Understanding the FTX Fallout From the Eyes of a Bitcoiner

The financialization, tokenization and the chase of short-term profits seen across Sam Bankman-Fried's trading empire is peak Wall Street.

AccessTimeIconNov 19, 2022 at 4:14 p.m. UTC
Updated Nov 21, 2022 at 8:57 p.m. UTC
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The cryptocurrency world is no stranger to high-profile blowups and cults of personality, and there have been several this year alone. But even by crypto standards, the FTX story is notable for the shocking revelations that have come to light. The rapid downfall of Sam Bankman-Fried is likely a watershed moment for the entire industry.

Steven Lubka, a CoinDesk columnist, is managing director of Swan Private Client Services, a concierge service for high-net-worth investors at Swan Bitcoin.

Much will be written on FTX from a mainstream point of view, and much will be written from the point of view of cryptocurrency investors. You'll hear a lot about FTX from the various venture capitalists (VC) who populate the industry and other influencers who cover decentralized finance (DeFi), Web3 and NFTs (aka non-fungible tokens).

Inevitably, the story that will be shared by crypto insiders will be "FTX was terrible but it just displays the problems with centralized companies and highlights the benefits of decentralized protocols."

What if that misses the point? The culture, norms and values of crypto had a central role in the rise (and fall) of FTX, more than these voices are likely to admit. Just take it from the bitcoin perspective.

What's up with bitcoiners?

You probably think of bitcoiners (or Bitcoin Maxis) as an odd bunch.

We look like strange fundamentalists who simply cannot wrap our minds around the innovation and possibilities inherent in digital assets other than bitcoin. We won't make any compromises and pursue a very narrow vision for how to develop and continue to grow the Bitcoin protocol.

Bitcoiners can seem like the Amish of Crypto. Weird, right? This perception of bitcoiners is cyclical: We are still coming off the heady highs of yet another crypto bull run and many still believe crypto will bounce back. At the highest moments the possibilities seemed endless, money was falling out of the sky and blockchain was going to change the world. People abandoned the basic precepts of going beyond financial intermediaries. (Why would you self-custody your coins when you can earn 10% lending through Celsius?)

Then came the blowups: Terra, Celsius Network, Three Arrows Capital, Voyager Digital (and many others only saved by bailouts and equity infusions).

The darling coins and new ideas lost 90%+ of their value. The counterparty risk suddenly reared its ugly head. Maybe the position bitcoiners take makes more sense to you now. Maybe not.

During bull runs, bitcoiners look like stubborn fools who just can't understand the possibilities. However, during bear markets, their ideals, values, and approach start to make more sense to people who do a little investigation. The culture of bitcoin, at its heart, is one of hard-won insights. Lessons learned. Money lost.

In many ways, FTX validates the way bitcoiners approach this industry. Let's explore how!


At the absolute core of Bitcoin is a single principle: we must de-financialize. This is absolutely antithetical to the entire ethos of crypto, which gives anyone the ability to instantly financialize assets. For me, this is actually the most profound divide between Bitcoin and Crypto.

Bitcoin is trying to de-financialize an overly leveraged, financialized world. Crypto is trying to further financialize everything.

Crypto wants art, music, games, login credentials and anything else they can get their hands on to become financialized. Bitcoiners think leverage, subsidization of risk and turning everything into a speculative asset is actually massively net-negative for civilization.

I'll paint you an example: houses. The real estate market is a perfect example of what financialization looks like. Houses have always been valuable, but they haven't always been financial assets in the ways they are today. As soon as the government subsidized the risk for lenders in making home loans, and the central banks made money cheap for mortgage lenders; the price of houses exploded becoming unaffordable for many.

Owning a home is an important aspect of societal cohesion. It's actually “proof-of-stake” for nations. Homeowners become stakeholders in the nation. They form families and they start to care about the long-term prospects of the nation. Financializing houses made them progressively unaffordable and undermined societal cohesion and financialization is everywhere in the contemporary economy.

FTX couldn't have existed without a culture that values financialization for its own sake. It became a popular exchange by offering traders insane leverage and the ability to collateralize almost any of their altcoin holdings (unlike many derivatives exchanges, and all spot markets). FTX also listed more exotic derivatives products than other exchanges and spent a lot of time optimizing their liquidation engine (yes, this made liquidations kinder but it also represented a push into more leverage).

Leverage is a weird thing. The optimal amount of leverage is always zero leverage, according to economists Ole Peters and Alexander Adamou. When people identify a market with low volatility and decide to take on leverage to juice returns, they end up inducing volatility into that market via the leverage itself.

That means leverage can never work in the long term. Yes, I know you know someone who made a fortune with a risky leveraged bet over a few weeks, but structurally, over the long term, leverage can never yield structural outperformance of markets as the presence of leverage itself leads to blowups that liquidate the leveraged.

This increased volatility results in liquidations for levered players and shows the optimal leverage is always zero. FTX was an endorsement of leverage and financialization. Bankman-Fried said recently that he let it get out of hand, thinking his hedge fund could make a bigger impact if it made bigger bets.

Leverage was bad for users, bad for hedge funds and bad for FTX itself. Bitcoiners often push for full-reserve spot markets, and advise new users to stay away from leverage and to reduce their counterparty risk.

FTX was built on the opposite principles.

Glorifying wealth

The crypto community often picks its champions based on one criteria: whether they make money. FTX is what happens when we divorce wealth and success from morality and ethics. It's extremely likely that SBF at some point misappropriated customer deposits to perform "effective altruism."

