated. For US citizens, short-term capital gains (e.g. from selling crypto that you’ve held for less than 12 months) are taxed at a MUCH higher rate (up to 37% tax rate) than long-term capital gains (e.g. from selling crypto held for more than 12 months) (up to 20% tax rate, but it really maxxes out around 15% for most middle-class investors with cap gains less than half a million $USD a year).
Anybody who’s already been actively trading crypto tokens in the last few months of this bear market might as well keep trading, e.g. selling whatever you think will drop even more. But anybody who’s been holding tokens for more than 12 months, and who’s already facing 80% losses (on paper) should NOT necessarily sell on another slight drop—because it would reset the capital gains tax clock on those assets.
Epistemic status: I’m not a financial advisor, crypto expert, or tax expert; just an amateur crypto investor; I’m just pointing out that the tax situation (in the US, but also in most other countries) complicates any simple expected-value analysis of trading advice for retail investors.
Might be time to update the “funds committed” table in this blog post: https://80000hours.org/2021/07/effective-altruism-growing/#how-many-funds-are-committed-to-effective-altruism
Meta is also down a lot (ergo Dustin ergo Open Phil)
It’s way too early to know with confidence, but at a first pass GV/OpenPhil is down to $5.2B (90% of $5.8B), and FTX team down to maybe double Sam’s estimated 1B? Other EA crypto donors also down to maybe sub-$1B? So the total wealth could be down by about 70%. But it’s also possible there have been gains that partially offset the losses.
Something like that seems right.
Though I don’t believe the Forbes figure for Dustin – it seems to assume that most of his wealth comes from his meta stake, and he’s said on Twitter that he’d sold a lot of his stake (and hopefully invested in stuff that’s gone up). Last spring, Open Phil also said their assets were down 40% when Meta was down 60%, which could suggest Meta was about half of the assets at that point. So I expect it’s too low.
Also seems like there might be some new donors in the last year.
Probably that loss is dampened then. Although worth noting that Dustin’s Asana is also down 75% since July ’21 when you wrote that post. (It was down ~55% from July ‘21 to Spring ’22.)
Yes, maybe we should model it as 10bn meta and 10bn other stuff, now worth 2.5bn and 7bn.
Update: Dustin says that the bloomberg estimate ($11.3B) is about right, if you add on an extra $3B of foundation assets, so community wealth would be down more like 55%, not 70%.
SBF has broke his silence on Twitter.
(continues in a 21 tweet thread)
For onlookers:
Basically the tweets promote the narrative that it is a short term liquidity crisis and there is a future for FTX.
As someone who strongly supports SBF, it’s perfectly clear that FTX, and Alameda is in the beyond dire position of insolvency as reported. This tweet is performative and misleading but is the best narrative the CEO can do, this fact is also is expected and normal at the same time.
Why doesn’t lying about this expose him to more legal risk? Feels like the sort of thing that ought to be illegal. Or if it does, why bother? EDIT: To be clear, I don’t doubt he is lying. It’s just if everyone knows it a lie, and it looks bad in court, why is this the done thing?
From the looking bad in court perspective, the CEO of a capsizing corporation has a tough rope to balance on. Because saying nothing, or not even giving the appearance of try to save the customers and the company, poses risks too. That is not to suggest that lying about factual matters is a good idea for any corporate executive, but in some cases a heavy dose of spin might be the least bad path from a legal-risk perspective. And the amount of permissible spin may be higher if ordinary depositors/investors are not in a position to take any actions in reliance on the spin.
So is there some technical way that ‘we have enough assets at current market prices to cover all deposits’ can be true, whilst not actually meaning very much?
Yes, see my comment above.
“4) FTX International currently has a total market value of assets/collateral higher than client deposits (moves with prices!).”—I think this is in line with the mainstream narrative of the assets (e.g. FTT) being almost completely illiquid—i.e. no way they can sell enough without crashing price to ~zero. So kind of misleading to say it’s liquidity when it’s really (most likely) insolvency in practical terms.
No, not at all. This “sale” already happened.
Right now, the tokens are “illiquid” in the same sense that “Charles He token” is illiquid, “depending on price”.
In theory, FTT at >$20 would support the whole endeavor. Whatever happened was life and death and happened two days ago.
I’d say the thing that was life and death for them wasn’t so much the price of the token (that was only a trigger) but the bank run that came after the token situation hit the news. Even if the token had stayed at the same price temporarily, no one could seriously expect their stake to be worth “number of coins times price at the time” (or 50% of that, which one source reported they had “conservatively” marked it down to) given the low liquidity / low historical sales volume of the token, the fact that they had so so much of the supply, and the logic of the token dynamics where the token does well when FTX/Alameda do well, but not when they’re forced to liquidate because they’re already looking like they’re under water.
So basically, I think it sets up a misleading narrative if we think of this as “if only the price of the token hadn’t tanked due to unforeseen events (pressure by Binance).” In reality, the token wasn’t worth as much as it showed on their balance sheet, and that was obvious, so it was bad for them that the balance sheet leaked, which doesn’t sound good and makes you think “why and how did they get into that situation in the first place if they’re supposed to take care of customer assets safely?”
50% is crazy if true. Even 10% would be generous. Conservative would be 1%, or not counting FTT at all! It’s like they didn’t countenance the possibility of a bank run, even after giving their arch nemesis a ton of FTT :( (Or maybe they did, and just hoped it would all come good via enough profits or something before it blew up).
Yes, as you say, the FTT token wasn’t worth anything even before the crash, the FTX/Alameda money to prop it up is what was operative, and is gone now.
We haven’t discussed anything that would contradict the overwhelming evidence that FTX has a gap of $4B or more.
Low information threads seem undesirable if there are people who are less informed and had very high/trust in SBF, partially due to EA associations.
They probably have on their balance sheet other illiquid low-circulation coins with inflated market cap where they were early investors or even (partly) coin developers, so it’s possible that the claim was technically true at the time Sam stated it.
Of course, it’s an annoying game to play when you can’t assume that people communicate with an intent to convey all relevant information as clearly and comprehensively as possible, so if we have to go to these convoluted interpretations, so much has already been lost.
For Alameda, other “coins” were covered in the link in my first post, it’s pretty clear that they aren’t worth anything, even if there was no crisis.
https://dirtybubblemedia.substack.com/p/is-alameda-research-insolvent
This is probably true of any “projects” on FTX that the entities control.
Yeah but the same is true of FTT under the assumption that FTX/Alameda rely on FTT for emergency liquidity.
I guess if someone had faith that FTX/Alameda would never sell a lot of it at once, but instead slowly sell over many years while keeping the exchange operating with profits, then FTT could be worth something for buyers. But on this model it doesn’t make sense to use it as collateral, let alone in any relation to backup for customer funds.
(TBC, we’re not 100% what happened, but if FTT was involved in securing customer funds, that’s very dumb at best and quite possibly illegal, as discussed by Matt Levine.)
You probably know all of this – I’m just commenting because IMO it’s misleading to think of FTT price dropping as “the thing that was life or death for them.” (Or maybe it was in a “proximate cause” kind of way, but the real problem was the reliance on FTT in the first place.)
Yes, I think we’re agreed.
It’s more like FTT was a quasi peg, they needed to keep it up at $>20. The fight that was life and death was keeping it that high with their resources.
I interpreted it as him saying that, even with FTT 80% down (and similar for other holdings), they still have enough to cover customer balances. And I’m saying that would only be true in theory as the price could still go down a lot further (and would if they liquidated all their holdings). According to the balance sheets, they held something close to the entire marketcap of FTT as based on circulating coins even before the crash. It’s unlikely they’ve sold even a tiny fraction of that.
Are you saying you have the balance sheets for FTX? Can you link?
Unfortunately, I think what you’re saying is omitting liabilities, and that makes it very uninformative.
The ones that were reported by Coindesk and others last week, for which their legitimacy wasn’t disputed (although here Caroline claims there is more).
