The difference between Bitcoin and FTX

Bitcoin is a digital currency (cryptocurrency) that can be paid to another bitcoin user willing to accept it via a blockchain account.  It is backed by nothing and promises nothing. Its US dollar value has fallen from $65,496 on November 14, 2021, to $15,630 on November 21, 2022.

“FTX Exchange was a leading centralized cryptocurrency exchange specializing in derivatives and leveraged products. Founded in 2018, FTX offered a range of trading products, including derivatives, options, volatility products, and leveraged tokens. It also provided spot markets in more than 300 cryptocurrency trading pairs such as BTC/USDT, ETH/USDT, XRP/USDT, and its native token FTT/USDT.12 In early November 2022, the exchange and the companies in its orbit began a steep fall from grace….  According to its bankruptcy filing, FTX, which was once valued at $32 billion and has $8 billion of liabilities it can’t pay, may have as many as 1 million creditors…. On November 16, a class-action lawsuit was filed in a Florida federal court, alleging that Sam Bankman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors from across the country. ” “FTX exchange”

The difference between Bitcoin and FTX is that Bitcoin is a digital coin/token that some believe might achieve wide adoption as money and thus a stable demand that could stabilize its price. In my opinion, this is HIGHLY unlikely. I explained this potential eight years ago: “Cryptocurrencies the bitcoin phenomena”   “The future of bitcoin exchanges”  But most people buying Bitcoin are gambling that they can sell it for a higher price than they paid for it (first cousins to slot machine addicts).

On the other hand, FTX and its related products and services promised real things and to play by known rules (contracts). On November 11, FTX and its affiliated firms were put into bankruptcy. Billions of dollars where missing? Founder Sam Bankman-Fried (SBF) claims that he was just careless. It appears more likely that he was a lying fraudster. “An attorney also said the firm had been run as a ‘personal fiefdom’ of Bankman-Fried with $300 million spent on real estate such as homes and vacation properties for senior staff.” “Crypto lender genesis says no plans to file bankruptcy imminently”  Presumably to promote himself as a good guy and to win influential friends, SBF also contributed millions to charities and politicians. 

Most crypto product and service providers want regulations that will give potential investors and customers more confidence in their products but that will not stifle the potential creativity of a dynamic industry.  Hopefully congress will get on with it — carefully. “Crypto bill criticized”

“Sam Bankman-Fried, the founder of the FTX exchange and Alameda Research, a cryptocurrency trading platform, seemed to confuse his bank and his companies. According to John Ray, the new CEO in charge of the restructuring of his empire which went bankrupt on November 11, Bankman-Fried received a personal loan of $1 billion from Alameda. He is not alone: ​​the firm, which is a kind of cryptocurrency hedge fund, has also lent $543 million in personal loan to Nishad Singh, an associate of Bankman-Friend, and $55 million to Ryan Salame, the co-CEO of FTX Digital Markets, one of FTX’s affiliates.  

“’Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,’ Ray wrote. ‘From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.’”  “Bankman-Fried received 1bn in personal loan from his company”

“Bankman-Fried’s net worth peaked at $26 billion.[11] In October 2022, he had an estimated net worth of $10.5 billion.[12] However, on November 8, 2022, amid FTX’s solvency crisis, his net worth was estimated to have dropped 94% in a day to $991.5 million, according to the Bloomberg Billionaires Index, the largest one-day drop in the index’s history.[13][10] By November 11, 2022, the Bloomberg Billionaires Index considered Bankman-Fried to have no material wealth.[14]”  “Sam Bankman-Fried”

I assume that jail is next, perhaps in the cell previously used by Bernie Madoff.

If you subscribe to The Economist you can read fascinating details here: “The failure of ftx and Sam Bankman-Fried will leave deep scars”

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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