The FTX Collapse – Why Are People Surprised?

Joseph Conrad has been one of my favourite novelists since my late teens, when I first read the novella Heart of Darkness. He could be hit and miss sometimes – Under Western Eyes is brilliant, but the similarly themed The Secret Agent seemed a mere shadow of his greatest works.

His best work is in his Marlovian stories – the ones which feature the sea captain Marlow as narrator. Those are Heart of Darkness, Lord Jim, Youth, and Chance.

And it was Chance which I was thinking of these past few days. In particular, I was thinking about the part where de Barral, the father of the heroine, is sent to gaol for his mismanagement of Thrift, a financial institution which turns out to have been what we would now call a Ponzi scheme.

After de Barral is sentenced, he cries out in protest at the world: ‘You haven’t given me enough time. If I had been given time I would have ended by being made a peer like some of them.’

As Conrad through his avatar Marlow sadly observes: ‘And this was awful. Just try to enter into the feelings of a man whose imagination wakes up at the very moment he is about to enter the tomb….’

The collapse of FTX, one of the largest cryptocurrency exchanges during the past week, has had me pondering such matters. There are now considerable accusations being thrown around by both the newly appointed administrator and the main rival to FTX of corporate governance failings and all sorts of irregularities.

It could well turn out that, when everything is done and dusted, FTX was little more than a Ponzi scheme or some other similar financially irregular operation, warranting serious criminal prosecution.

But am I surprised? I regard cryptocurrency as a giant bubble, probably more similar to the Tulip Mania of the Netherlands some 300 years ago than to the various stock market bubbles in the intervening centuries. The only reason why I don’t consider cryptocurrency itself to be a Ponzi scheme is because it is not really being run by any one individual or institution – it is more a madness of crowds and our society, a situation where the Greater Fool Theory has been unleashed to its full destructive insanity.

Which is not to say that Ponzi schemes cannot be run within the realms of cryptocurrency. Anywhere people are going to believe that something has value as an investment is going to be a place where the unscrupulous can run a Ponzi scheme. That is one of the dark aspects of human nature.

I do not really understand Bitcoin or other cryptocurrency, nor do I know how you can store or trade it, so I steer clear of those things. It all seems far too complicated, particularly the encrypted electronic wallets you hold them in.

I suppose that is where exchanges like FTX and Binance come into the picture – to make it possible for mug punters like me to hold onto those magic beans without the stress of having to remember a very complicated password. I might be wrong, but then, I have not paid too close attention to how these things work.

Where the Ponzi element seems to have crept into the picture is the cryptocurrency which FTX itself created – FTT. Where an exchange is creating its own cryptocurrency, it is very similar to when the reserve banks print more money, except that the reserve banks have government backing for what they do. The self-created cryptocurrency only has the backing of its creators and the mass hysteria of that part of the human race who fleetingly ascribe value to it.

And now FTX has collapsed, and the recriminations are flying.

I have one question:

Why have people waited until this institution collapsed to discover that it was all smoke and mirrors?

I get the feeling that everything around cryptocurrency and such exchanges has had more red flags than Moscow on May Day for quite some time. I expect that if anyone had bothered doing some digging into FTX, they would have found out all about the weird polyamorous circle running it and their rather crazy ideas which they expressed online. More importantly, why did someone not call out the creation of FTT and it’s subsequent leveraging as a viable asset base as some sort of seriously dodgy practice which is probably unethical, immoral and illegal?

But that is how Ponzi schemes operate. The red flags are only discovered retrospectively after the failure becomes public. It is just like Bernie Madoff – a man who was able to get away with running a giant Ponzi scheme for decades. Madoff kept reporting consistent high returns year after year to his investors – something which was statistically impossible. Regulators kept hearing rumours of irregularities, but turned selectively deaf. They wanted to believe that it was all real, right up until the whole edifice came crashing down in a major collision with reality.

Just like the fictional de Barral, and the not so fictional Madoff, it appears that there is another figure about to join the Pantheon of Ponzi scheme villains. And there will be more to come, for as long as (to borrow from Joseph Conrad) the old earth keeps rolling!

Published by Ernest Zanatta

Narrow minded Italian Catholic Conservative Peasant from Footscray.

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