The sudden and ignominious collapse of FTX, one of the largest cryptocurrency exchanges in the world, has sent significant shockwaves across the highly speculative and volatile world of so-called digital assets.
Bitcoin has plunged below US$17,000 per coin, from previous highs of nearly $70,000. And other notorious cryptocurrencies have experienced similar spikes.
Many investors were left penniless by the FTX crash, with founder Sam Bankman-Fried estimating that $8 billion in funds would be needed to pay back every depositor in full.
There is growing alarm about the risk of spillovers to the rest of the global economy. And some have even declared that this crash could mark the beginning of the end for cryptocurrencies.
Investors and economic commentators alike were shocked and shaken by this spectacular fall from grace for cryptocurrencies, FTX and its golden boy Bankman-Fried.
But actually the writing had been on the wall for some time. But as the old saying goes: there is no one so blind as those who do not want to see.
At its core, as Marxists have repeatedly warned for some time, cryptocurrencies are not fundamentally different from every other asset bubble seen throughout history: whether it’s the mortgage-backed securities that underlie the 2007-2008 financial crisis; the dot-com companies at the center of the 2001 crash; or Dutch bulbs famous for the “tulip mania” of the seventeenth century.
The incredible implosion of Crypto – combined with the current crisis facing the tech sector and its speculative actions and deeds – reveals the underlying rot of today’s capitalism.
The vast majority of these “investments”, in truth, are scams and rubbish. However, seeing the uncertainty and chaos in the real economy, capitalists are increasingly turning to such gambling instead of the grimy business of actual production.
Such speculative orgies are therefore a symptom of the impasse of capitalism on a world scale; sign of the degeneration and fragility of the senile capitalist system, which is unable to develop the productive forces as it did in the past.
Fraud and gambling
At the time of its collapse, the Bahamas-based but US-operated FTX was the second-largest cryptocurrency exchange in the world. Together with its rival Binance, it was responsible for processing the majority of cryptocurrency-related market trades worldwide, taking fees from every transaction.
FTX’s downfall was triggered by a CoinDesk article warning of widespread fraud and scams. According to reporters, the hedge fund arm of the exchange, a company called Alameda, also founded and owned by Bankman-Fried, held billions of dollars of FTX’s cryptocurrency, FTT. Additionally, reporters claimed that Alameda was using this token as collateral for its loans.
All of these loans, along with billions of dollars of customer money generated by the FTX exchange, were then used by Alameda to bet on other cryptocurrencies.
As cryptocurrency markets began to decline earlier this year, loans taken out by Alameda were subject to margin calls as significant losses mounted. At one point, Alameda owed FTX about $10 billion.
On top of this, billions more have been invested by FTX and Alameda in highly illiquid venture capital (VC) and cryptocurrency investments. For example, $5.4 billion has been invested by FTX in nearly 500 crypto firms and VC funds, including $1.15 billion pumped into “mining” firm Genesis Digital Assets from Alameda.
House of cards
Nearly all of these cryptocurrency-related companies have been hit hard by rising interest rates and depleting access to cheap credit, prompting nervous investors to seek safe havens for their money.
When the tide went out, shady companies like FTX came out naked. Leaks from his accounting spreadsheets showed that the Bankman-Fried operation was being handled entirely like a classic Ponzi scheme, based entirely on cryptocurrency speculation. The numbers clearly didn’t add up, with a big black hole right where client funds should be.
It turned out that the parasitic profits made by FTX were being funneled into Alameda, which was then borrowing more money based on cryptocurrencies that had been invented and controlled by Bankman-Fried himself – tokens that were ironically called “Sam coins” by insiders. industry jobs.
Like all other cryptocurrencies, however, FTT coins have no intrinsic value. And their market price appears to have been secured by nothing other than FTX’s pledge to buy any token for $22 apiece.
But with nothing but empty promises and arrogant assurances backing up all this financial jiggery, once the real picture became apparent, the Bankman-Fried house of cards soon collapsed.
