Crypto may well transform the world, but it became a problem when many smart people governing these institutions, such as Temasek, SoftBank Group Corp., and Tiger Global, turned a blind eye to the red flags. The bankruptcy and collapse of FTX have ended the bull market’s spell of willing suspension of disbelief.
FTX’s problems began when the price of its native FTT token dropped, and many users withdrew their cryptocurrency. But even so, it revealed a vast ecosystem of fantasy and deception.
The correct targets, with Sam Bankman-Fried at the helm, could be hedge funds, venture capital firms, and other professional investors, as well as the world’s leading investment firms, which showered SBF with funds.
Despite their lauded investing expertise, these firms all missed numerous red flags, such as Bankman-Fried’s unprofessionalism when he was secretly playing a videogame during a Zoom interview to raise money from Sequoia Capital.
Or when Brett Harrison, then-president of FTX’s US arm, tweeted that it held customers’ assets in FDIC-insured bank accounts. Mr. Harrison apologized and deleted the tweets after the regulator labeled them “false and misleading.”
SBF mused on the “Odd Lots” podcast, where he didn’t even bother to clarify things about whether a large part of his business might be a Ponzi scheme and instead dished on how VCs choose investments.
“You get a bizarre f—ing process that does not look like the paragon of efficient markets that you might expect. [Venture capitalists] see what all their friends are chattering about, and their friends keep talking about this company…and they start FOMOing [feeling the fear of missing out] and then [they] find a way to get into that…. And all the while, you’re like, ‘How do we justify: Is this a good investment? Like, all the models are made up…. You’re valuing [companies] off a model built by a person who owns the thing that’s being sold. So, like, of course, the number’s going to go up between now and 2025, right? It’s going to go up an arbitrary amount. And you can justify anything.”
The question is, how did everyone miss the red flags?
And now, the domino effect of this is the destruction of billions of dollars of wealth and even more skepticism for cryptocurrencies at a time when the industry could use a vote of confidence.
As Minneapolis Fed President Neel Kashkari stated, crypto, in general, is “nonsense,” calling into question some of the benefits most frequently cited by crypto supporters.
“This isn’t a case of 1 fraudulent company in a serious industry,” Kashkari said on Twitter, commenting on an article about how investors fell for FTX. “Entire notion of crypto is nonsense. Not useful 4 payments. No inflation hedge. No scarcity. No taxing authority. Just a tool of speculation & greater fools.”
And billionaire Charlie Munger blasted crypto as a “demented” enterprise riddled with “fraud” and delusion,” referring to digital currencies as a “very, very bad thing” ripe for exploitation by bad actors.
