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Category: Soap Box

Soapbox: Losing your shirt

At the start of this year FTX was acclaimed as the fastest-growing cryptocurrency exchange, enlarging by around 600% last year. Trading volumes on the...

15 November 2022

Gary Mead

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At the start of this year FTX was acclaimed as the fastest-growing cryptocurrency exchange, enlarging by around 600% last year. Trading volumes on the exchange in 2021 increased 2,400% year-on-year, with more than five million active users. In 2021, FTX raised more than $1.4 billion from major investors; it had a valuation of $32 billion heading into 2022. It became the second-largest cryptocurrency exchange. Was this explosive rise since the exchange was founded, in 2019, too good to be true?

Yes.

FTX filed for chapter 11 bankruptcy on 11 November, along with some 130 affiliate organisations and Alameda Research, a hedge fund founded and owned by Sam Bankman-Fried (aka ‘king of crypto’), the founder of FTX, who has now stepped down as CEO of FTX. Chapter 11 proceedings permit a debtor 120 days to file a plan of reorganization with a court. In the filing FTX estimated it had between $10 billion and $50 billion in assets and liabilities and more than 100,000 creditors. A breakdown of the balance sheet of FTX shows that it had nearly $9 billion in liabilities and $900 million in liquid assets, $5.5 billion in “less liquid” assets, and $3.2 billion in “illiquid” assets. Most of the biggest holdings, including lower-profile cryptocurrencies such as Serum, Solana and FTT, have since plunged in value.

The collapse of FTX has evoked plenty of schadenfreude. While that’s predictable and even understandable it’s not helpful. Cryptocurrency generally is a laudable attempt to break government monopolies over money – its creation, issuance, distribution and systemic devaluation (thanks to targeting even low rates of inflation) that reduces purchasing power.

When damage is done to a part of cryptocurrency, the whole project suffers, and lack of confidence in forms of money beyond government control can spread.

Warnings about FTX, which has been based in the Bahamas, have been in the air (in the UK at least) since September. The UK’s financial regulator, the Financial Conduct Authority, then said the exchange appeared to be offering products and services in the UK without its authorisation. It said the “firm is not authorised by us and is targeting people in the UK” and that people would be “unlikely to get [their] money back if things go wrong”.

Bezzle-fever

All this is a consequence of many things – personal greed, no regulation, a kind of Wild West buccaneer spirit, a ‘move fast and break things’ attitude that has developed in recent times, but above all a kind of bezzle-fever that has infused our society.

What’s a bezzle?

The term was created by the great economist J. K. Galbraith in his book The Great Crash, 1929, first published in 1955. He derived it from embezzlement, which he called “the most interesting of crimes”. A bezzle is an inventory of undiscovered embezzlement. He wrote: “In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks”. During boom times, which we have just lived through, this temporary discrepancy between perceived asset values and their real longer-term value can widen considerably.

Moreover, a bezzle doesn’t require actual fraud to exist; all it takes is great PR, easy money and a period where the lack of profitability seems of no concern. One could add that carelessness about lack of regulatory oversight adds to the chances of a bezzle emerging.

Since 2008 until now we have lived through perfect bezzle breeding conditions – interest rates declining to zero, massive amounts of fiat money have been either given away by states or pumped into the financial system by Quantitative Easing. Irrational growth funded by irrational lending – lending without apparent care about a return – has been behind the last decade’s expansion of all kinds of businesses. All it takes is some mishandling for the likes of FTX to come tumbling down when money is no longer “plentiful”.

Gold is security

“The public has burned its fingers in the flame of wild speculation and has learned to fear the fire. While it still fears the fire is the time for us to act”. These words were said by F.D. Roosevelt during the Great Depression, shortly before he became US President. He steered through Congress the Securities Act but it wasn’t until the 1950s that cheating in finance had dropped dramatically. It’s time for those engaged in ‘wild speculation’ to re-learn fear of the fire; what’s happened to FTX may help them.

The days are numbered for the lax regulatory environment in which cryptocurrency has thrived. The bankruptcy and collapse of the Bitcoin exchange Mount Gox in 2014, with losses of hundreds of millions of Dollars, sent warning signals (largely ignored by policymakers for whatever reason) about the need for tighter regulation. Calls for tougher regulation after the FTX debacle will be difficult to resist, even by those most sympathetic to the cryptocurrency revolution. What some are calling cryptocurrency’s ‘Lehman moment’, in reference to the 2008 collapse of that investment bank, which triggered a global financial crisis, is bound to evoke a backlash.

Yet the initial impetus behind cryptocurrency – to create a new form of money that would be impervious to government interference and central bank control – should not be jettisoned. We have seen since 2008, with private banking bad debts being socialized, with rock bottomed interest rates and injections of multi-billion sums into economies creating inflation rather than growth, just how badly managed our economies are managed. And this bad management is costing individuals dearly.

The crypto world has become less attractive thanks to people such as Bankman-Fried. Thankfully there is an alternative form of money – gold – which is not a Ponzi scheme, which is not managed and controlled by an individual, which cannot be created on the whim of a computer wizard. Gold is not regulated by the UK’s Financial Conduct Authority (FCA); but Glint is regulated by the FCA. And thanks to Glint, you can use gold as money safely. Gold cannot be hacked – although Glint enables its use within electronic payments, hackers haven’t yet worked out a way to dematerialize it and steal it across the wire. We are confident they never will.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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