For someone that only dabbles in crypto - what are the reasons people choose to use high-risk exchanges like FTX, and buy even higher risk "sh*t coins" on them? Especially the exchange-created-and-owned coins - of which I have yet to see one actually do what it promised.
Is Coinbase just not cool anymore, or is there some advantage to using exchanges like FTX until they go belly-up?
- FTX had much bigger trading volume (which might get people better fills)
- FTX had lower fees than Coinbase
- FTX offered a lot more coins to trade than Coinbase
- FTX (like many others, but not so much Coinbase) were giving large sign up bonuses, and advertising like crazy. (Finance YouTubers like Graham Stephan, Meet Kevin, Jeremy Financial Education, Minority Mindset, etc. are taking some heat for their paid promotions they did for FTX.)
- FTX offered options on some cryptos, like Bitcoin. This seems to be kind of rare.
- FTX offered leverage (like most of the other big exchanges, but not Coinbase)
- Since FTX also set up a separate FTX.US entity, it gave the perception that it had all the same US regulation protections as Coinbase. And since FTX was much bigger than Coinbase, it gave the perception that FTX was more likely to be more solvent than Coinbase. A month ago, I suspect if you asked most crypto people which exchange was more likely to go under first, they would have all said Coinbase.
This whole industry looks very unhealthy. The large exchanges that most people use like Binance and FTX have books and operations shrouded in mystery, so nobody really knows how solvent any of these things were. FTX said they were not lending out coins (and by law, as an exchange, they are supposed to have all assets), but only after a leak revealed by Coindesk, did the public find out something was really wrong. Without that leak, FTX would still be doing business as usual.
Meanwhile, Coinbase which is a publicly traded company in the US which is many magnitudes more transparent with their books (because they are required to be), can't seem to make a profit.
The overall implication is that regular exchanges that just make money from fees are in an unsustainable business model. And all the other exchanges that are making a profit, might be doing all the shady things that FTX was caught doing.
> FTX (like many others, but not so much Coinbase) were giving large sign up bonuses, and advertising like crazy.
Any company that sponsors more than one Formula 1 team is high on my "probably not a good thing for humans" list. The shit that has taken the place of tabacco advertising is just automatically suspicious.
Coinbase doesn't offer the leverage that offshore exchanges do. FTX was popular originally because they offered 100x leverage, later reduced to a maximum of 20x. They also had better spreads, probably because they were making their own market and had inside info. I think that people generally didn't expect FTX to be high risk. It's got a profitable business, all they had to do was not embezzle customer funds.
> Coinbase doesn't offer the leverage that offshore exchanges do. FTX was popular originally because they offered 100x leverage
Sounds like a red alarm for me. There's probably a good reason domestic exchanges don't let you extend out that far... particularly on extremely volatile securities.
Definitely alarming, but mostly for counterparty risk. If the exchange is just a middle man then they can't lose as long as they're able to liquidate toxic positions before they're negative. Turns out FTX was also the market maker through alameda and because of that was hesitant to liquidate toxic positions, leading to the embezzlement to try to save alameda and the current crisis.
market making in a volatile instrument is not easy. when all instruments are .96 correlated it makes it harder to balance your book. the good thing is that its retail flow but just because its retail doesnt mean you won't lose money when the market jumps in one direction or another.
That kind of gets into philosophy of what governments are for: should they protect people who make bad decisions from themselves? Does the answer change if people are actively marketing the bad decision? Does the attempt at doing so suggest they're actively trying to keep poor people from getting rich?
(This comment is an explanation of a viewpoint, and not an endorsement.)
I see it as the government should get out of the way of those who know what they are doing and the risks.
The problem is, these exchanges do not make you go through the same "vetting" processes traditional securities brokers/exchanges do before you can leverage up to your eye balls and lose everything.
They also go out of their way to make it "fun" to trade crypto - gamification at it's best - which reduces/removes the traditional apprehension of getting in way above your abilities.
We can liken a lot of these exchanges to gambling more than investing.
That is to say, an 18 year old with $500 in total assets shouldn't be eligible to leverage 20x or more. That's just a life-changing problem waiting to happen.
In the absence of a government, people would respond to fraud using violence. The government protects embezzlers and fraudsters from the violence of those they have cheated, but in turn creates non-violent consequences for such behaviors.
All of these places were offering insane APRs as well as other perks for staking your coins. So speculators park real money, expecting that they'll be smart enough to see the crash coming and slurping up that sweet return in the meantime.
And it's glaringly obvious everyone offering these outsized returns is literally just pulling a ponzi.
FTX’s lending product was (theoretically) peer-to-peer, the rates were driven by actual borrow demand from other people.
FTX was just a tremendously better derivatives exchange than everybody else when it was launched. To this day only Okex of the major exchanges has a competitive margin system imo. Continuous pnl realization and cleaner perpetual models are icing on the cake.
Theft of user funds aside, SBF likely knows more about derivatives and trading them than most exchange operators and it shows in the design of the exchange.
"... the rates were driven by actual borrow demand from other people..."
Or, alternatively, the rates were artificially inflated by a ponzi operator interested in getting more and more people joining the pyramid. Just like Coinbase, FTX was, with 99% certainty, not profitable. Of course, the creators of the pyramid WILL profit and take resources for themselves to buy things like, let's say, a 10% stake on Robinhood, or invest in many real state properties around the world, a la Do Kwon. People are just gullible, anyone who believed on those "crypto earn" vehycles, paying 5 to 10 times the market interest rates, is probably the same people that would buy magic beans from a random dude in Times Square.