If it was just a liquidity issue, surely you’d think they would’ve been able to fix it by now. It’s quick and easy to sell crypto tokens, even OTC.
Those are Alameda balance sheets.
Fair enough. WSJ story here saying that Alameda owed FTX $10B!
Since it doesn’t seem to have been posted here yet: FTX has filed for bankruptcy, and SBF has resigned.
This sounds bad to me in terms of ‘was this just some legal bets that didn’t pay off, or actually morally/legally fraudulent’: https://www.semafor.com/article/11/09/2022/ftx-legal-and-compliance-teams-quit
https://www.bloomberg.com/news/articles/2022-11-09/us-probes-ftx-empire-over-handling-of-client-funds-and-lending#xj4y7vzkg
Anyone with actual finance expertise want to say if this is likely as bad as it sounds?
The finance people I know say it sounds as bad and maybe worse.
Note that Hofmann/Semafor is sort of hostile, but as characterized, it’s very bad for the prospects of a recovery.
It’s more likely that people don’t want to “hold the bags career wise”/work 20 hours a day to fix this for uncertain comp. It’s not evidence of conduct (like embezzlement)—I’m pretty sure Hoffman would go for the throat if it was.
I think people should be very careful about promoting earning to give in light of this. It still seems true that because the capital is much more unequally distributed than income if you’re trying to earn to give you should be doing by trying to increase the value of equity you hold in firms rather than working a high paying job. Wealth also seems to be distributed according to a power law which also pushes towards a strategy of being extremely ambitious if one is earning to give.
I think it would be very bad if people who otherwise could do high impact direct work switched to earning to give in investment banking, consulting or corporate law as a result of this. EA funding has not declined to the point where there is an immediate crisis where relatively small amounts of money from high paying jobs is needed to keep the EA movement going—Dustin is worth somewhere between 5 and 10 billion, founders pledge has 8.5bn committed (although substantially less than 100% of this will go to the highest impact things.)
This post is exceptionally useful, especially for people who don’t know much about crypto (like me)
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.
Thank you for writing—seems like a good summary of what I’ve seen.
This is interesting: https://www.reuters.com/technology/exclusive-behind-ftxs-fall-battling-billionaires-failed-bid-save-crypto-2022-11-10/
In particular, here’s another hypothesis for why Binance withdrew:
How did Binance have such leverage over FTX?
Looks like it was a massive strategic error accepting Binance as an investor in the first place (they were the no.1 exchange, so had incentive to derail any smaller exchange; derailing is made easier by being an insider via investment!). And then a massive tactical error paying Binance back in FTT! (And this is not to mention the (likely) massive error of engaging in “fractional reserve banking” with a crypto exchange..)
They may not have had better alternatives at the time. But yeah, then rather accept slower growth or give up – except if you’ve got an extreme upside-focused mentality that isn’t worried about negative consequences.
I assume AI timelines also contribute to the rush
I have to say I didn’t expect “all remaining assets across ftx empire ‘hacked’ and apps updated to have malware” as an outcome.
Or more sinisterly, he hacked it himself, and is trying to steal all of his customer’s money.
[this comment references the first version of this post, which has since been edited substantially such that this qualification no longer feels necessary]
Just want to note that my main contribution to this post was listing out questions I wanted answered to inform what EAs or the EA community should do. I have a lot of uncertainty about the structure of what assets belong to whom (compared to previous expectations) and what this implies about the EA funding landscape.
I don’t have high confidence in empirical claims that might be made in this post, and I think there should be a more obvious qualifier at the beginning indicating that this was put together quickly with some crowdsourcing (and that it will be updated in response to spotted inaccuracies).
Happy to remove your name Juan if you are uncomfortable though also I think most of the empirical claims are doing pretty well.
I agree, most of my uncertainty / hedging was on parts of the post that were removed within a few hours of posting. Thanks for checking.
Re funding, does anyone know if the FTX Foundation is an actual legal entity? If so ,I imagine its funds should be relatively safe at least in the short-term (i.e Binance/bankruptcy court will have no claim on them). Although perhaps when FTX depositors sue, they might have some claim if it can be shown (as it probably can) that the Foundation’s assets were gained through some kind of illegal activity? If not, and “FTX Foundation” is just a name for SBF giving money out of the (formerly big) pot of Alameda/FTX funds, then it probably all dries up overnight.
Disclaimer: I do not work for FTX, and am basing this answer off publicly available information, which I have not vetted in detail.
Nick Beckstead in the Future Fund launch post described several entities (FTX Foundation Inc, DAFs) that funds will be disbursed out of: https://forum.effectivealtruism.org/posts/2mx6xrDrwiEKzfgks/announcing-the-future-fund-1?commentId=qtJ7KviYxWiZPubtY I would expect these entities to be sufficiently capitalized to provide continuity of operations, although presumably it’ll have a major impact on their long-run scale.
IANAL but I’d expect the funds in the foundation/DAF to be fairly secure against bankruptcy or court proceedings. Bankruptcy courts can’t just claw back money arbitrarily from other creditors, and limited liability corporations provide significant protection for directors. However, I’d expect assets donated to FTX Foundation or associated DAFs to largely be held in-kind (again, this is speculation, but it’s standard practice for large philanthropic foundations) not liquidated for cash. These assets mark-to-market value are likely worth a lot less than they were a week ago.
Why do you think there will be lawsuits? Have other crypto exchanges that went under resulted in lawsuits? Not disagreeing, just not up to date on this stuff.
There have not actually been many exchanges that went under, but there’s been lawsuits re: Luna and 3AC, the two other big crypto stories this year (this one trumps both by a long shot). The only other example of a big exchange scandal I know is BitMEX , and while I don’t know of any civil lawsuits the founders, one of them a major EA funder, were criminally indicted in the US.
yeah the crypto lending platforms that went under, well, they lent badly. But an exchange is not supposed to be lending out customer funds at all! Ergo I think there’s a lot more lawsuit potential. And ofc FTX is way bigger.
fwiw I think it’s no better than a coinflip that CZ/Binance actually buys; it very much depends on just how big the hole in the FTX/Alameda balance sheet is. When Full Tilt Poker went under and it turned out they also had not segregated customer funds, Pokerstars came in to make FTP depositors whole. But Pokerstars did this because they were getting kicked out of the US, wanted to come back to the US one day when regulations changed, and wanted to buy themselves some credit with US regulators by buying FTP and assuming its liabilities. But CZ/Binance have never really acted like the sort of people who care all that much about what regulators think.
What’s not even being discussed yet is ties to Tether of both Binance and FTX. Tether seem shady/criminal, but both FTX and Binance have stated they think tether ‘FUD’ is wrong. In a worst-case scenario where FTX is insolvent and billions in the hole, maybe one reason for Binance to step in at a loss could be that Binance wants to prevent info about tether dealings from leaking. (I’m completely speculating here!)
Yes agreed the litigation potential could be much higher here, but depends very much on details we don’t know yet and what’s to come. Withdrawals continued to go forward and deposits are safe, the only significant damages so far it seems is the drop in FTT, but that keeps us in typical crypto-implosion territory, my understanding is trading volume in FTT is not high.
Also, this would only matter for SBF’s wealth if they were able to go after him personally at this point assuming he is 100% out of FTX, which unless things were extremely shady and bad under the hood will not happen. If they go after FTX (and sale goes through), that’s Binance’s problem now.
Withdrawals are definitely not going through on FTX itself—only on FTX US afaik.Very much doubt deposits on FTX itself are safe in the slightest—depositors there are basically 100% reliant on the Binance deal going through.
I’m confused why you say
Two things have happened:
The value of FTX appears to have gone down (a lot).
Some part of FTX is potentially being sold to Binance.
(1) causes Sam to lose control of a lot of his resources, because those resources have essentially evaporated with the value of FTX. But conditional on (1) happening, doesn’t (2) just mean that whatever value SBF retains after (1) is converted from equity in (the relevant part of) FTX to cash? “Losing control” implies something bad has happened in addition to the loss of value of FTX. I’m not sure what else that is.
