Date: 11/11/2022
Author: Mr. X
Sam Bankman-Fried of cryptocurrency exchange FTX says he’s “sorry” and that he “f***ed up.” He admits he “should have done better.” This is small consolation to investors who fear they have lost everything.
The Securities and Exchange Commission (SEC) is reportedly pondering an investigation into FTX for criminal activity. The Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) are also reportedly considering action.
White House Press Secretary Karine Jean-Pierre said that the debacle “highlights why prudent regulation of cryptocurrencies is indeed needed.” She said the White House and other government agencies “will again closely monitor the situation as it develops.”
Bankman-Fried made an ill-advised pledge to spend $1 billion to help Democrats through 2024. After he had to back away from it and told Politico it was a “dumb quote” and that his messaging was “sort of sloppy and inconsistent in some ways.” He obviously can no longer count on having any political allies among the Democrats.
This is just the last echo of the shift away from support of cryptocurrency from the political left. Instead, Democrats will probably rally to the cause of regulating crypto, not just because it provides a useful political foil but because of their concerns that it empowers extremists or hostile foreign actors. Cryptocurrency has an increasing base on the political right and among libertarians, but the drop in price this year has made it less popular. El Salvador’s adaptation of bitcoin as state currency has been opposed by the International Monetary Fund and was poorly timed, as the price has declined since then. It’s doubtful other countries will repeat the experiment anytime soon.
It’s also doubtful that FTX is the last domino to fall. As this is written, BlockFi is pausing withdrawals. It tweeted that it was “shocked and dismayed” by the situation. It also said that it would not be able to conduct “business as usual” because of the lack of clarity on the status of FTX.com, FTX US, and Alameda. This is especially important because BlockFi was arguably saved by a $250 million line of credit that it got from FTX in June.
People should be looking at Tether now. Again, I’m reminded of what our late friend Dr. Kent Moors predicted about crypto and Tether specifically.
Since it is tied to the dollar, tether should have a value that remains at $1. However, that has not always been the case, prompting some panic upon occasion among investors. Since crypto traders will often use the tether to buy cryptocurrencies, rather than the dollar or other traditional fiat currency. Digital traders are increasingly preferring this approach to provide transaction safety a more “stable” asset during times of sharp volatility in the crypto market.
However, crypto is not regulated. Most banks balk at working with digital currencies, citing the increased risk involved. That is different from MBS [Mortgage Backed Secuirties] paper where, initially at least, the injection of dollar-denominated assets provided the semblance of some risk protection. This is the reason why tether has caught on inside the crypto trading market so quickly and is now poised to have a wider impact.
With the MBS crisis paper, the problem was suspect asset valuation. In that case, the face value of the mortgages buried within a wider asset class never had the dollar value the consolidated mortgages conveyed. The amount represented by subprime borrowers reflected a false valuation. The dollar amount reflected was never the true (more discounted) value of the underlying asset. That asset, in turn, was not the market value of the real estate but the payment value of the mortgage on that property.
The same problem may emerge with tether. Only this time, it will play out in a still unregulated market yet serve as a transaction base for a widening collateralization of other dollar-denominated assets.
If there isn’t enough to back a stablecoin, the result will be market chaos. It’s worth remembering he wrote that column in July 2021, when cryptocurrency looked like it would conquer all before it. Tether ever so briefly depegged from the dollar on a few exchanges yesterday, though I didn’t see anything lower than 96 cents. Tether says everything is fine, but there’s yet to be a major test.
The stakes for ordinary investors can’t be overstated. I am not speaking for effect – if your money was in FTX, it’s not clear what will happen. While FTX is reportedly saying that its American business is fine, those who loaned out their crypto or put their savings into FTX are fearful that their money is just gone.
THIS TRADER MADE $64,000 IN JUST ONE WEEK
And he never risked more than $10,000 at a time…
The closest equivalents I can think of outside cryptocurrency are what happened to Enron and the absurd situation that hit Luckin Coffee. Once the great challenger to Starbucks, it filed for bankruptcy in the US in February 2021 after millions of dollars in transactions were reportedly faked. That said, Luckin Coffee has come back with a vengeance – could the same hold true for crypto?
It likely will – but in a form that may horrify many of its early proponents. The movement towards a Central Bank Digital Currency to serve as a kind of official stablecoin in transactions probably just got a big boost. China has banked on beating the United States with a digital currency as part of its long-term campaign to undermine the global hegemon. It has a lead, but the United States is moving swiftly to catch up.
Regulation of cryptocurrency could be a way towards that end. The trend of increased government control over finance, media, and journalism in the name of preventing misinformation and fraud seems unstoppable. While crypto provides a way of getting around this in theory, in practice it requires knowledge and dedication that most people simply don’t have. It’s also vulnerable to an entire system breaking down because of greed or foolishness, as we’re seeing here.
The bottom has not dropped out from bitcoin or Ethereum. The latter has successfully pulled off “The Merge,” which allows the creation of a host of decentralized apps. Bitcoin will always be bitcoin – the gold standard of cryptocurrency, valuable simply because it was first and because its supply is limited. However, other cryptocurrencies remain vulnerable because the speculative market is going to come under unprecedented pressure in the coming weeks.
The best way investors can protect themselves is to get a Crypto Wallet that they control. Do not allow your assets to be stored or controlled by another company. Do not settle for something less than a custodial wallet. Pick the crypto storage device that is most appropriate for your situation and make sure you have total ownership. Store all relevant information safely and do not allow others access.
In short, treat “digital gold” like real gold. Keep it to yourself, with your own security system, and view it has a long-term hedge. With the massive volatility underway, there will be opportunities for cryptocurrency speculation – but this is best left to experts who focus almost exclusively in this sphere. For the casual crypto investor, ignore the screaming and wailing, ensure control over your own assets, and have patience. By historic standards, bitcoin is still much higher than it was just a few years ago.
A complete drop to zero will require far more than a few exchanges going under – and I would expect to see the government to step in before that happens. It wouldn’t be to protect ordinary investors. It would be to protect the value of the dollar by using crypto technology as a support.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