In this sense, Bankman-Fried serves as the paragon of an industry: someone who is fine with harming others if it furthers his definition of the good. There’s a long line of influential people in crypto that came before him that essentially operated on the same principle, even if they didn’t directly steal or grift. Bankman-Fried is the culmination of contemporary crypto culture, a phenomenon enabled by VCs, media and users alike, Bankman-Fried is the output you get when your input is the contemporary values of the crypto community.

Now, that’s not to say bitcoiners are allergic to wealth or success. The difference is that wealth is good when it is generated *ethically* and *morally.* Wealth is good when it comes from providing value to the world or building something that matters.

Ethics? Morals? Here go the bitcoiners moralizing again!

I get it. Hearing about how there is a morality gap between Bitcoin and Crypto sounds like fundamentalism. But it only comes from understanding the incentives and values which are behind the past 50 years of economic change and thinning. A paradigm that saw the rise of financial service providers over industry. Financialization over value creation. And capital depletion over capital creation. In other words, postmodern finance.

Show me the incentives (I'll show you the outcome)

Glorifying financialization, amoral wealth creation and unrestricted issuance of financial instruments have created a system of incentives that enabled fraud, manipulation and deceit to happen repeatedly.

Maybe you know of a crypto founder who is acting in good faith, really believes in their project and hasn't taken advantage of their token’s issuance mechanisms in any way – wonderful! These people certainly exist.

However, empowering anyone (including anonymous founders) to issue financial instruments in a completely unrestricted manner while funding them with an endless stream of cheap VC cash has created an unsustainable system. Worse, opaque claims about “innovation” and utopian visions of a future without hierarchies enticed retail investors and created a situation with comically bad incentives. Is anyone actually surprised Sam Bankman-Fried got his start during the initial coin offering boom?

Further, the ability of a centralized team to control the issuance of a token is highly contentious. You can say tokens are a way to decentralize ownership and influence in a project, but if you look at what happens in practice instead of, in theory, you will find massively concentrated ownership among insiders.

Tokens are issued as though they were equity, and serve the exact same role for founders – that's because founders are selling tokens to fund their joint ventures. Why are securities regulated in traditional financial markets?

Because over hundreds of years we have observed time and time again that allowing people unrestricted access to the sale of financial instruments which were minted from thin air resulted in continuous abuses of power.

Does that mean securities laws are perfect? Does it mean that the Securities and Exchange Commission is infallible? Of course not. But it does show us that being able to issue tokens from thin air is at the heart of so many disastrous crypto outcomes.

Regardless of what they actually are, people buy tokens believing they are a type of equity. They think they represent ownership in the protocol.

Did FTT represent ownership in FTX? ABSOLUTELY NOT! But people treated it like it did, despite being a worthless integer in a spreadsheet that FTX controlled unilaterally. FTX would not have happened if:

  1. FTX couldn't print FTT from thin air
  2. FTX didn't control the exchange and the prop firm (Alameda)
  3. FTX didn't wash trade FTT to inflate its paper valuation
  4. Borrowers didn't accept tokens printed from thin air as collateral

The entire scheme relied on FTX being able to borrow against FTT. Why? Because if it had to sell FTT the market would have gone illiquid as there were few natural buyers.

FTX used this same playbook to inflate its assets using Serum, MAPS and OXY. It discovered it could seize control of "decentralized protocols," acquire a huge percentage of the supply and artificially pump the value into an illiquid market.

DeFi, or decentralized finance, provided absolutely no protection against this. Despite creating non-custodial and verifiable protocols, DeFi has also created the cultural precedent where centralized teams of developers behind the scenes control of keys and almost always the coins. Bankman-Fried likely saw he could game this ... and did, like in the strange Sushi storyline.

Ironically, the crypto world loves to champion decentralization. They say we need decentralized protocols, decentralized exchanges, decentralized everything. But crypto loves centralized issuance of tokens. Why is no one fighting for purely decentralized issuance of these tokens?

Proof-of-work mining was designed as a fair issuance system where there are no privileged insiders and everyone competes for tokens by doing costly work. This isn't sufficient if insiders can start mining before others, but as long as there is a fair launch mining is the most decentralized way to bring a token to market.

If you remove the ability for companies and teams to issue tokens, you suck the air out of so many of these abuses.

3 core tenets, countless problems

There is more to the story, but these three core tenets are at the heart of the FTX saga: financialization, separating wealth from ethics and centralized issuance of tokens. There is a rot at the core of the cryptocurrency universe, and it is fueled by allowing these trends to propagate and fostering a culture of predation.

Ideologically, crypto was supposed to be a break from the traditional financial system, yet it has largely only succeeded in recreating some of the worst aspects of modern finance – only with fewer guardrails. Crypto is peak Wall Street, an acceleration of financialization, amoral business and the cult of personalities.

Bitcoiners fight for de-financialization, moral accrual of wealth and protocols built without centralized token issuance. This is one reason Bitcoin matters. It offers us a pathway to a new system (or perhaps a return to an older system – things weren't always like this!).

The FTX story will be spun as something which is fixable by DeFi. You will hear this. I don't think it's true. DeFi protocols themselves (separated from tokens, etc.) may do some things well, like enabling non-custodial financial services through programs that stick to a predetermined set of rules and are independently verifiable.

But there’s a difference between theory and practice. DeFi didn't stop FTX from capturing the decentralized exchange Serum or other protocols. Perhaps DeFiers will say, "Well, that's not real DeFi." Yes, and the Soviet Union wasn’t "Real Communism," it was just what happens every time we try it.


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Steven Lubka

Steven Lubka is managing director of Swan Private Client Services, a concierge service for high-net worth investors at Swan Bitcoin.

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