The great FTX blow up

This is not a post about I told you so.

It is about trying to understand how easily we can get carried away with mimetic desire and FOMO.

About three years ago, someone asked me what I had thought about crypto-currency. I knew very little about it. I think I still know very little about it today. After all, this is an asset class that only came into more prominent existence over the last decade.

Do I think an investment into crypto or bitcoin take off? I do not know. But perhaps, more important than what I think is actually what others think of it. And that is exactly what brought FTX down.

Cryptocurrency, bitcoin, NFT, and all things in the metaverse, work the same way as stocks, bonds and paper money. The case with FTX is simply a bank run in the world of cryptocurrency.

People who held these assets just lost faith in them.

This is the unavoidable reality: Most of our material possessions are only as valuable as how others think it to be. That's all there is to it.

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FTX was at one point of time the second largest crypto-exchange in the world. So why doesn't a large financial firm like this get the same bailout treatment enjoyed by Bear Stearns, Wells Fargo or AIG?

Similar to the downfall of Credit Suisse, why aren't the middle eastern investors stepping in to evaluate and put in more capital?

The same group of people who decided in 2008 that Lehman Brothers should be taken out to the streets and shot in the head are basically the similar set of people who decide whether FTX should be saved.

It's a systemic risk.

If the fallout doesn't result in jeopardizing the greater good or threaten social-economic stability, we can afford for a few investors to lose money.

But see, no one wants to hold that hot potato.

When people say that they want to “evaluate the situation"[1] before taking action, they are not waiting for the favourable outcome of a due diligence exercise.

What they really want to know is whether there is sufficient faith in the market to ensure that the assets in the business can be monetised at some point of time in the future.

This brings forth another argument: All virtual and digital assets are valuable only to the extent that they can be monetised.

If bitcoin and cryptocurrencies are truly valuable as what their advocates say they are, shouldn't these be freely used in our daily transactions?

If your company tomorrow decides that all employees shall be paid in ethereum or some other form of cryptocurrency, would you be amenable?

And how does this compare to employees who are willing to accept discounted shares or stock options as an alternative form of wages?

At the very core of it, it is simply because we all believe that, for better or worse, shares of a company (privately held or listed) can be readily sold in the future. There are even platforms today that facilitate the monetization of employee share options in privately held start ups.

And so, digital assets, such as like cryptocurrencies, are essentially a derivative product. Just as the value of a share in a company is fundamentally derived from its intrinsic value, based on the future performance of its underlying business. But perhaps more importantly, shares in a business can be exchanged for cash.

Cash, be it the dollar, euro, yen or renminbi, is fundamentally a derivative product. The value of cash is based on the fact that people can use it to exchange for goods and services, knowing full well that the counter-party on the other end of the table can use that money to do the same.

Notwithstanding the multitude of currencies, the foreign exchange market is also a tried and tested system that so far works with traders all over the world. This is a USD 7 trillion market per day that works 24-7. Just loosely applying a 0.1% spread on this gives a USD 2.6 trillion annual wallet share - just on the FX business alone.

Given the above, it is easy to see why there is so much resistance towards changing the status quo. The biggest stakeholders in the room are the institutions that hold the most amounts of cash.

Maybe the 'new generation' of investors who have experienced the devaluation of cash due to the ridiculous printing of money into the system, want some credibility restored to the markets. I can also understand that inflation (and hyper-inflation in certain countries) eroding the savings of many individuals also partially makes the case for cryptocurrencies. But ironically, it also seems that a huge part of getting crypto adopted into the mainstream has gotten carried away by the greed of a few individuals.

It's not that I don't believe in digital assets. Maybe it is just that I don't want it badly enough.

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[1] In an email, OKX commented on the FTX opportunity, saying that “at this point we are just evaluating the situation before we consider any participation from our side,”https://blockworks.co/news/ftx-bailout-candidate-list-is-shrinking-by-the-hour/