Nathan’s post is not entirely wrong though. If FTX.com sells at a discount, we have no idea who gets paid first. Maybe it takes FTX to sell and lose 50% of its value for SBF to get zero, maybe it takes 90% discount, maybe 99%?
This happens a lot when there are aqui-hires because of start-up going bankrupt, and employees with shares get 0 because investors have prefered payback clauses
I agree we have no idea what the terms of the deal are, which is why I don’t think we can say what the total effects on SBF’s assets are other than by informed guessing.
Not only we have no idea of the terms of the deal for FTX.com, but it seems hard to predict what it means for the value of FTX US (what does the probability of another bank run look like now?) and Almeda (did they actually use FTX.com’s info/cash as a significant generator of alpha?)
It’s almost certain that the residual value after FTX.com’s sale will be very low.
There are also major implications for Alameda trading and the remaining FTX entities.
It’s easy for me to say this now, but the reason I said it was because I sensed that that chunk would be valueless and maybe much of the rest. ~50% was my median value between 20% and like 90%.
But it felt a little exhausting to say that given I couldn’t really justify it.
It’s cheeky of me to say this without evidence, (though I guess maybe we could find me rewording it in the original google doc)
Touché
FTX doesn’t seem to be able to pay its customers, so the value here looks like it’s negative (“in debt to customers;” and Binance may bail out customers rather than give money to FTX owners for the sale).
I mean, if you interpret “liquidity crunch” in the most optimistic way, then there’s still value from the sale. But I think that would be somewhat naive here given the drop of FTT token (which, according to the balance sheet that was floated recently, made up a lot of FTX/Alameda reserves) and the general prior for crypto that “liquidity crunch” is usually a euphemism for “sorry it’s gone.”
What also looks very serious is the fact that they have to sell to their competitor who was attacking them, as opposed to being able to sell to other buyers. If it was a more innocuous “liquidity crunch,” wouldn’t you be able to show balance sheets to interested buyers and offer them a good price and not give anything to the immediate competitor who’s been defecting (or retaliating, depending on how one sees it) against you? (But maybe there are other reasons why Binance is a good fit and I’m not aware of them.)
Illiquidity is not the same thing as insolvency.
Some of the thoughts in this post and thread seem pretty half baked and very uncertain, I think the pace of writing should be lower.
For example, the withdrawals might be at $6B this morning, that would break systems in a purely ops or make movement of money impractical for very innocent, mundane reasons. This experience adds a lot of confusion and noise when reported and echoed.
The “Satan’s Apple” seems excessively abstract, looking at this from a regular business expansion/portfolio theory seems like more useful and this would benefit from more time.
What do you mean by this?
It refers to a part of the text that was removed after receiving feedback that it would be better if we just stuck to the facts, given all the uncertainty. (Charles’ comment is one example of this, we got some more elsewhere)
Obviously I was too optimistic here :-(
Is it a good idea to communicate to Sam that CZ is emotionally manipulating him and that he could be making a suboptimal decision by selling for low cost?
(also commenting on the sale to Binance rather than deliberation with several potential buyers mentioned by Lukas_Gloor)
I happened to be learning full-time about FTX and its broader ecosystem for the past month or two. (ah, hah, I thought maybe next week I can apply)
CZ is a great diplomat. It can be argued that Binance runs on fear, abuse, and limiting the motivation to leave. (This is juxtaposed with FTX model, which is powered by consideration and support.)
In his announcement to sell FTT, CZ (or the team tweeting as CZ), used emotionally challenging language as well as alluded to social biases. This could have motivated SBF to act impulsively, as if to avoid the prospect of prolonged ‘emotional terror’ of the perception of wrongdoing, uncertainty, powerlessness, etc.
In context, one can imagine CZ enjoying liquidating FTT bit by bit, for an unknown extended period of time (which may not end), which can seem dreadful to customers and SBF, considering the somewhat ‘sadist’ reputation of CZ. People would just seek to avoid pain (that CZ implies to threaten).
This can be read as further appealing to Sam to prevent the ‘hurting’ of vulnerable users (and platforms) (and sell impulsively).
This portrays effortlessness, that may be disempowering to SBF, who is admired for his fast-paced decisionmaking. ‘was out with friends’ can seek to inspire loneliness, ‘whale alerts’ can be considered fatphobic, and the part with the straw broke back can further allude to physical disempowerment and implied physical threat. Thus, SBF can be motivated to feel powerless compared to CZ.
---
The counterargument to the hypothesis that SBF acted impulsively due to CZ’s threatening is that actually, the assets on FTX and Alameda had little value beyond that assigned to them by buyers. SBF can be thus collecting maximum value possible, greater than that which he would gain if further actors studied FTX/Alameda assets.
I am not sure about the valuation of FTX/Alameda. However, Binance is a very similar business. Thus, it can be that studying Binance can have similarly detrimental effects. I am uncertain about this, but it prima facie can seem that assessing the ‘actual’ value of Binance and estimating that of FTX based on that can provide decisive negotiation leverage to SBF.
---
One person who seems to be resistant to CZ’s threats is Anatoly Yakovenko (for example, read Binance CEO CZ mused on this very subject on Twitter:. Anatoly could be helpful in negotiating with CZ, creating leverage by seeing through (and shaming) aggression and threats.
I’d think Sam has enough experience in the space (incl. negotiating these types of deals from the position of the buyer) that he wouldn’t let himself be manipulated. So the fact that he’s interested in sealing the deal means he may be in a pretty poor negotiating position. :/
While I agree that FTX.com has more than enough experience negotiating deals objectively, I also think that this decision considers the fear that CZ is creating.
This is because as long as FTT gains value after Binance’s sell (due to speculation), then there is no need to agree to the deal. Whether FTT gains value is influenced by investor sentiments.
The deal with Binance shows that SBF does not expect FTT to appreciate after Binance’s sell. This would be the case when fear is associated with FTT. This is what CZ is creating.
Based on this line of reasoning, it is not necessary to agree to the deal with Binance, if one can mitigate the fear being caused by CZ.
Market price manipulation is illegal, so, technically, CZ cannot do anything besides influencing investor sentiments. One can argue that mitigating CZ’s ability to threaten can be the key here, because that is the only effective strategy to keep FTT value high.
One way to mitigate one’s ability to threaten is disclosing their techniques, such as deliberate motivation of negative emotions by appeal to biases, possibly using Twitter bots, etc.
On one hand, ignoring Binance’s offer had to be already thoroughly considered by FTX.com. On the other hand, introducing an external motivation to find a solution by ‘making CZ sincerely contribute’ or ignore him could improve the sentiments around FTT value and thus resolve the problem.
I would be very surprised if Sam was unaware of this dynamic
https://twitter.com/AutismCapital/status/1590779299946442753
tl;dr – insider source says many FTX employees etc have lost their life savings; SBF had a history of pitching them to double-down on holding FTT and other assets on the exchange
Follow-up from an independent source: https://twitter.com/AutismCapital/status/1590852094894149632
Bloomberg is estimating the recent events have caused SBF’s net worth to decline 94% from $15.6B to $1B. I think they are suggesting Alameda and FTX have zero value. I hope that is not accurate. In combination with the 75% decline in Meta it would mean a lot less funding for EA causes until new mega donors are recruited.
Bloomberg now estimates that FTX and Alameda are both essentially worth $0, and that SBF is no longer a billionaire.
His remaining estimated wealth ($991 million) seems to mostly be based on his stake on FTX.us, which AFAICT has not been affected by today’s events. [ETA: also Robinhood stock.]
Today, Bloomberg updated its estimate of SBF’s personal wealth:
The following tweet is being shared now: https://twitter.com/autismcapital/status/1590551673721991168?s=46&t=q60fxwumlq0Mq8CpGV3bxQ
This is obviously just a random unverified source, but I think it will be worth reflecting on this deeply once this is all said and done. It feeds directly into how EA’s maximizing behaviour can lead to these outcomes. Whether the above is true or not, it will certainly be painted as such by those who have been critical of EA.
