astralcodexten.substack.com
I made this a top level post because I think people here might want to discuss it but you can remove it if it doesn't meet your standards.
Edit: removed my opinion of Scott from the body
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But FTX's business made sense, they were a crypto exchange that made money off of crypto trading, why would they go bankrupt without fraud?
Crypto exchanges in general can be perfectly legitimate (uh, modulo legal compliance), and maybe even simple. You trade one currency for another, take a small cut, and run your business's operating expenses from that cut. You can add some complexities, like shifting where your assets are based on expected future rates, or the weird self-minted stablecoin, or reasonable loans, or what have you, and it's not automatically going to collapse. But there are variants of that business that don't make sense.
FTX specially has a problem: that "small cut". Crypto exchanges aren't easy, between legal compliance, potential risk, the difficulty of safe storage of assets, and the complex question of reputation. But they're also not monopolies, by their very nature. There's an upper limit to how much can be extracted from a given amount of assets, before you either get competition or your customers go broke. Not quite the efficient market hypothesis, but that there's a lot more one-dollar bills than hundred-dollar bills laying on the sidewalk. And while FTX's bankroll was big, its publicly-known expenditures were tremendous even for its size, often with large upkeep costs and likely hidden costs.
FTX claimed one billion USD revenue for 2021, based off... depending on how you measure it, 300-700 billion USD-equivalent in trades. That's high as the current market goes, but not unreasonable, not hugely surprising for a publicly reported number. (there's some flaws in this 'lump of
laborcash' fallacy sense, since a lot of those USD-equivalent trades are in weakly or unconvertable coins, but they're not-obvious enough that I can understand people not seeing them without a deeper examination.) That would make an estimated two billion USD expenditures as double revenue the year before, and the /160 million USD funding already marked for grants by FTX Future Fund would be /6% of revenue. Note: that's revenue, not income. Either of these individually would be major warning signs.There are rare cases where this level of discrepancy can make sense -- if the expenditures are one-offs, or if they're an important part of getting an very near rapid growth state, or both, or where the company is in early stages of development with little total income compared to its potential. But FTX was talking about scaling many of these costs up (to 1 billion USD in the Future Fund!). And even if FTX could keep its revenue-per-trade constant, a healthy income/revenue ratio would take something like 1.2-trillion to 2.8-trillion USD in crypto trades. Even if you think this is possible, or even more likely than not, it's at least something that can go tango uniform.
In a perfect world, a truly ethical company have these sort of problems and a proclaimed reserve requirement would fold without bankruptcy, but in practice there's a ton of things where an ethical company might not even have realized exactly the day they'd gone into the red (though it'd probably not be eight or twenty billion dollars late, either, so that's definitely better).
((This isn't specific to crypto or to charity; in the business world, nutjobs willing to sink a lot of someone else's money that they'll 'make up with scale' are more common than anyone needs.))
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