I’d be absolutely shocked if more than 25% can be recovered. They spent multi-billions on venture investments that were not just high-risk due to their early stage nature but also inextricably linked to ftx by way of the cryptocurrency market as a whole and thus about as undiversified as humanly possible. There’s a few of their investments that have value and value could be recovered through sales but almost all of them are illiquid and have seen valuations collapse.
Also consider that a lot of the players involved are overseas and anonymous* which makes it much more difficult to clawback relative to people onshore (like in the case of madoff).
People have already looked into this, and the claims on FTX' debt were valued at 5c on the dollar. Alameda has burned through billions, and most of what was left were illiquid shitcoins and other worthless junk. Madoff, at least, was dealing with real assets.
I'd be surprised if you could claw back actual trades on an open arms-length market assuming that's what the FTX exchange was. In Madoff's case, there were no trades at all. Madoff collected the money from his investors, generated fake statements showing inflated fake balances and profitable trades (that never actually occurred) and then selectively doled out limited cash redemptions until everyone demanded their money back at once and the whole thing came crashing down. In SBF's case, it looks like SBF took money from his customers, and then bought or sold crypto in arms-length transactions on an open exchange. If that's the case it's hard to see how they can get the money back from the other side of the trades where his counterparties were buying or selling on the market in good faith. I think the only hope is that if they can somehow get the assets from his affiliated entities and/or reclaim assets that SBF and/or his companies still have control over whether on the block chain or elsewhere.
Matt Levine has speculated that a bunch of the money was lost via market-making with insufficient controls (margin enforcement etc.). For example, as reported by the Financial Times (via Levine's Dec. 5 newsletter, "Crypto had a Credit Bubble"):
[begin quote]
In April 2021, a crypto token called MobileCoin — used for payments in the privacy-focused messaging app Signal — suddenly spiked in price from about $6 to almost $70, before crashing back down again almost as quickly.
The wild moves came after a trader on FTX had built an unusually large position in the little-known token. Two people familiar with the matter said that when the price rose, the trader used the position to borrow against it on FTX, potentially a scheme to extract dollars from the exchange.
Alameda was forced to step in and assume the trader’s position to protect FTX. The trading company’s loss on this deal was at least in the hundreds of millions of dollars, the people said, and as high as $1bn, according to one of the people, wiping out a large share of Alameda’s 2021 trading profits.
[end quote]
...So whomever was on the other side of positions like that. Savvy outsider or well-informed insider? Who knows! Maybe it can be reclaimed, or maybe it's long dispersed down a chain of dozens of crypto exchanges, tumblers, offshore fiat accounts, and so forth. I expect we'll learn a lot more over the next few weeks as the federal case ramps up and the bankruptcy executor delivers more findings.
> The wild moves came after a trader on FTX had built an unusually large position in the little-known token. Two people familiar with the matter said that when the price rose, the trader used the position to borrow against it on FTX, potentially a scheme to extract dollars from the exchange.
Makes calling regular currency "fiat" super ironic:
> offshore fiat accounts
It looks like at the end of the day, cryptocurrency is something people "fiat" out of thin air, "fair" algorithms and computers and systems be damned.
There was never "billions" of deposits in the first place. Someone mints a coin and pays FTX 5 million to list it. Then that person pays influencers and invests themselves to get the price of the coin to go up. Now on paper that coin is worth "100 million". But in reality only 8 million dollars has been spent.
I don't pretend to fully understand markets but movement on BTC, etc with all of these developments is just further proof to me there is no connection between any of these coins and reality.
As another example, when Ethereum successfully moved to proof of stake without a hitch (an ultimately impressive and challenging development) the price actually went down.
Lots of events are already "priced in" before they happen. That is, investors have anticipated the upcoming event (eg Ethereum upgrade) and the stock/token price has already moved accordingly.
It's not clear to me that the collapse of corrupt crypto exchanges should make the price of bitcoin drop.
What is the mechanism exactly? It's not like FTX holds a shitload of bitcoin and now suddenly they have to sell it all, driving down the price.