Thank you for sharing your thoughts on this. It’s such an uncertain time and I want to express my sympathy to you and the FTX’s team.
With all the above discussion, make me wonder the following things:
- how other EA orgs that were mainly funded by FTX will operate and what are ways to help those that affected severely in this situation?
- how the hiring opportunities may be affected? is there expected a hiring freeze from most EA-orgs?
- what are the next best strategies when it comes to funding diversity and the future of EA overall
In my view, it’s essential that orgs that were involved with FTX funding should communicate clear about their next strategies and be honest about their concerns regardless of the FTX outcome in the upcoming weeks/months. I worry less about the reputation/prestige and care much more about promising projects that were funded that may be put in very struggling financial positions leading to lot’s of harm to both human and non-humans well being.
This is what Matt Levine said re: why FTX lost money. (archive).
(I should note that this answer aligns with my ideological biases more than a lot of the other comments in this post, so moderately high uncertainty, can easily be very wrong).
(My current guess is that significantly more blatant fraud is going on than the Levine article was suggesting)
Folks have mentioned the Polymarket question on whether Binance will put out of the FTX deal, but there’s a separate question on whether FTX will become insolvent by end of year.
Wait that’s so confusing. What? Have I missed something? I’m just going to flail in writing here in hopes that someone can explain why the eff Binance would not want to acquire it’s largest competitor for peanuts.
I think you’re missing that (1) FTX is not Binance’s biggest competitor now that what has happened has happened, and (2) it’s not just about the face cost of the acquisition—there may be a further cost to Binance from assuming FTX’s debt. One imagines it may not be immediately clear whether acquiring new customers and stabilising the markets is worth the total costs, when (2) is included.
Because FTX is almost certainly morass of worthless assets and enormous liabilities, totalling $5bn or more. The brand also will be worth very little. And Binance may not feel the political capital it would acquire from making depositors whole is worth the risks.
What news has there been in the last few hours that has made the markets update to thinking ~80% FTX will fail (become insolvent; deal with Binance will not happen)?
In the last few hours, Coindesk reported that Binance is “strongly leading towards” not doing the FTX acquisition.
https://www.coindesk.com/business/2022/11/09/binance-is-strongly-leaning-toward-scrapping-ftx-rescue-takeover-after-first-glance-at-books-source/
See also https://polymarket.com/market/will-binance-pull-out-of-their-ftx-deal and
SBF has invested in a lot of start-ups, right? I’m thinking this should give him a decent chance of bouncing back (via one or more of those start-ups making it big) if the worst happens with the current situation.
He still has ~$600m of HOOD stock plus whatever equity stake is left in FTX.us. FTX.us is probably worth at least a few billion.
Isn’t FTX.US likely to significantly drop in value too?
Probably. They are insulated financially (I think), but not reputationally. They might need to rebrand (despite the large amount of costs sunk into marketing!)
Disagreevote if you think I should delete the post
I think this is confusing and it should be “upvote if I should delete”
Edit: I meant “agreevote if I should delete”
but then you give me karma.
No, agree/disagree doesn’t affect karma
Oh huh
There are a lot of options here—you could embed an elicit prediction thing and say you’ll delete if it’s below 20%
That seems like a lot of effort
To whom?
To me, to make an elicit question. Also we have a little voting system here, why add another one. And upvote downvote always feels like a thing that shouldn’t be messed with, hence agree/disagree.
Oh, I just misspoke originally, I meant agreevote if I should delete.
Oh I thought that would give me karma and I didn’t want that.
On November 10, FTX announced that it was ordered to facilitate Bahamian withdrawals by Bahamian regulators. Well, today, the Securities Commission of the Bahamas claimed that that was a lie. (h/t bruce’s Shortform.)
WSJ
How didn’t anyone notice the problems in how FTX backs their money until now? (Read as: Are there more such multi billion dollar mistakes just waiting to be found?)
I wish that I could allow other people to edit this post. Would take out some of my errors and be less time-consuming for me.
Clearer version control would be nice too.
It’s pretty well done now. This is difficult to follow and this must have been a lot of effort, even exhausting. I think your idea to edit posts was a good one and helpful in this situation.
Could someone explain why we would expect Alameda to be solvent and have value, if a huge chunk of their assets were collateralized FTT (the story that triggered this)? They would have been facing many margin calls right?ETA—Statement in post to which this was responsive I think has been removed. But yeah if anyone thinks Alameda has any value, genuinely interested in understandingFor anyone tracking this thread: Distill Web Monitor is a handy plugin (Chrome, FF, Opera) that can track web pages for changes.
EDIT: I’ve made a forum post about it.
Some EAs could be destabilized in their mental health. We should install an emergency network also involving people not currently working as therapists but with previous professional experience. Can someone organize this? I’ve already reached out to the EA Mental Health Navigator and posted about it in the EA Mental Health slack channel.
This is not about us. A bunch of retail investors just completely lost their shirts due to, I don’t know what exactly, but let’s say “apparent bad behavior”. If possible, we should try to provide some kind of support to them.
Yes, but a lot of EAs were those retail investors as well losing their shirts, or will likely lose their jobs now as they were funded via FTX. Many in our community will be a subset of those affected, who indeed need lots of support, but a reasonable number nonetheless.
This wasn’t unforeseeable. Over a month ago I posted a comment about worries I’ve had for a long time:
https://forum.effectivealtruism.org/posts/YgbpxJmEdFhFGpqci/winners-of-the-ea-criticism-and-red-teaming-contest?commentId=odHG4hhM2FSGiXXFQ
Likewise, I have a post from January suggesting that crypto assets are over-represented in the EA funding portfolio.
Good explanation here: https://twitter.com/jonwu_/status/1590099676744646656?s=46&t=Oui5JuTdhGbt1Cql2OfAbQ
Thanks, best one I’ve read.
if you dislike long-form twitter: https://threadreaderapp.com/thread/1590099676744646656.html
Alameda Research is going to be worth nothing after today, zero, nada, nyet. I will confidently bet good money that their trading losses on various shitcoins (Solana and ofc FTT itself) are what is responsible for FTX going down (i.e essentially Alameda was using FTX customer deposits as a cheap source of capital). This is of course incredibly unethical and doubtless illegal in every jurisdiction, but hey, some altruism was done along the way? Of course no one is going to buy Alameda itself because it’s almost certainly a giant cesspit of vast liabilities & worthless assets.
Btw, SBF would never sell in a fire sale to CZ (who he hates!) unless FTX had massive solvency issues, not just a short-term liquidity problem. This thing was valued at 32 billion just a few months ago, if SBF could prove it was all a liquidity problem he could raise the capital to get through this and keep things together IMO. That he can’t do so indicates that FTX is almost certainly deeply insolvent, probably as a result of doing some incredibly unethical and illegal things. The lawsuits are going keep everyone busy for a few years, though!
Can you give an operationalization of this, and how much money you are willing to bet?
what operationalization would you accept? Perhaps at some point in the next 5 years a court finds that FTX/Alameda were doing this? Perhaps CZ/Binance publicly anouncing that they’ve found this to be the case when examining FTX’s books?
FWIW I would be hesitant to bet on this because I would lose the bet in worlds where the EA community has less money. Not to say it wouldn’t be worth it at sufficiently good odds.
Yes, interested in taking the over!
no longer endorsed, huh?
The site has been taken private. https://www.alameda-research.com/
Sabs — do you think you want to write (negatively) about cryptocurrency in a focused way, as a longer form piece? I think this would be valuable compared to a lot of smaller comments.
how much are you paying
removed earlier today. well done!
If there’s any money left over after you’ve agree a line with Joel and Nuno, I’ve got next.
we can do 10k at evens
Huh, I took ‘confidently’ to mean you’d be willing to offer much better odds than 1:1.
I’m going to try to stop paying so much attention to the story while it unfolds, which means I’m retracting my interest in betting. Feel free to call this a win (as with Joel).
well of course I have to try to start negotiating the bet at completely terrible odds for you, how else am I suppose to make any money?
how much money are you willing to bet, huh?