"FTX’s lending product was (theoretically) peer-to-peer"
that's the point of theoretically?
Their spot lending system didn't come out until well after they had cemented their spot as a top exchange, and if you look at the rates anytime in the last year they were well under market rate - like ~1-2% rates for most major products.
It might have been part of the scam, but this looks much more like pretty bog standard "let's go trade our users funds away".
Their little friend BlockFi was offering 8% at the end of 2021 if I'm not mistaken. That was the moment I got out of the crypto space for good, the ponzi mask was all but gone at that point. The fact that FTX bought BlockFi just cemented their ponzi friendly, to say the least, business model.
Ah yeah, I was thinking about the ftx on-exchange spot margin system.
You're definitely right that the retail lending aspects were generally somewhat scammy. I suspect those rates made more sense pre-2021 when it was very expensive and hard for crypto firms to borrow capital, but offering 8% fixed on dollars in any recent time was a loss leader at best.
It's sadly looking more like sbf was buying up these firms to do exactly as you said and grab capital to fill the whole, and hide their own liabilities to said firms.
I am convinced that him not believing in it, getting paid a boatload to do a commercial stating he doesn't believe in it, then it failing is definitely the plot for a Curb Your Enthusiasm episode.
You would be surprised how easy it is for people to get sucked into a crypto bubble vortex that makes you feel like you're missing out big time by not being invested in crypto.
I was pretty heavily involved in the personal finance community on Twitter and there's two camps.
1) VTSAX and chill (basically dump money into an ETF and forget about it)
2) Moar passive income by side hustles and crypto
The latter became more and more common and ultimately drowned out the former. I believe it's because the market was doing so well that folks' risk meter just wasn't registering.
Probably the same reason why people choose to get into MLMs.
> well that folks' risk meter just wasn't registering.
That's because they were probably still in school back in 2008. I remember the days of late October 2008 like it was yesterday, and back then I was a no-name computer programmer working for an independent mortgage broker, not a big finance schmuck from Wall Street.
That one is easy... FOMO - Fear Of Missing Out. People see the 10,000%+ returns extreme early adopters obtained and think they need to get in before the good-getting is done. Most of the time they're wrong and just throwing money into dark pits...
"Gamified" trading apps like Robin Hood have made it all too easy to feel much lower risk that it is in reality though.
For the rest, crypto can be part of a diversified investment strategy. Not all crypto is outright scams... but you do need to be able to handle the volatility.
I bought some (emphasis on the some, sadly) Bitcoin when it was $80. I’ll never get a return like that in my life. Other people are chasing that dragon. Unfortunately it leads them to burgeoning “shitcoins.”
It’s all fine if you view it like the lottery and put “fun money” into it. It’s not fine if it’s your primary investment vehicle. For what it’s worth I still think Bitcoin and Ethereum will be fine and bounce back up, eventually.
“they abolished the fundamental distinctions between investment and speculation… they ignored the price of a stock in determining whether or not it was a desirable purchase.”
Benjamin Graham & David L. Dodd, Security Analysis, 1934
Where is he a commie? EA has insanely famous liberals like Steven Pinker on their side. If that’s what you’re trying to get at. Otherwise I’m puzzled since his main focus is EA.
I know this gets into politics a bit. But when it comes to forming my worldview about these things there is usually the rational side then there is the gut instinct.
The rational side told me (and the best investors in the world) these guys were the smart people in the room, the wont do anything stupid.
Then you look at SBF: he is a major democratic donor, he supports UBI, his underlying driver is to make money to give it away, he is a vegan, he hangs around with clintons etc.
I believe ever since the bloody collapse of communism, the modern descendants of that ideology never label them selves as communists. They use different words to achieve the same end: stakeholder capitalism, effective altruism, UBI etc..
Its a huge leap and to clarify I'm not saying they are closeted or anything. I guess what I'm saying is we are living in a very weird world where nothing is as its seems.
Therefore its more important than ever to rely on ones gut instinct about a person. Its more important than ever to not disregard signals like a high iq person who is also a vegan or supports UBI.
I know this is a controversial opinion but its my 2 cents. I think the corruption of the intellect is the most fatal of threats.
The kind of damage avg people can do is often limited and can be seen from a mile away but these high iq people with a god complex can destroy entire civilisations with their good intentions. SBF is a good example, next is vitalik and Proof Of Stake ethereurm (IMO)..
I don’t think SBF really cares about UBI. That’s pretty clear via his actions.
The problem with trying to put EA alongside post communist thinking is that actually identifying socialists and communists have huge issues with EA and can’t see how EA is the same as their ideology.
Being a capitalist is one of the biggest issues. Completely supporting the current structure of society and being able to selfishly take advantage of it by making the most money possible [and donating some of it] is not close to communist ideals. It’s better than being someone who is just selfish, but EA still allows one to selfishly take advantage of capitalism and privilege without issue. In the name of supposed altruism. Just the name is troublesome. Seeing oneself as so good.
Then going as far as celebrating this selfish behavior and making that a core part of the ideology. As well as fawning over overly rich classist and uber wealthy millionaires and billionaires who donate to one of the two major party presidents is not post-communist ideology.
To give some credit to EA, actual socialists and communists are be able to view EA people as allies at times. Not more than that though.
Is Coinbase just not cool anymore, or is there some advantage to using exchanges like FTX until they go belly-up?