FTX: Here we go again, as traders wonder where their money went

Everyone’s talking about the potential bankruptcy of the major digital asset exchange FTX. The recent revelation that FTX’s business clout might be based entirely on the value of its self-created token was too much for the market to bear, leading to criticisms from Binance and a sell-off that crashed FTX’s value. The news was shocking but, to those who’ve watched the digital asset for years, hardly surprising.

What’s more shocking than the deja vu is the realization that blockchain has become a gamified experience where most players don’t know what it’s actually for.

As recently as a few months ago, FTX CEO Sam Bankman-Fried was (for better or worse) seen as a blockchain industry savior, representing more big investors entering the market and higher gains. At worst, some saw him as a villain trying to corner the digital asset market by snapping up its failing projects at bargain prices. FTX acquired the assets of defunct digital currency lender Voyager, and stepped in to buy LedgerX, Liquid Group, BlockFi, Bitvo, Embed, and several others.

Dave Portnoy reveals a few things

Barstool Sports President and social media personality Dave Portnoy today explained many of the problems inherent to the digital trading world in his video “Emergency Press Conference – Breaking Down the FTX Debacle for Dummies.”

“Here is the situation. I’m gonna dumb it down like you’re speaking to an idiot, because in some respects I am an idiot,” he said.

Portnoy then gives an extremely rudimentary rundown on exchange/bank runs, fractional reserves, and using assets created out of thin air as collateral. He also notes FTX spent US$5 million on advertising with his own company.

Emergency Press Conference – Breaking Down the FTX Debacle for Dummies pic.twitter.com/gPeIjwBumE

— Dave Portnoy (@stoolpresidente) November 9, 2022

He also pretends to forget Bankman-Fried’s name and not to know who Binance CEO Changpeng “CZ” Zhao is, suggesting he thought CZ was a Twitter spam bot (likely due to the number of actual spam bots using CZ as their name/avatar).

Sure, Portnoy is not really the naive teenage crypto-bro character he plays on the internet (for starters, he’s 45 years old). But it indicates the level of understanding many aspiring twitch traders have. When Portnoy lists off some of FTX’s marketing sponsorships, it shows this is probably the audience FTX was trying to reach as well.

This is kind of scary, as there was a time when a technical glitch or bad news about a certain blockchain would tank its market price. These days, everything seems to carry on as normal. Essentially dead cryptocoins continue to trade. If you point to Ethereum’s scalability issues or BTC’s five transactions per second, the response is more often a screenshot of a price chart than a technological rebuttal. In other words, no one seems to care if the assets they’re trading have (or will ever have) a real-world use case as long as they can sell them for dollars.

This is what “Bitcoin going mainstream” has created: a trading market obsessed with fads and pumps—one that doesn’t understand what blockchain is supposed to do and doesn’t care.

It also sees the same problems occurring again and again. Digital asset exchanges going bust is a meme almost as old as Bitcoin itself, as is the advice “don’t keep your coins on exchanges” that is repeatedly ignored and will be ignored again.

The whole system is configured to ensure people keep their coins in exchange wallets. Anyone who’s tried to send coins to an exchange wallet to capitalize on a sudden bull run knows that run will have peaked before the coins ever arrive— mempools get clogged with thousands of others trying to do the same, and the exchange itself will take longer to confirm the funds. You’ll also lose a lot of your money in transaction fees by moving them in and out of exchanges. If you want to win money playing this game, you’ll get more if you leave your coins in those exchange wallets.

To Portnoy’s credit, he does suggest exchanges need more regulation and refers to them as “chop shops,” which are complaints familiar to those in the BSV world. Whether he means it or not is another story, but the points are valid.

Likewise, and whatever the real intentions behind them, CZ himself made similar comments:

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

— CZ 🔶 BNB (@cz_binance) November 8, 2022

Like Portnoy, sometimes I wonder how digital currency exchanges are even legal. Ten years before Bitcoin, if someone had tried to create a trillion-dollar market selling inherently worthless tokens, regulators would’ve shut it down fast, or the fad would’ve died a natural death before it grew so big. Somehow, blockchain has mystified the public with a narrative that every new digital “asset” that comes along represents “the future of money” somehow, and speculating their dollar prices to insane heights is beneficial to society.

A gamified safe space for digital assets

The irony is that corralling digital assets into a trading game and nothing else means most coins wouldn’t ever realize their potential as digital money, even if their protocols worked. The more speculators think a coin’s price will rise at some point, the less likely they are to ever spend one of those coins in the real world.

Do people imagine some future point where everyone decides, “OK, speculation time is over, the natural price is realized and it’s time to use this stuff as spending money”? Does anyone think about this question at all?

In one of my more tinfoil-hat moments, I wonder if regulators tolerate digital asset trading for this very reason— it confines the user base to a niche, distracts them with adrenaline rushes and occasional winnings, and prevents blockchain technology from posing any serious threat to legacy networks.

Blockchain has gone from being a serious technological breakthrough to a play-to-earn video game. In many ways, so have stock markets, although there’s still enough real-world economy in stocks to stop them from becoming completely gamified. While it might be fun and occasionally even financially rewarding, speculative trading is toxic to the blockchain. We need to maintain a focus on the technology itself and promote the concept of a scalable, auditable data recording network to serious users if we want to achieve anything real.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.