I think some slightly less incendiary language here would be appropriate.
For example, the term ‘shitcoin’ is a very loaded term from Bitcoin Maximalists that’s typically used to derogate every crypto token other than Bitcoin itself.
Consider toning down the emotional rhetoric and making these points a bit more dispassionately?
well Bitcoin is also a shitcoin, yes, they all are (apart from USDC or other stablecoins operating on a simple money market fund model).
I think I’ll update this less often. If you have things you think are important for others to see, then comment them here (even if linking to another comment) and I’ll maybe include them when I get round to it.
Is there a lesson here that we didn’t sufficiently focus on asset class as a factor in the patient vs impatient philanthropy debate, and if EA has more crypto money in the future, we should spent it very quickly with a low-ish funding bar (for EA standards)?
There’s probably a weaker version of the same argument to be made with tech stocks as well given Meta’s falling value over the last year.
Whilst crypto is a factor, I don’t think it’s the main one here. If FTX/Alameda had held the bulk of their reserves in BTC or ETH, this wouldn’t have happened. Although granted, they may not have got anywhere as big as they did get if they had done this—it seems likely that the $16B was mostly illiquid paper wealth that they couldn’t’ve spent fast even if they wanted to.
As someone who’s rode out 3 previous crypto crashes of ~90%, ~70% and ~93%[1], I think in the long run it’s still a good bet, and I’m still holding[2] (If I had cashed out at either of the first two peaks I’d have much less than I do now, and even now I’ve got ~what I had at the 3rd peak. There is less potential in multiples though now than there was; maybe another 10-100x is possible in the next decade? [Not financial advice!]).
In general, I still think EAs should be ~risk neutral with their investments (i.e. much more risk taking than the average investor), given the value of spending on EA work scales ~linearly with money spent (vs. value gained from personal consumption scaling logarithmically, not to mention starting at a much lower QALY/$ rate!). This is especially so for those who have secured their own financial independence, and are investing money that is surplus to their own personal/family requirements. This may mean that the median EA investor loses money, but that shouldn’t matter so much if the ultimate total is higher—we are all on the same team.
Yes, I know the pain of thinking of what the money could’ve been spent on (saving lives etc)
Although I have diversified a fair bit into (similarly high risk) start-up investing over the last year or so.
About a year ago there was discussion on Twitter about how EA was highly concentrated in crypto and tech stocks. Someone asked if it could/should be hedged. The reply was that there was not appetite for hedging. I remember thinking to myself that I’m sure the ultimate beneficiaries of the EA causes would have appetite, but clearly it was not their decision, it was SBFs. I guess someone could ask if, from a moral perspective, he should have looked at the decision about whether or not to hedge from the perspective of the ultimate beneficiaries.
Another approach could be to be more proactive in taking funding assets in advance and liquidating and holding them in fiat (or other stable) currency. (e.g. ask big highly EA sympatethic donors to fund very long periods of funding at once if in any way possible.)
Altough your argument may make a more convincing case for the funders to fund, since the money will actually be spent quickly.
Or we should try to quickly move any money made in crypto into the S&P. I don’t think this is about patient vs. urgent philanthropy per se.
This gets more complicated when you factor in capital gains tax.
Better yet, into a total world stock fund, since it’s best to hold each country’s stocks in proportion to its market cap.
New Bloomberg story out:
As a FYI for anyone trying to analyze the probabilities of this situation, on “real money” (altough it’s crypto money) prediction market Polymarket the odds of the deal continuing are 45% vs. 55% odds of being pulled off from the table as of posting this message. https://polymarket.com/market/will-binance-pull-out-of-their-ftx-deal
The data might be noisy because of some people possibly using the market to hedge their crypto positions but I would still rate this data in the same ballpark of reliability as manifold markets data, most important reason being that Polymarket is popular with crypto people whereas Manifold Markets is popular with EA / rationalist people, who have possibly a very one-sided view on this current FTX trouble.
FYI, the odds are now 81-19 in favor of Binance pulling out.
Calm down. It’s a complex situation developing rapidly, let’s wait and see for what happens as a final outcome.
I think it’s only natural for EAs to be doing a bit of collective soul searching now.
This is very sad and terrible, but I think the relevant companies are bankrupt and rescue seems unlikely. Maybe if it’s helpful in some way, the newspapers Reuters and NYT contain information, if you want to read it.
Onlookers: Guys, it’s a highschooler, I think there might be special duties here to people of different ages and backgrounds.
While they are insolvent, FTX and SBF have not declared bankruptcy. In developing scenarios, information is unclear and from unknown sources. (Alameda’s balance sheet may prove incomplete.)
Bahamian authorities have obtained a court order to begin provisional liquidation proceedings for “FTX Digital Markets and related parties.”
There is wisdom in this comment: for many people, following this story closely as it rapidly develops doesn’t add any value to their lives or their work.
However, I suspect it will be many months before we have a truly “final outcome.” At least as of this morning, people have enough knowledge of the situation (and the range of likely outcomes) that it should be affecting—or at least causing them to delay—decisions that need to be made in the next weeks to months. I think it is extremely likely that FTX is done for and that the bulk of Bankman-Fried’s assets are gone. It wouldn’t be responsible to ignore that likelihood in making any decisions from this time forward, unless and until the probabilities change.
People involved in managing EA organizations, people who were considering sizable donations in the near term, and people who are employed at organizations highly dependent on FTX-affiliated funding probably shouldn’t wait for a more final outcome before assessing their situations. But for those who don’t have any decisions to make in the next few weeks to months (including decisions not to change funding or operations) that could be affected by the breaking news, I think you’re absolutely correct.
Is this post making things better? Agreevote for yes, disagreevote for no?
I guess I feel that being up to date and getting the bad stuff out of the way will allow us to process this more healthily. But it may just waste lots of time.
I could stop updating it.
Personally, I find it disorienting that there’s no change log, i.e. it’s hard to track the updates. Besides that, I’m glad I have a one place I can check for updates and wish I could commit to checking only this one.
Firstly, thank you for putting this together! This is a super important issue and the summary you produced makes it much easier to follow.
I agree with @mandelbox that it might be easier to follow with a change log. If you think it’s possible with the format, you might consider updating at the bottom of the article with dates (and times) so that it is possible to have some sense of development in this fast-evolving situation.
I wonder how people should talk about this on twitter. Feels like a much more adversarial environment where it’s easier for things to go wrong.
“1) Per our Bahamian HQ’s regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.”—FTX_Official
”FTX Announcement Regarding the Tron Credit Facility: We are pleased to announce that we have reached an agreement with Tron to establish a special facility to allow holders of TRX, BTT, JST, SUN, and HT to swap assets from FTX 1:1 to external wallets.”—FTX_Official
Both of these seem to be causing some amount of chaos. The first looks bad in terms of potentially being a loophole for FTX employees to cash out; but is also understandable in terms of having good relations with their host country. The second has caused the price of the Tron tokens to spike massively on FTX, with people speculating that Justin Sun will be making huge profits out of it. Neither look great from a globally equitable perspective for FTX account holders, but maybe they are better than nothing (or an 8+ year wait for everyone like in the case of MtGox)?
Ok, now the Security Commission of the Bahamas has frozen FTX’s assets. Was the withdrawal by Bahamian account holders supervised by the Security Commission from the beginning? (Or have they been digging an even bigger hole for themselves?)
This is Matt Levine’s (Bloomberg) take on what’s happening with FTX (copied from a newsletter). I haven’t included the footnotes/links. I thought he explained well how (even absent fraud) fragile financial institutions are. His crypto primer is also very good on the ecosystem around the various currencies etc: https://www.bloomberg.com/features/2022-the-crypto-story/
——————
So how could this happen? I don’t know, but let me speculate a little bit.