Is the mechanism just some kind of psychological thing, where a centralized criminal enterprise is associated with "crypto", even though it was mostly esoteric shit like FTT and MobileCoin and not bitcoin, but since bitcoin is also "crypto" then people who hold it would sell it because FTX folded?
It's like saying the collapse of Bear Stearns and Lehman Brothers should somehow make US dollars worth less.
1) I would expect a fairly large portion of people are selling their cryptocurrencies on exchanges and wiring out in fiat instead of undertaking the relatively technically challenging process of moving them on chain to somewhere/something else. While we can see on chain activity acknowledged numbers citing "withdrawals" from exchanges don't provide specifics. I personally know several people who have just said "Yeah turns out the entire thing is a scam, I don't trust anything and I'll just cut my losses and be done with it all".
2) Bear Stearns and Lehman Brothers were not a total loss that resulted in the founder being arrested and charged with multiple counts of fraud within weeks with multiple reports from the guy who handled the failure of Enron (John J Ray) expressing public incredulity on just how crazy the whole thing was. Failed crypto institutions aren't receiving TARP loans or being absorbed by other institutions. I'm not saying what caused the 2008 financial crisis wasn't criminal but as we all know no one went to jail over it, which if nothing else highlights the differences in terms of public opinion and treatment by regulators.
3) Any comparison between crypto (individual coin or the entire ecosystem) and the world's reserve currency backed by the world's largest economy is dubious at best. The complete collapse of a couple of even the largest banks barely puts a dent in USD in terms of circulating supply, activity, etc. USD has this status because it's backed by what is considered to be the most financially stable institution in the world - the United States. In the minds of many if crypto is "backed" by anything it's people like SBF, the VCs this kid was able to hoodwink, etc.
4) The collapse of FTX has had an incredible ripple effect that has caused at least a dozen other entities (that I've tracked) within crypto to fail.
5) Over the past few weeks there has been increased focus and media attention on the shadiness of Binance, Tether, and virtually every other crypto exchange/institution up to and including Coinbase.
This is all reflected in a survey from a couple of weeks ago that indicates just 8% of Americans have a positive view of cryptocurrencies[0]. I'm sure if they ran that survey again now that number would be even lower.
So yeah, I would expect crypto prices to move downward significantly.
Okay, then to summarize, you're saying there's lots of shady stuff with centralized exchanges, and more of them could go bankrupt, and people with fiat and shitcoins and bitcoin on deposit there could lose it.
There's a run on the bank, people want out, and the easiest way to get out is to sell your shitcoins and your bitcoin, and wire transfer dollars to your bank account.
With all the selling of bitcoin to raise cash, the price of bitcoin must drop.
And yet the bitcoin price is up six percent in the last seven days, so there must be some other mechanism at work.
More or less - exactly but like I said in my original post, almost nothing in this space makes sense to me. I'm trying to decide if there's something I'm missing (happens a lot) or like Theranos, mortgages and real estate in 2006, WeWork, etc (which I always knew were off) it's all being propped up by who/what knows what and it's just a matter of time before it crashes and burns.
I moved to Florida in 2006 and have distinct memories of meeting sleazy and disgusting mortgage brokers from Countrywide, real estate agents, etc flaunting their fast cash while thinking all along "this doesn't seem right". I basically watched "The Big Short" in realtime... Same goes for Theranos (it's been 10 years, where is your product?) and WeWork (wait aren't you just leasing out office space?).
Crypto is 14 years in and absent a few extremely rare use cases like fleeing a dictatorship, dealing with currency destabilization in developing nations, etc no one uses it for anything other than trading on exchanges, which at this point seems like Russian roulette.
It's as though the last remaining "widespread" use case for crypto has now almost been effectively wiped out.
A lot of it is probably stolen. A lot went into thousands of worthless altcoins and their devs got rich. Another big portion is probably advertising. They spent big on YouTube influencers. Basically a lot of people got rich and a lot more people got screwed.
Altcoin devs are not paid well; Bitcoin devs make entirely normal SWE salaries according to public information, and I can't imagine DogeCoin or whatever is any better. All the big money is in marketing, since that's what creates the value.
If we limit ourselves to depositor funds -- who morally ought to be superior creditors to investors-- I wouldn't be shocked if the recovery percentage was quite a bit larger than that.