Karl Marx discussed this smoke and mirrors Capital. He called these worthless pieces of paper ‘fictitious capital’: money that circulates in the economy as capital – money invested to make more money – but with no corresponding real value.
Fictitious capital takes many forms under capitalism: from government bonds, to stocks and shares. What they have in common is that these paper tokens are traded as if they contain real, intrinsic value. But in reality, they are useless. In reality, they are mere claims to future values (tax revenues or corporate profits) that don’t exist yet – and may never exist.
A similar process occurs when banks create money by issuing loans. It is usually the case, however, that actual assets with genuine value, such as property or other commodities, are used to back these loans, providing a material anchor to the entire jamboree.
In the case of FTX and Alameda, however, the borrowed money was backed by even more fictitious capital, in the form of cryptocurrencies that were thought to have value simply because their creators (those taking the loans) claimed they were valuable.
It’s the equivalent of a crook who goes into a top-rated bank and secures a mortgage by convincing the clerk that an origami house is reliable collateral.
From hero to zero
According to Financial Timesthe day before FTX’s bankruptcy, the company held just $900 million in easily marketable assets, against a whopping $9 billion in liabilities.
In fact, earlier this month, the company’s largest purported asset was a $2.2 billion worth of cryptocurrency called Serum, a decentralized token invented by Bankman-Fried!
Investors were quickly spooked when the company’s financial strength was called into question. A spate of withdrawals occurred (including $5 billion in a single day, November 6), and the company’s value plummeted almost overnight, forcing it into bankruptcy.
In a matter of days, the personal fortune of Sam Bankman-Fried, formerly considered an industry hero, dropped from about $16 billion to zero.
Spivs and crooks
Stripping away the extravagant facade of digital assets, what we have below is simply another capitalist Ponzi scheme, just like those of Bernie Madoff and others before him.
Sam Bankman-Fried’s downfall is one of the swiftest and most humiliating in recent history. At one point FTX had the backing of high profile investors like BlackRock as well as celebrities like Katy Perry.
The cryptocurrency kingpin has also donated substantially to the Democratic Party in the United States and has been a prominent proponent of the “effective altruism” cult of elite philanthropists.
Eventually, however, Bankman-Fried was revealed to be little more than a corrupt snake oil salesman; a greedy financial fraudster, just like any other capitalist quack.
We should expect nothing more from a system that encourages and facilitates such scams, gambling and parasitic profits. And no amount of regulation is ever going to put an end to these spivs and scoundrels and their shenanigans.
The hype surrounding cryptocurrency may be coming to an end. But such digital assets are just one example in a long history of asset bubbles.
Such calamities are an inherent feature of the capitalist system, which is driven by profit above all else. The rampant speculation we see today – and in previous similar episodes – reflects the complete anarchy of capitalism and the market.
Instability and crisis are the irrational result of a process that is completely rational for any single capitalist, as investors put their money wherever they can get the easiest and biggest profit.
Speculation is not something limited to useless things like Bitcoin, or that only happens on the stock exchange. It permeates the entire economy under capitalism, including the necessities of life like housing and food, fueling rising rents and inflation.
None of these speculations provide anything useful to society or enrich anyone except the super rich. It is simply a means for short-sighted and selfish capitalists to make a quick buck at everyone else’s expense.
The demise of FTX could spell the end of cryptocurrencies. But whether or not that happens doesn’t matter. If it’s not cryptocurrency, as long as the madness of capitalism remains, something else will eventually come to replace it as a vehicle for speculation; the chaotic cycle will repeat like clockwork; and every time it will be ordinary people who will pay the consequences.
The only way to end this madness is to eliminate capitalism altogether and strive for socialism, a higher stage of society based on conscious, rational and democratic planning of the economy.
Only then will we free ourselves from the anarchy and blind economic forces of the market, and definitively close the doors to the casino of capitalism.