Let’s start with Coinbase. Coinbase Global Inc. runs a cryptocurrency exchange. When FTX.com, one of the largest crypto exchanges, was instantaneously vaporized yesterday, Coinbase put out a statement, the gist of which was “don’t worry, we are not going to be instantaneously vaporized.” The part that I want to focus on is this paragraph:
There can’t be a “run on the bank” at Coinbase. As you can review in our publicly filed, audited financial statements, we hold customer assets 1:1. Any institutional lending activity at Coinbase is at the discretion of the customer and backed by collateral. We have no gating for client loan recalls or withdrawals.
The way it works is roughly that you open an account and send dollars to Coinbase, and then you tell Coinbase “I’d like to buy some Bitcoin with those dollars,” and Coinbase buys Bitcoin and holds on to it for you and charges you a fee for that transaction. You can check your account balance, and Coinbase says “you have 0.5 Bitcoin” or whatever. That 0.5 Bitcoin is, in the general case, held by Coinbase; it has possession of the Bitcoin.[1] But it is held in a custody account for you. Coinbase says:
Your funds are your funds, and your crypto is your crypto: Coinbase maintains internal systems, like a bank or a broker. Our fully audited ledger identifies your account, your fiat and crypto holdings, and tracks your account activity in real time. There’s never a situation where customer funds could be confused with corporate assets.
We will never repurpose your funds: We do not lend or take any action with your assets, unless you specifically instruct us to. Many banks and financial institutions use customer funds for commercial purposes including lending and trading, meaning that they often hold only a fraction of their customer assets at any given time. Coinbase always holds customer assets 1:1. This means that funds are available to our customers 24 hours a day, 7 days a week, 365 days of the year.
The analogy is: Imagine a weird sort of bank. You come to the bank with $100 in paper bills, and you deposit it in the bank, and the bank takes your paper bills and sticks them in an envelope with your name on it. Then it sticks the envelope in a vault, and if at any point you ask for your money back, it opens the vault and hands you your envelope. This sounds like a bad business model: The bank needs to pay for real estate and tellers and vaults, and it is not doing anything with your money. But the other weird thing about this bank is that, every day, you come in and say “hey I’d like to exchange my dollars for euros” or “my euros for pounds” or whatever, and each time you do that the bank charges you a dollar. So you have $100, which you exchange for €99, which you exchange for £98, which you exchange for $97, etc.,[2] paying the bank $1 each time. If all of the bank’s customers do this every day, then the bank makes plenty of money to pay for real estate and tellers and vaults and executive bonuses, without doing anything else with your money. It just takes the $100 out of your envelope and replaces it with €99, etc., always keeping exactly the right amount of money (in whatever currency you like that day) in exactly your envelope.[3]
And then if one day every single customer walked into the bank at the same time and said “we would like our money back,” the bank would just hand them all their envelopes. Don’t get me wrong, this would be a catastrophe for the bank: If everyone took their envelopes back, then presumably they would stop changing money at the bank and paying fees, and the bank would stop making money, and it would no longer be able to pay for real estate or tellers or vaults or executive bonuses. It would go out of business in fairly short order. But it would not go out of business that minute. It would actually have enough money to give all the customers their money back, because it kept all the customers’ money in their own envelopes the whole time.
No actual bank works that way. Real banks take deposits but don’t keep the money in envelopes; they lend it out.[4] Most classically, they borrow short to lend long, taking checking deposits that can be withdrawn at any time, and using them to make long-term mortgages. This makes them vulnerable to runs, Diamond-Dybvig, It’s a Wonderful Life, etc., everyone knows all this.
But in theory a cryptocurrency exchange could work that way, and at a high level of generality Coinbase sort of does.[5] Historically — not so much now, but until early this year anyway — cryptocurrencies were volatile and exciting and people were jazzed to trade them a lot, so you could make a lot of money by just charging fees without doing anything else with customer assets. And that is a run-proof business. If everyone takes their money out at once, you have the money.
But then one day a customer comes to you and says “I have $10,000, but I am really bullish on Bitcoin, so I would like to buy $20,000 worth of Bitcoin. Why don’t you lend me $10,000 so I can buy $20,000 of Bitcoin, so I can get more excitement?” This is called a margin loan.
Or — equivalently — a customer comes to you and says “I have $20,000 of Bitcoin in my account, and I need some cash this month. I don’t want to sell my Bitcoin, because I am a true believer and also do not want to realize gains for tax purposes. Could you just lend me $10,000, secured by my $20,000 of Bitcoin? You know I’m good for it: If I don’t pay you back, you can sell my Bitcoin and pay yourself back from the proceeds.”
You might just say “no, that’s dumb, Bitcoin is volatile, buying $10,000 of Bitcoin is plenty of excitement.” (In fact Coinbase shut down margin trading in 2020.) But your competitors probably offer loans, and it is tempting for you to do it too. So you say, sure, fine, I’ll take your $10,000 and put $20,000 of Bitcoin in your account.
But where do you get the money that you are lending to the customer? Well, you have to borrow it too. Ordinarily the way that you will borrow it is by putting up the customer’s Bitcoin as collateral to your lender, just as the customer puts up its Bitcoin as collateral to you. If the customer defaults, you still have to pay your lender (and then you get the Bitcoin back and can sell it to pay off your customer’s liability to you); if you default, the lender sells the Bitcoin.
But who are the lenders? Oh, various possibilities. But one general point is that while some customers will want to borrow dollars to buy Bitcoin, other customers will want to borrow Bitcoin. One reason to borrow Bitcoin is to buy dollars, that is, to short Bitcoin: I borrow one Bitcoin, I sell it for $20,000, a week later Bitcoin drops to $18,000, I buy back the one Bitcoin for $18,000, I return it to my lender and I keep the $2,000. There are variations on this trade (I borrow Bitcoin and sell it for Ethereum, betting on the relative value between the tokens, etc.). It is necessarily a leveraged trade; I can’t short Bitcoin without borrowing it.[6]
If you are a crypto exchange, this is a nice opportunity. You have Customer A who has Bitcoin and wants to borrow dollars, and Customer B who has dollars and wants to borrow Bitcoin. (By “dollars,” for a crypto exchange, I mostly mean “dollar-denominated stablecoins,” though potentially also dollars.) You take some of Customer A’s Bitcoin and lend it to Customer B, and you take some of Customer B’s dollars and lend them to Customer A. Each of them is overcollateralized — you only lend Customer A half the value of her Bitcoin, and you only lend Customer B half the value of his dollars — so you feel pretty safe. And they both pay you interest.
But there are risks. One day Customer A might come in, pay off her dollar loan, and ask to take her Bitcoin back. You don’t have her Bitcoin, or not all of them anyway; some of them are with Customer B. Customer B owes them to you — ultimately you’re good for it — but you don’t have them now. There is a timing problem.
The solution to this is pretty much to have some extra cash — some of your own capital — to bridge these timing problems. Eventually you’ll get the rest of the Bitcoin back from Customer B, but for now you just pay Customer A out of your own Bitcoin stash.
But the timing problem is also connected to a real economic risk. If the price of Bitcoin falls by 90%, Customer B will be thrilled. He will come to you and say “here’s my Bitcoin back, I’d like to withdraw my dollars.” But you don’t have his dollars, or not all of them; half of them are with Customer A. Your dollar loan to Customer A is now underwater: You loaned her 50% of the value of her Bitcoin, but Bitcoin fell by 90%, so she owes you more than her collateral is worth. You call her up and ask her for more money — a “margin call” — but she, sensibly, doesn’t answer the phone.[7] You have to pay Customer B out of your own capital, and you don’t get it back from Customer A. You’ve just lost money. Actually that’s the best outcome. The worst outcome is that you don’t have enough capital, you go bankrupt, and Customer B does not get his money back.
Everyone knows this, which is why crypto exchanges — and securities broker-dealers, who have the same basic business model — spend most of their time thinking about risk management. Before the price of Bitcoin drops too far, you will be calling up Customer A for more margin, and if she doesn’t answer the phone you will liquidate her position to pay back the loan you made. If you are a sophisticated modern crypto exchange like FTX, you will have automated 24⁄7 margining systems that automatically liquidate trades that have gotten too risky, so that only the rarest catastrophic market moves could get you in trouble.
