Revaluation

Now that Bankman-Fried is being held personally responsible for the implosion of a technology that Australian crypto investor Mark Carnegie once predicted would, Marx-style, redefine the relationship between labor and capital, it would seem fair to add feeble accounting skills to the negative side of his personality.

The “mislabelled” $8 billion bill, which was also described as “hidden,” sounded more like an excuse than an asset. It was recorded as a negative amount of cash in the Excel balance sheet, but it should have been positive if it was, as Bankman-Fried told the FT, an “accidental” extension of credit to a trading company run by his ex-girlfriend, Caroline Ellison.

A math graduate of Stanford University, Ellison was not a fan of conventional finance practices at Alameda Research, a cryptocurrency hedge fund. How to sell assets that are falling in price.

“We tend not to have things like stop losses,” he told the El Momento podcast last year. “I think these aren’t necessarily great risk management tools.”

Alameda and FTX both filed for bankruptcy on Friday, sending the cryptocurrency world into a paroxysm of angst (Carnegie: “Think, ‘What the absolute f**k?'”), and skeptics into satisfying complacency.

“Who could have predicted that an asset with no intrinsic value of any kind would eventually become worthless?” the New York Times Pitchbot Twitter account released on Sunday.

Mismatch

The point about the value of cryptocurrencies was illustrated by the leaked FTX balance sheet.

The FTX crash has severely eroded confidence in the digital asset market. Getty

The largest asset was $2.187 billion worth of coins in Serum, a cryptocurrency trading exchange created and promoted by FTX and Alameda Research. In October, Serum’s asset was valued at $5.4 billion, which made FTX, the world’s second-largest cryptocurrency exchange, look healthy.

As Bloomberg columnist Matt Levine and others have pointed out, Serum has never been worth it.

The reason lies in the central conundrum of cryptocurrencies. The 10 billion Serum coins – about two-thirds owned by FTX and Alameda – were created out of thin air. They are not real coins. They’re entries in a ledger somewhere. Unlike stocks, they are not backed by cash, inventory or machinery.

In theory, Serum’s price will go up and down based on the success of the underlying asset. But only 3% of “coins” are available for trade.

The limited supply supports the price. If Bankman-Fried had said last Thursday, “Hey, I’m selling 6 billion Serum coins. Anyone interested?” then it is likely that the price would go to zero, or close to it.

Bankman-Fried had to know. It would have been impossible not to grasp its meaning. The Excel spreadsheet listed FTX’s total assets at $9.6 billion and liabilities at $8.9 billion. So why did he, or anyone else, create a balance sheet that so clearly misstates the value of the company?

The narrators will try to provide the answer. Bankman-Fried will likely now replace Elizabeth Holmes, the lapsed founder of Theranos, as the world’s most scrutinized tech founder.

Perhaps his life will turn into a movie, and we can ponder whether his relationship with his parents, Stanford law professors, caused him to overcompensate by blowing up an industry, or whether he was seduced by a crypto world -brother introduced by Mark Zuckerberg.

The answer may be right in front of us, though. Nine months ago, FTX created a spot that now feels like an accidental classic of tongue-in-cheek comedy.

Comedian Larry David appears in the story against inventions: the wheel, forks, coffee, indoor toilets, the Walkman, universal suffrage. The commercial ends in contemporary times with a guy saying to David: “It’s FTX. It’s a simple and secure way to access cryptocurrencies.”

“Naaa, I don’t think so,” says David, “and I’m never wrong about these things.”

“Don’t be like Larry,” the ad says. “Do not lose the opportunity.”

Maybe cryptocurrencies were all fun nonsense from the very beginning?

Leave a Reply

Your email address will not be published. Required fields are marked *