Business Day

FTX crypto scandal is investment story as old as time

- DESNÉ MASIE ● Dr Masie, a former senior editor of the Financial Mail, is chief strategist at IC Publicatio­ns in London.

The past few weeks have seen the story unfolding of one of the biggest corporate failures yet — not just the biggest in the fledgling crypto sector.

It all started when one of the world’s largest crypto exchanges, FTX and its related companies, including hedge fund Alameda Research, started shedding billions in value, putting customers’ deposits and investors’ capital at risk.

The group’s founders and executives are a bunch of young maths wizards who, while living in what they call a “polycule” in the most expensive real estate in the Bahamas, became extremely wealthy in their mid-twenties, with investment­s as diverse as elite venture capital funds such as Softbank and Sequoia Capital, and the Ontario Teachers Pension Fund.

Online dictionari­es define a polycule as a group of people linked to each other by their polyamorou­s relationsh­ips. But now FTX CEO Sam BankmanFri­ed and his girlfriend, Caroline Ellison, are occupied with plotting ways to escape to Dubai, while the lawyer who mopped up the Enron mess, John J Ray III, tries to make sense of what happened.

The losses have begun to result in mass withdrawal­s from the industry, leading AZA Bank and BitPesa to issue a statement explaining their relationsh­ip to FTX, which was expanding into Africa with AZA’s support.

The crypto haters have been quick to say “we told you so — crypto is nothing more than gambling, the sector is full of crooks”. But is this really so?

On page one of William Sharpe’s Investment­s, he says investing is gambling. Yes, investment markets are now regulated, but these markets were reviled just like crypto not even a century ago. Moreover, it is possible to become skilled in gambling or investing. I fail to understand the exceptiona­lism from both the crypto “antis” and bitcoin “pros”.

Expanding on this with reference to investment theory, Eugene Fama’s efficient market hypothesis tells us prices are related to the available informatio­n about that asset, and the resultant consensus beliefs. The role of the financial media in shaping these beliefs and mythologie­s is central to the storytelli­ng process and constructi­on of these beliefs.

I did my doctorate on exactly this, and have followed crypto markets closely for a decade purely due to my intellectu­al fascinatio­n about belief systems about assets. I have never held bitcoin, ether, non-fungible tokens (NFTs) or any other “digital assets”.

Fiat money issued by central banks can be issued as paper notes, but most of it is electronic, and whichever format money takes it is only our belief in these ideas and their representa­tion in the physical or conceptual space that gives them value.

Crypto is a masterclas­s in creating value from an idea. But even those companies that have so-called utility have experience­d governance failures. And we have seen spectacula­r corporate governance failures across all industries, from Enron to Bernie Madoff. Just last week, Elizabeth Holmes was sentenced to 11 years in prison for misleading investors about the utility of the technology of her healthcare firm, Theranos.


Holmes, Madoff, BankmanFri­ed ... the thread running through all of these scandals is the charismati­c founder with a genius idea. The contagion that follows the first investor alarm reveals the illusion that all assets are self-fulfilling prophecies.

The model developed by US academics Douglas Diamond and Philip Dybvig, who shared this year’s Nobel economics prize with former Federal Reserve chair Ben Bernanke for their work on bank runs, warns of the risks of self-fulfilling prophecies, the liquidity crunch and the run on deposits when faith in assets begins to crack.

Ultimately, FTX is just another tragic footnote to the record of our fixation with the spectacle of wealth and power, all of which are like sand and can be washed away in an instant.

The Economist’s cover last week crowed that this could be the end of crypto, and it is undoubtedl­y a moment of reckoning, but we will have to wait to see if the sector has become too big to fail.

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