But sometimes market moves are catastrophic, and in particular, sometimes securities broker-dealers and crypto exchanges will have “run on the bank” risks. If everyone knows that you are in this situation — that you have a lot of Bitcoin collateral and Bitcoin prices are falling — people will expect you to have to liquidate your Bitcoin collateral, so they will expect Bitcoin prices to fall, so they will sell Bitcoin, which will cause Bitcoin prices to fall, which will cause your long-Bitcoin customers to default, which will cause you to liquidate Bitcoin at lower and lower prices, etc., until you are bankrupt.
Now let’s add one more crypto element. If you are a crypto exchange, you might issue your own crypto token. FTX issues a token called FTT. The attributes of this token are, like, it entitles you to some discounts and stuff, but the main attribute is that FTX periodically uses a portion of its profits to buy back FTT tokens. This makes FTT kind of like stock in FTX: The higher FTX’s profits are, the higher the price of FTT will be.[8] It is not actually stock in FTX — in fact FTX is a company and has stock and venture capitalists bought it, etc. — but it is a lot like stock in FTX. FTT is a bet on FTX’s future profits.
But it is also a crypto token, which means that a customer can come to you and post $100 worth of FTT as collateral and borrow $50 worth of Bitcoin, or dollars, or whatever, against that collateral, just as they would with any other token. Or something; you might set the margin requirements higher or lower, letting customers borrow 25% or 50% or 95% of the value of their FTT token collateral.
If you think of the token as “more or less stock,” and you think of a crypto exchange as a securities broker-dealer, this is completely insane. If you go to an investment bank and say “lend me $1 billion, and I will post $2 billion of your stock as collateral,” you are messing with very dark magic and they will say no.[9] The problem with this is that it is wrong-way risk. (It is also, at least sometimes, illegal.) If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.
The worst case is something like:
You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000. You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin. You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral. Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances. You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.” You say “sure, sounds good,” and hand over all your collateral. Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars). Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances. But then if the value of FTT drops to zero, you have nothing. You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars. You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?
Now let’s add a few more FTX-specific elements. One is that FTX is an exchange for levered traders, offering products like perpetual futures and leveraged tokens that build in margin lending. So whereas the basic model of Coinbase is “they buy Bitcoin for you and put it in an envelope,” the basic model of FTX has to be “they lend you money to buy crypto and then make use of your crypto to get the money.” In financial terms, they have to rehypothecate your collateral; you can’t expect them to just keep it in an envelope if they’re lending you the money to buy it.
The other is that FTX is closely associated with a hedge fund called Alameda Research. Sam Bankman-Fried founded Alameda to do crypto arbitrage and market-making trades, and then he founded FTX to basically have a better exchange for Alameda to trade on. Alameda has lots of FTT, and last week Coindesk reported on its balance sheet; the gist of that report was “wow its balance sheet is mostly FTT”:
The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”
There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)
That is not in itself a reason for a run on FTX! It might be a reason for the price of FTT to go down, if you think that Alameda has too much of it and might need to sell it.
The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.
And all of this is self-fulfilling: If you are worried about FTX’s business, then the price of FTT should go down. If the price of FTT goes down, then FTX’s business is riskier, because it has less collateral. If, say, the operator of the biggest crypto exchange gently raises one eyebrow and says “FTT, eh?” that can be enough to topple FTX. FTT goes down, leaving FTX undercapitalized, leading to customer withdrawals, leading to ruin.
Anyway it is still early and confusing but that seems to be the story of FTX. Coindesk reported on Alameda’s FTT exposure, and then Changpeng “CZ” Zhao, the founder of Binance Holdings Ltd., the largest crypto exchange, raised eyebrows by tweeting that Binance would sell its FTT holdings “due to recent revelations.” People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and Bankman-Fried started calling around asking for a loan or a bailout. Eventually he called CZ himself, and they announced a non-binding letter of intent for Binance to acquire FTX and make customers whole. Bankman-Fried’s fortune basically vanished, as did his “ emperor aura.” Venture capital investors in FTX — which last raised money at a $32 billion valuation — are probably getting zeroed, the price of FTT collapsed, and now regulators are investigating.
In this description I have drawn on Twitter threads from Jon Wu, Lucas Nuzzi and an anonymous “Wassie Lawyer,” who make arguments along these lines, as well as this Substack post from Byrne Hobart. But the most informed view is probably that of CZ himself, who tweeted this morning:
Two big lessons:
1: Never use a token you created as collateral.
2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve.
Binance has never used BNB for collateral, and we have never taken on debt.
“Never use a token you created as collateral” suggests, to me, that FTX accepted its FTT token as collateral, probably from Alameda, probably in exchange for borrowing assets that it owes to customers. And that that went wrong in roughly the way I have outlined.
One other point here is that if this is the story, then it is not a liquidity crisis but a solvency one. That is, the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. 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. On that note:
Changpeng Zhao moved fast when Sam Bankman-Fried’s FTX.com was on the brink, offering to take it over and stem any further crypto contagion.
Within hours, he was forced to reconsider.
For starters, Binance executives quickly found themselves staring into a financial black hole—a gap between liabilities and assets at FTX that’s probably in the billions, and possibly more than $6 billion, according to a person familiar with the matter.
On top of that, US regulators are circling FTX, investigating whether the firm properly handled customer funds, as well as its relationship with other parts of Bankman-Fried’s crypto empire, Bloomberg News reported Wednesday.
It makes for a tricky decision for Zhao, known in the crypto world as CZ: Follow through with rescuing his onetime top rival and shoulder the financial and regulatory burdens, or let FTX crumble and sort through the potential wreckage? Zhao himself admits there was no “master plan” to take over FTX.
His answer, at least for now, is that the financial hole appears too deep. Binance is unlikely to follow through on its takeover of FTX, according to the person familiar, who wasn’t authorized to publicly discuss the matter.
I don’t have opinions on any of the specific details, but what I do have is a feeling that darkness has stuck a great blow against us. There’s stuff that needs to get done, and recent events have imperiled our ability to do them. I’m scared, but most of all I want to help make up for the loss. Not by trying harder, but by persevering in the things I do with what I have to do them with.
Happy to add extra markets if you can think of them.
Polymarket question about will Binance cancel the FTX bailout deal: https://polymarket.com/market/will-binance-pull-out-of-their-ftx-deal (The question is in reverse phrasing related to some other markets.)
Looks like all the Manifold markets are gone? Why were they deleted? Seems like useful information.
I think Manifold was experiencing an (unrelated) database outage when you posted this comment, and the markets should be up again; please let me know if this isn’t the case!
I had no inkling the problems with FTX, but I had was somewhat surprised to see the crypto influence on the EA movement. Even absent fraud crypto currency businesses seemed to be financially risky, and also posing a PR-problem.
For me it’s not black and white. The (expected) amount of good from the money has to be considered in consideration to the (expected) bad PR.
And I don’t feel the EA movement was advertising for FTX so turning this against EA would be in bad faith.
At least on Twitter I felt that EA followers gave quite a lot of attention to SBF in particular. It certainly was positive PR for him and his companies, but I think an obvious risk for the movement.
To be honest I feel like this is all part of the high-risk high-reward that is crypto . This is not the first crash and probably won’t be the last. I would treat this as an interesting exercise for EAs in general who are considering similar high-risk high-reward careers—it’s a good time to ask yourself if you are prepared to take on the high-risk part if it comes down to that, with a very vivid example now.
Of course, there were things that could be handled by FTX/Alameda better (and also Binance if they were truly benevolent), but interesting thought experiment to consider for the rest of us not directly involved, and for us to personally extract some use out of this.
I’ve worked in crypto since March this year (though not in crypto trading, so I’m sheltered from the worst of it) and I’ve enough money locked up in FTX and BlockFi for it to sting, so I’m learning some lessons here too.
