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“The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

— John Maynard Keynes

Q: What’s the most efficient way to steal $65 billion?

God mode!

Advisors to the FTX bankruptcy filed a PowerPoint presentation this week detailing how the failed exchange funneled customer funds to its affiliated hedge fund, Alameda Research.

The report refers to the preferential treatment given to Alameda as “God Mode,” which allowed it to borrow up to $65 billion from FTX customers, no questions asked.

This generosity was hard-wired into FTX’s systems with a line of code that reads “‘can_withdraw_below_borrow’ = true.”

The generous interpretation of this programmatic access to customer funds is that Alameda required it for market-making purposes.

That has some logic to it: FTX started out being more dependent on Alameda than Alameda was on FTX.

But that line of reasoning is undermined on slide 19 of the advisors’ PowerPoint, with its photos of $253 million of Bahamian real estate acquired with customer funds, as well as the reminder on slide 20 of the $2 billion of personal loans extended to SBF and his inner circle.

And the $65 billion limit assigned to the “can_withdraw_below_borrow” function is an indication they were thinking even bigger.

Q: Why is FTT still worth $600 million?

If you’d asked me on January 1 for investment advice on FTX’s exchange token, FTT, I’d have told you it was laughably overvalued with its then market capitalization of $300 million.

And if you ignored me and bought it anyway, you’d be up 100% in the three weeks since.

Ignoring me is generally solid investment advice, but in this case, it was maybe surprising because exchange tokens like FTT are the closest thing to traditional equity in crypto (seeing as they’re designed to return a percentage of exchange revenue to holders) and yet its behavior has been entirely crypto-native.

In the case of bankruptcy, you’d expect a company’s equity to be worth zero. But in the case of FTX’s bankruptcy, its non-equity, FTT, is still worth $600 million.

Holding a crypto token with no legal claim on assets or any governance rights has somehow worked out better than holding equity that gives you actual ownership of a company.

Such is the magic of crypto.

It’s not exactly clear why: perhaps there’s some meme value to FTT. Or maybe people think FTX could relaunch as an exchange, as John Ray told the Wall Street Journal a task force he’d set up was considering.

(“Exploring potential reorganization opportunities for FTX exchanges” is an option listed in the bankruptcy advisors’ presentation too.)

But more likely it’s because 1) most FTT tokens are held by FTX, which is not yet selling, 2) short interest via perpetual futures has been high, and 3) the passive liquidity on decentralized exchanges provides a constant bid (for small size).

If FTT had been a stock on the stock market, it would have been delisted by now, wiping out holders.

But it’s not a stock, it’s a token.

And tokens never die.

Q: Why is Silvergate still worth $400 million?

That will indeed seem a mystery to anyone who gets most of their news from Twitter, where the knives are out for the crypto-focused bank.

You get an entirely different impression, however, from analysts at investment banks, who seemed generally encouraged by the full-year results released this week.

The analysts at Keefe, Bruyette & Woods (KBW) expect Silvergate’s deposits to “normalize between $5 - 6 billion.”

If so, that’s a business that could still have plenty of value: Silvergate pays no interest on the deposits it takes from its crypto customers, which makes for a nice margin with T-bills at 4.5%.

It’s also an important business: Silvergate’s SEN network allows its crypto customers to mint and redeem stablecoins 24/7…which is handy as crypto markets are also 24/7.

Silvergate’s critics on Twitter give the impression that its primary purpose is to launder money, which I guess makes sense if you think the primary purpose of crypto, in general, is to launder money.

But if you think crypto has any greater purpose than that, you’ll think Silvergate does, too.

KBW noted that “No other bank could survive a 70% reduction in deposits and still have positive book value, more cash than core customer deposits, and be well-capitalized.”

That’s in part because its crypto customers don’t have many other places to go: Without Silvergate we’d be close to a world where stablecoins could only be minted and redeemed during regular banking hours.

We got a taste of what that would be like in December when Binance suspended transfers in USDC for eight hours while it waited for a bank in New York to open.

Without Silvergate, that could become a permanent state of affairs: fiat stablecoins might routinely trade at, say, 90c on Saturday morning because arbitrage buyers would have to take the risk of waiting until Monday morning to find out if they’re still redeemable at $1.

That might prove entertaining for traders, but it would make for a highly inefficient crypto market.

So let’s hope the bank analysts prove more right than the Twitter trolls.

Q: Is crypto a decentralized Ponzi scheme?

It’s not just Twitter trolls that hate on crypto, of course.

Jamie Dimon reiterated his skepticism at Davos this morning, calling crypto a “decentralized Ponzi scheme.”

I’m confident he's wrong in that, simply because a Ponzi, by definition, cannot be decentralized: If it’s decentralized, it’s transparent. And if it’s transparent, it can’t be a Ponzi.

The point of a Ponzi is to give investors the fraudulent impression their money is making real investment returns.

Crypto investors may have that impression, but if so, it’s just because they haven’t read the docs — there’s no hiding the source of returns in a decentralized blockchain.

Bitcoin and most other cryptos may well be “greater fool” assets: Making a return on them is dependent on someone paying you more than you paid someone else. But that doesn’t mean they’re Ponzis.

Either way, we shouldn’t really care what Jamie Dimon thinks, anyway.

He’s good at running a very large bank, but that doesn’t mean he’s any good at assessing emerging technologies.

Nor, for that matter, are the rest of the TradFi powers-that-be. Or the government.

So we should stop looking to them for approval.

Per John Maynard Keynes, crypto is an idea that will live or die on its own merit, irrespective of the power of vested interests.

— Byron Gilliam

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During this episode of Forward Guidance, Darius Dale of 42 Macro joins Jack to share his macro view for 2023

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Written byByron Gilliam

Produced by Kat Dittmeier

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