Crypto Winter: A Whiff of Enron and the Housing Crash

Bitcoin gone

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Unfortunate encryption state

Anyone who follows the world of cryptocurrency knows FTX (FTT-USD) and its former chairman Sam Bankman-Fried and the demise of his “empire.” What many cryptocurrency believers may not realize is the final blow to the effects of FTX’s implosion and those of its investment fund, Alameda Research.

Having lived in the markets during both the Enron bankruptcy and the global financial crisis, I see many parallels with the past and now: little or no disclosure of excessive leverage, interconnected entities with questionable utility and ownership, and conflicts of interest. Widespread, complete inconsistency. There is no reasonable control.

These traits have led to disaster in the past and I suspect now will be no different. The expression, “There isn’t just one cockroach” was appropriate then and seems apt to describe the events that followed the FTX crash. I expect to see more crypto-related bankruptcies in fairly short order and more vulnerability in most cryptocurrencies.


I think one of the biggest surprises to come out of the FTX debacle is the amount of leverage that was employed. Sam Bankman-Fried has been tweeting aggressively (and probably to great risk to himself) since bankruptcy and made a stunning confession this week.

In a Twitter thread from November 16, he announced that FTX leveraged $5 billion and was backed by $20 billion in assets. We can argue the part of the $20 billion in asset value given the slump in crypto-asset prices, but $5 billion should have been unquestionable. Somehow it wasn’t.

Later that same day he tweeted,

“I was wrong. The leverage wasn’t about $5 billion, it was $13 billion. $13 billion leverage, total run on the bank, total collapse in asset value, all at once. That’s why you don’t want that leverage.” .

Oh really Sam? Didn’t you know that you have $13 billion instead of $5 billion? 8 billion dollars of debt magically appeared?

It’s hard to think of any CEO (or anyone for that matter), who could be clueless. My opinion is that Bankman-Fried is probably more aware of that. However, it was evident that his organization was in disarray. John Ray III, who replaced SBF, wrote a scathing letter about the state of the company in which he had crushed previous management, saying:

“Never in my career have I seen such a complete failure of corporate controls.”

And the

“From the compromised integrity of systems and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, inexperienced and vulnerable individuals, this situation is unprecedented.”

In case anyone wanted to question Ray’s credentials, he led the bankruptcy restructuring of Enron. More and more details keep coming out as Ray picks through the chaos he gets into and none of it is constructive.

As was the case in both Enron and the global financial crisis, there are knock-on effects from such a large player backsliding with so much leverage in a world where derivatives create labyrinthine interdependencies. The effects in this case started to wipe out other players.

Crypto lender BlockFi is rumored to be planning bankruptcy. FTX provided BlockFi with a $400 million line of credit, and BlockFi also lent the money to Alameda Research, SBF’s hedge fund, which also received money from FTX. Genesis Global Capital, the lending arm of Genesis Global Trading, which, like Grayscale, is owned by Digital Currency Group (OTC:GBTC), is pausing new loans and redemptions.

This comment appears to affect accounts at Gemini, the cryptocurrency exchange owned by the Winklevoss twins. Gemini had a program called “Gemini Earn,” where customers could earn high interest rates on digital currency assets. The company tweeted,

“We understand that Genesis Global Capital, LLC (Genesis) – the lending partner of the Earn Program – has paused withdrawals and will not be able to honor customer refunds within the 5 business day SLA.”

Questions are now emerging about the size of deposits at Silvergate Capital (SI), whose stock has fallen precipitously this week. SI had no loans to FTX or Alameda, only deposits. However, they do offer loans secured by Bitcoin (BTC-USD), which can become problematic. Coinbase (COIN) is also on the decline, less on concerns about exposure to margin lending and more on depreciating volume thanks to declining crypto values.

potential repercussions

I posted an article on Microstrategy (MSTR) earlier this week. MSTR is another highly leveraged player in the crypto space albeit simpler than FTX, BlockFi, Genesis or Gemini. She simply holds 130,000 bitcoins underwater for the leverage she used to buy them all. Despite this in my opinion reckless speculation about bitcoin, many advocates of Michael Saylor commented on that article. Most of the defense focuses on the belief that a recovery in the price of Bitcoin is possible. The reasons given for why he recovers are tenuous at best.

This brings me to my central point of view on cryptocurrencies. Given the price drops that almost every cryptocurrency has seen this year, I think it’s safe to say that cryptocurrencies incorrect:

  • store of value. Which store of value drops from 75-99%?
  • An alternative to fiat currencies. The volatility is too high to be legal tender.
  • Inflation hedge. This year they were tested and failed.

If cryptocurrencies aren’t any of the above, what are they? Judging by the (lightly posturing) reckless nonsense that has gone on in places like FTX, cryptocurrencies are just (perhaps the most outrageous) examples of the rampant speculation caused by ultra-loose monetary and fiscal policies. Such an environment gave birth to an investment style where the intrinsic and fundamental value of the assets was never as important as the momentum. People bought things just because they moved up. The fear of missing out has replaced the risk of poor capital.

Crypto is an example of this risk dynamic. Federal Reserve Governor Neel Kashkari tweeted today “The whole idea of ​​cryptocurrency is rubbish. Not 4 payments useful. No inflation hedge. No scarcity. No tax power. Just a tool for speculation and bigger idiots.”

well said. With the end of easy money came the end of this type of speculation.


My two favorite Warren Buffett quotes are:

“The first rule is never to lose money. The second rule is never to forget rule number one.”

And the

“When the tide goes out, you see who is swimming naked.”

I think it’s very clear that a lot of people like them have been skinny diving and that many cryptocurrency believers who hung on every word forgot rule number one.

Investing is hard. There can be a lot of pitfalls. One can lose money even in seemingly very safe situations. Speculating in highly volatile assets is just a bad idea, full stop. Using leverage on it is a recipe for disaster for both the investor and the lender (as we see with FTX, BlockFi, etc.).

I fully expect true cryptocurrency believers to disagree with this piece or claim that I don’t understand the asset class. My only answer would be, please tell me the intrinsic value of these things.

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