This is just categorically wrong and mistaken. This is not a question of a company operating in a high-risk and high-reward sector, but one of fraud. FTX used its customer’s deposits to stave off Alameda’s own insolvency and essentially stole his users’ funds. Labeling this as a thought experiment or as something that could be handled better is inaccurate and does a disservice to the irresponsible and immoral actions that took place here. It is not an interesting exercise that FTX owes its users close to $10 billion. Now, we are all left wondering what exactly happened here and who enabled such egregious actions. This is honestly a Lehman moment for crypto or a Enron-type event.
The collapse of an exchange is qualitatively different than the collapse of coin. His clients did not perceive risk, and there was no compensation for the risk that they were unknowingly subject to. That is fraud.
Moreover, if SBF viewed fraudulent behaviour for the purposes of EA as “high-risk high-reward” it signals there are norms within EA that are in dire need of clarification and/or change. Tolerance for fraud would lead to disastrous consequences for EA in the long-run.
That’s my concern as well.
Just as concerning is how EA (leadership) may have reacted if the events that transpired at FTX were identical but SBF ended up turning billions of profit instead of sustaining immense loss. What would be our reaction to that?
In this alternative universe, I’d imagine he’d receive only a bit of censure, instead being rewarded with significant praise by EA leadership for his willingness to take on risk and make 51 EV bets. Community members might assert that it doesn’t matter what he did so long as the consequences ensured he was going the greatest good possible. They would be captivated, enchanted by promises of further funding.
These condemnations are because SBF committed fraud and lost. If he did all that and won the jackpot, I imagine his reception here would be rather different.
It depends on where you set the baseline. Before FTX existed there were a lot LOT fewer assets for effective causes. Sure this will take the number down from some theoretical maximum, but the net is that if FTX doesn’t generate another dollar for EA, it has already made a large, positive difference.
🪙🪙
A sad and unfortunate turn of events that isn’t good for anyone. I wish Binance had sat down with Sam and worked it out in the background. Without the bank run Sam could have corrected and worked towards a merkle-tree proof-of-reserve model and none of this would have happened.
SBF might have made some mistakes, taken risks and used funds when he shouldn’t have but I don’t think he did anything in bad faith and we have lost a great philanthropist.
Strongly disagree-voted because “I wish they had sat down” doesn’t address the publicly stated reason why Binance pulled out. It makes it seem like they had no good reason, and a good conversation would have fixed the issues. Without knowing much, this seems implausible to me.
Also, I consider “I don’t think he did anything in bad faith” to be somewhat irresponsible. If SBF actually did something wrong, then EAs going around and supporting him by saying “I don’t think he did anything wrong” will hurt the optics of this further.
It was an attack from Binance that caused the entire episode. CZ chose the nuclear option of dumping FTT, which he knew would hurt people and most of all Sam. This started with the Bankless interview, CZ and others didn’t like SBF’s pragmatic approach to regulation and this was the response.
He could have gone to Sam and given him options and made it clear that if he didn’t change course both on regulation and the use of FTT then this is what he would do. However he didn’t, he went nuclear too soon.
Sam should have been more sensitive to the situation and prevented it before it got to this point.
In terms of bad faith, it’s very much in EA reasoning that he could have thought. I’m taking X risk and the probability of massive failure is very low and the benefit is high. Therefore I can do more good but taking X risk. This fits his profile more than complete bad faith. If I do X over 10 years I can give more than if I didn’t do X.
Personally I think what Sam did is reckless and he shouldn’t have used FTT the way he did and he should have been the leader of merkle-tree proof-of-reserves.
However I think the probably of complete bad faith is very low.
It’s almost like putting all our eggs in one basket was a bad idea
Reliance on billionaires is not the way
Relying on more billionaires (from various uncorrelated fields) might still be the more cost-effective strategy. But the community isn’t just doing that anyway, we encourage everyone to give, even if just a little.
Slightly confused by the large number of disagree voters here? Like, people disagreevoting are saying they prefer to rely on billionaires?
I understand that it might be the most effective way to direct money at this point in time.But people aren’t commenting saying that—just multiple people strong-disagreeing with this. I personally would encourage reaching out to more HNWIs. Though it wouldn’t be correct to say I am not concerned about relying on a small number of super-super rich.
Note: I can understand the downvoting (karma) - as maybe this doesn’t have the style of communication one prefers in EA Forum, nor does it explain, nor is it ‘be kind’. The latter two advised under commenting guidelines.
I don’t think the choice was between a diversified portfolio equal to SBF’s net worth and what EA actually got. I think the choice (if you can model it as a choice at all) was closer to something like SBF’s money or nothing.
(I didn’t downvote the parent comment though.)
SBF could have liquiditated and redistributed earlier rather than continuing to build risky leverage. This is true of any billionaire that may claim they’re trying to hoard more because they can in the long run then donate more
My guess is people are (reasonably in my view) reading “reliance on billionaires is not the way” as “stop trying to get money out of billionaires, or at least do it less”, and not merely “in an ideal world, billionaires would not be the main funders of EA causes, and plausibly wouldn’t exist at all”.
The communication norms of the movement either have created the movement’s impotence relative to its potential or have been powerless to change that. I think we should be prepared to challenge EAs cultish mistakes even if we’ll get downvoted for it
Got any better ideas?
Redistribution—I think the tacit endorsement of extreme inequality of means by the movement could be net negative long run
I think this is an irresponsible ad hominem to be posting without any substance or link to substance whatsoever. There are many EAs who know a lot about crypto and read the forum—if there are substantial criticisms to be made I think you can expect them to make them without this vague insinuation.
It’s important that this is not an ad hominem.
I’m torn between:
It is pretty annoying when Nathan has come in with a best-guess doc, being very transparent, to get such a blanket and vague statement argued from authority. An EA community that lost its ability to have open discussion and relied on authority like that would be a worse one indeed. And:
If Jonas has received a tip from someone, but does not want to reveal his source, and his source does not want to post more details, this is the best Jonas can do. Jonas has added information to the commons, and been rewarded by losing karma.
I think it would have been very easy for Jonas to communicate the same thing in less confrontational language. E.g., “FWIW, a source of mine who seems to have some inside knowledge told me that the picture presented here is too pessimistic.” This would have addressed JP’s first point and been received very differently, I expect.
Agreed.
To clarify, was it this sentence you found confrontational? (I’m not counter-arguing, I am genuinely asking, because I seem to lack an eye for this sort of thing, or alternatively I’m usually right and most people are wrong. The truth is probably in the middle somewhere if I were to guess.)
“Typically, this term refers to a rhetorical strategy where the speaker attacks the character, motive, or some other attribute of the person making an argument rather than addressing the substance of the argument itself.”
Jonas said that Nathan was making overblown claims here and on Twitter. In particular the inclusion of “and on Twitter” points to Nathan as someone engaged in irresponsible conduct, without addressing his substance, and thus meets the definition of an ad hominem IMO.
My second point addresses your point 2. As I said, there are many people who are knowledgeable about crypto on the forum, and this is a very topical post, so a reasonable person should expect the substance to be addressed in the comments. Adding only vague nonspecific criticisms, while I agree it is not zero information, I think it is worse than staying out of it and posting nothing.
Retracted it, didn’t mean to attack Nathan personally. Apologies.
No worries. Thanks for the retraction.
I’ve made some corrections, how do you feel now. Specifically I deleted the first tweet, changed the title and corrected a couple of numbers. Can you see any other errors.
But also, I’m happy to bet that I will have been roughly right here.
(I now broadly agree, especially after the edits)
(though to push slightly, what did the edits change? They were a few small maths errors and deleting the tweet that said that FTX had been sold (bad error). other than that, if you agree with me now it looks like you were wrong, right? My main point was that things are gonna be bad, and they are)
Yeah I think it was that Tweet; I also vaguely remember specific numbers that seemed overly precise and a claim that CZ was deliberately trying to cause a run on the bank to then buy FTX.
I left that comment very quickly (which I shouldn’t have) and don’t remember the details very precisely, and given that things are now deleted it’s hard to remember everything.