One thing that made 90% recoveries of Madoff possible were that they first backed out all the fake gains that the customers thought they had but never actually had. This will be harder to do with FTX, but I expect that once all the bogus margin trading on fake assets is backed out we'll find that the losses were far less substantial than the numbers being thrown around.
I think that might have been true a year ago but at the time of FTX’s collapse, most market participants were underwater, especially the laypeople. The amount of money in the crypto market is definitely not anywhere near the supposed market cap, but if we look at USDC’s 50bn we can say with reasonable confidence that there’s at least 50bn of USD in the crypto market. If FTX was 10% of the market then 5 billion seems very plausible as a lower bound for the amount of real money value on the exchange (before backing out paper gains). That’s 5bn after people have lost >50% in the last year.
There was something like 6bn withdrawn in the days before the collapse and if clawbacks could get most of it, we would at least see 0.40 on the dollar recovered… but I am very very skeptical about that happening, given FTX international was for people outside of US jurisdiction — not impossible to recover but much more difficult.
I hope you’re right that it turns out that there’s only, say, 2bn of real money missing, and most people can be made mostly whole… but given the bloodbath of the last year, I fear that there’s probably more real money gone now, rather than less. A lot of people would be absolutely gleeful if you could somehow rollback the last year of trades on FTX.
My wild ass guesstimate before learning about the mobilecoin (the signal integrated crypto) apparent fraud would have been 1-2 billion lost, so I guess I should update that to 3 billion lost-- though there is probably reasonable odds on recovering the mobilecoin funds since there were probably only a few people who could have had access to enough mobilecoin to hit a billion worth even at $67/coin.
It's quite possible that I'm just being bubbled/hopeful. I don't personally know anyone who lost money in FTX even though I know a lot of cryptocurrency people and I thought it was obviously sketchy from when I first heard of it, so these are probably influencing my perspective on how big it actually was.
> If FTX was 10% of the market
I'm dubious about 10%. We know in hindsight that FTX was faking their size in multiple respects (including e.g. faking their valuation by MTMing illiquid coins that they created and never circulated) -- probably every claim we've seen about their size based on their own figures was just lies.
I'd imagine there's a huge problem in that FTX did not declare bankruptcy until the vast majority of their liquid assets had been removed by the bank run. If they had declared bankruptcy before the run, most people might have gotten out with a 50% haircut.
Instead, after the run, those left over will get nothing and those who got out will got 100%.
I assume they're referring to the over a billion people living in China. Whether China is a place you'd want to live depends entirely on your personal cirumstances, of course.
Bankruptcy law allows for the clawback of preferential transfers. Any transfers within 90 days of bankruptcy are assumed to be preferential. Or transfers for a longer time to insiders. And that's without fraud. With fraud they can go back farther. Like, Madoff's investors who got out in time had to turn over a lot of cash.
But this is nothing like the Madoff situation. So you're saying if I withdraw my rightful funds 80 days before a company goes bankrupt, and I use those funds to pay for consumable goods, and consume those goods, that those funds can be clawed back and I am now in debt? That doesn't sound right at all.
I also just looked and a preferential transfer would be when the company that goes bankrupt deliberately pays off some debs but not others, hence giving some creditors preference. The notion does not seem to extend to individuals otherwise regularly conducting business with the company. That can't be resolved the way you suggested. Customers who ran FTX will not be required to return their funds so that someone can distribute some of their money to FTX's creditors, or even so that things can be "fairly" distributed across all customers...
Not only can it happen like that, it can happen like that even if there is no fraud. Paying off some customers you owe money to would be giving those creditors preference, I don't see how else you could interpret it.
Heck, FTX went out of its way to only allow Bahamian citizens to withdraw money at the end, imagining that would be the jury pool deciding their fate soon.
I don't believe it would even be possible to "claw back" consumed goods, is my point. If you can link to some examples of ordinary people getting money clawed back because they withdrew it form a financial institution prior to bankruptcy, please do, because I simply don't understand how that's possible. The money is gone.
Also consider that a lot of the players involved are overseas and anonymous* which makes it much more difficult to clawback relative to people onshore (like in the case of madoff).