Here’s a hot take on the FTX scandal that not everyone will like: Sam Bankman-Fried did us all a favor.
You heard me right. The t-shirt-wearing, Corolla-driving, bushy-haired millennial messiah who will forever be known simply as “SBF” may have helped all of us invested in the crypto industry. That’s probably a tough pill to swallow for many people given the chaos of the past few months, but I believe he’s unwittingly given us a few reminders of what we sometimes forget when excitement turns into hysteria in the finance world: A reminder of how there’s always people trying to game the system in the face of a transformative technological advance. A reminder that cryptocurrency regulation remains something the industry absolutely needs to protect consumers and companies alike. And a reminder most of all – at least to me – that Bitcoin is still the gold standard in the industry to which everything else will always be compared.
Hear me out: We’ve all heard the stories of how SBF defrauded investors, venture capital firms, and some of the smartest minds in the industry in a variety of ways, the most egregious being how he used billions of customer dollars from FTX to prop up his crypto-trading firm, Alameda Research. I don’t need to rehash the whole story for you. Still, the layers of high-risk leverage-playing and shady to nonexistent bookkeeping at FTX almost make the downfalls of lesser firms like Celsius and Voyager (a firm SBF bailed out last summer!) seem minor in comparison. The deceit uncovered in the recent investigation surrounding FTX’s absent oversight is truly astounding. I’m blown away. When I go to raise capital for my company, I suffer through a staggering amount of due diligence. SBF, it appears, was able to get gigantic VC funds to put billions of dollars into his firms despite what now appears to have been zero reporting, zero research, zero accountability. It’s as if supposedly smart and seasoned investors all looked at one another, assuming the other person had done his homework, when in fact no one had. How does that even happen?
Still, the kind of madness SBF’s wheeling and dealing embodies is hardly something new in the financial industry. This kind of reckless greed has been happening for decades. We all lived through the Lehman Brothers disaster in 2008. Many of us remember the insanity of the go-go dot-com era in the nineties. How about Charles Keating and the savings-and-loan scandals of the 1980s? The Nifty 50 stocks in the 1970s? I could go on. Someone is always looking to bend (or break) the rules. Here’s a classic: The salad-oil scandal of the 1960s. When Allied Crude Vegetable Oil Company took bank loans from companies like American Express and Bank of America using cargo ships supposedly full of millions of dollars of salad oil as collateral. That’s right – actual tankers full of the slippery commodity. Inspectors would come in to certify the value of the oil in any ship, and then, while the inspectors got wined and dined, company workers would move the oil from the inspected ship to an uninspected one, adding to their alleged reserves. What’s worse, most of the tankers were full of water, with just a layer of oil floating on top. What a scam.
Still, my feeling is that the collapse of FTX is exactly the kind of massive reset the cryptocurrency industry needed to temper the euphoria that had been bubbling up the last couple of years. Think of it as a cleansing, a massive flushing of the toilet. Wash away the speculators. Warren Buffett often talks about too many people at the punch bowl, trying to get in on the easy money. Add SBF to the list.
Of course, FTX’s collapse certainly wasn’t exactly the PR message the industry needed given the “crypto winter” we’ve been in for a hot minute. After all, a little over a year ago, in November 2021, the market cap of the entire cryptocurrency industry was sitting around $3 trillion. Today, that number is down to under $1 trillion. That’s not a blip or a downturn or even a chilly reckoning. That’s a clear-cutting of the industry. A lot of people are hurting. A lot of companies didn’t or won’t survive. I get it. I’ve had a lot of sleepless nights myself over the last few months.
One thing is clear about the collapse of FTX and SBF: It has accelerated the call for greater regulation of cryptocurrency. Already you can see the politicians and pundits rallying around the idea. In early January, Republican lawmakers in the House of Representatives formed a new subcommittee to develop rules and policy on crypto going forward. Great. My hope is that they do it right, balancing proper regulation with the opportunity for growth. We can’t risk overregulating to the point where people won’t be able to take risks or be creative. No one is asking my opinion, but I think it should be regulated by the Commodities Futures Trading Commission since, again, it’s more of a commodity than a traditional security. Chairmen Gensler and Powell? I’m ready to chat when you are.
The fact is I don’t want the government to tell me what I can own. I want it to simply establish rules to protect my assets from swindlers like SBF. I want the government to set up rules that prevent companies from lending my crypto out without my permission. I want institutions that hold crypto to have to report how much they own and what they do with it, lending it out or not. Regulation, after all, doesn’t have to be a bad thing. Sometimes we need rules. I remember a time years ago when people threw their garbage out the window of their car. It was a normal thing. The freeways were littered with trash. You finished your Coke from McDonald’s and then tossed the cup. Imagine that. Then the government stepped in to create campaigns to discourage littering. They started handing out fines. Pretty soon, people’s behavior changed. Who knew? Regulation works.
Above all, though, the collapse of FTX just reaffirmed something I already knew: Bitcoin remains the most powerful and important digital currency, the North Star of the crypto universe.
Remember the fundamentals: There’s a limited amount of Bitcoin tokens – 21 million to be exact – so it’s not like someone can keep printing them. Unlike, say, with Dogecoin or FTT, SBF’s token through FTX (or even the U.S. dollar, for that matter), you can’t simply keep the presses running to make more to sell to consumers. It’s a limited digital asset. As the saying goes about land, they aren’t making any more of it.
What’s more, I’ll beat the drum again about the fact that Bitcoin is decentralized, meaning no megalomaniacal rich guy is pulling the strings or making secret decisions. Bitcoin transactions occur on a global network of ledgers, which are secure, traceable, and completely transparent. Companies may be hacked, but the technology upon which Bitcoin transactions occur (called the blockchain) never has been.
Look, I realize this is a lot to take in. I know a lot of smart people who have a hard time wrapping their minds around what Bitcoin is and how cryptocurrency functions. But don’t let SBF’s actions throw you off the fact that Bitcoin is really in a class by itself and will be one of the few currencies – and certainly the strongest – to survive these tough times.
Right now, things are looking up: For the past month ending January 15, Bitcoin is already up over 25 percent and hovering around $21,000. And that’s despite not a hurricane in the industry but a nuclear winter. This isn’t a recommendation to buy on my part, but I think we’re going to wake up one day in the next few years and see Bitcoin at $100,000, hitting new highs. Of course, I’m a believer in Bitcoin. I’m ride or die with Bitcoin. Someday, we’ll look back on everything that happened with SBF and FTX and understand that, as painful as it was to live through, the lessons we learned probably strengthened the industry and story for Bitcoin.