Forbes magazine technology writer David Jeans released a piece last weekend titled “The Devil in Nerd’s Clothes”. The article depicts the rise and fall of the cryptocurrency exchange FTX, an abbreviation of “Futures Exchange.” More importantly, the article explains the personality and destructive decisions taken by FTX founder Sam Bankman–Fried. The nerd in this situation is Bankman-Fried and the devil stands to be his destructive decisions that have led FTX to bankruptcy. Jeans’ piece is an excellent read, and I highly encourage checking it out. But for now, hear me out, because I have some thoughts on the matter.
For people like myself who have been bearish on cryptocurrency since its rise to popularity, the collapse of FTX comes as no surprise. Bankman-Fried’s net worth has depleted, and investors and regulators alike are calling for SBF’s (his self-proclaimed nickname) head on a platter. Think King Herod and St. John the Baptist, it’s that bad. It’s certainly worth taking a deeper look at how a Silicon Valley raised, MIT educated billionaire let it all go to waste.
FTX’s collapse is not a strange one, as the economics are simple, but boy it was a quick collapse. FTX’s business model was supposed to be simple. The world’s first cryptocurrency exchange, the company promoted the liquidity and transacting of coins and tokens (Minecraft anyone?). FTX allows users to connect their wallets, place trades, exchange digital commodities, enter derivative contracts or buy/sell NFT’s. Founded in 2019, SBF and his constituents gathered massive investor interest, as funds and individuals joined seed rounds in order to not miss out. The rise of meme stocks and amateur day traders (looking at you Dave Portnoy) helped FTX to gain billions in liquidity, and that money was quickly spent. Advertising and endorsements took center stage, as athletes Tom Brady and Lewis Hamilton inked deals, and the Miami Heat’s arena was renamed “FTX arena”. All these endorsements would’ve been great, if FTX actually had the money.
FTX created their own make-believe token called FTT and encouraged investors to buy it for two years. These tokens served as airline miles for loyal customers and allowed Bankman-Fried to invest new cash into a company run hedge fund. The problem with this was the lack of insured value, as the worth of FTT soared to $80 a token. When financial reporters began to investigate the solvency of FTX, the company Binance, another cryptocurrency exchange, sold all of their FTT holdings. This terrified investors, and the value of FTT plummeted like the Hindenburg. Investors could not recover their holdings in cash because, well, FTX didn’t have any cash.
There is a quote from HBO’s finance show “Industry” that probably best describes SBF’s mindset in this whole debacle. “The thing people forget about this Icarus dude, is that before he fell, he flew. And I bet the sun gave off a lovely light.”
Bankman-Fried probably felt euphoric when raising his company to unprecedented new heights in a completely uncharted and unregulated space. Seeing the “FTX” logo on jerseys, Twitter, and on TVs across the world must’ve been quite the rush, especially if your personal net worth inched closer each day to $10 billion. And sure, I have no way of knowing anything about SBF’s character and morality, but the dude certainly took care of his friends. He even bought a five story penthouse in Nassau, Bahamas, for them all to live in. He also was active in politics, donating close to $40 million in contributions to campaigns in 2020. But, as in the tragic story of Daedalus and Icarus, they both knew that if they flew to close to the sun with their makeshift wings, the heat of the sun would melt the wax holding their wings, sending you to certain death in the ocean below. Regardless, Icarus flew to close to the sun, and died. SBF is Icarus, and I believe he knew a crash was unavoidable.
As detailed in Jeans’ piece, FTX is a venture that allowed SBF full autocratic control. I don’t know whose idea that was, but SBF singularly ran FTX because he got investors and employees to buy into his vision. And as former staffers point out, Sam was not only aware of the company’s Ponzi scheme strategy, but also aware of the mirage he put on to inform and persuade. So why didn’t anyone say anything? I mean, for crying out loud, the company is incorporated and headquartered in the Bahamas, which is a tax haven. Was that not enough of a red flag for investors? For a company without proven cash flows, firms were unusually eager to throw millions at SBF’s now severely flawed vision. And now, as firms like Sequoia Capital are writing off nine-figure losses on their balance sheets, the world for the story to further develop.
Now, so what? Why does it matter to us that large hedge funds and average investors have lost billions thanks to this collapse? Are we supposed to feel sympathy? Remorse? I don’t. And I won’t. Now I am not insensitive to the fact that people lost money. Rather, my negativity is based on who they lost it with. Some of the best investors in history have used simple philosophies to generate returns. One such philosophy — to invest in companies that offer product and services that directly increase the quality of life for customers and employees — can be foolproof when done correctly. Investment in FTX is not this. Creating value and owning “value” are two very different concepts. The value owned by FTX token holders does not create. In fact, it has done the opposite. It has destroyed.
But we shouldn’t be surprised. Technology focused “Nerds” and entrepreneurs like SBF have become increasingly commonplace in the 21st century. Hustlers and salespeople such as Adam Neumann and Elizabeth Holmes have been at the forefront of schemes pulled off for personal gain. Bankman-Fried and other nerds have used their educational expertise to generate investor buy in. Even worse, this has extended to generational buy in. I cannot begin to comprehend how many conversations I’ve had with peers who’ve been obsessed with crypto, Dogecoin, FTX and so many other means of superficial commerce. One conversation with a graduating peer last May left me dumbfounded. “What are you planning to do after graduation?” I asked. This classmate responded, “Oh I am going to move to Silicon Valley and make my own NFT”. Dude. What the hell does that even mean? I don’t have a lot of suggestions this week, but I don’t expect this trend to change anytime soon. I am not usually one to eagerly drink the Fighting Irish Kool-Aid, but I am certainly glad we have the chance to learn under minds who would certainly agree with me.
Stephen Viz is a one-year MBA candidate and graduate of Holy Cross College. Hailing from Orland Park, Illinois, his columns are all trains of thoughts, and he can be found at either Decio Cafe or in Mendoza. He can be reached at sviz@nd.edu or on Twitter at @StephenViz.
The views expressed in this column are those of the author and not necessarily those of The Observer.
