I Fought the Law...
...and the law won
There are many different opinions running about around about a guy called SBF, an exchange called FTX, and even a token called Tether.
It seems, that some of these tried to βfight the lawβ.
I began getting interested in crypto in 2019 when I read a book by economist George Gilder. I donβt claim to be an expert, but writing about it helps to understand it. So, if you are an expert, feel free to correct me.
Letβs start with figuring out blockchain as I understand it. Bear with me.
Blockchain
Blockchain is what is known as a write only ledger. In other words, it is a record or ledger, that you can only write on, never change or erase. The catch is that it is all digital.
How does blockchain achieve this? Think of blockchain as being like the graph above, blocks connected by chains. The first block (called the genesis block) has a number, called a hash (not a pound sign or a drug, but a number), based on the information in the block. The second block also has a hash, which is based on both the info in it and the hash of the previous block. The same counts for the third, fourth, fifth, so on.
What this means is that in order to change the info in any block you would have to change the hash in every block. This is said to be practically impossible.
If, like with the bitcoin blockchain, you are adding to it multiple times an hour, the chain is securing itself in real time, and cannot be broken without enormous amounts of computer power.
Now, how do all the hashes and blockchains makes these weird things we call bitcoins?
Before I explain that, I first must explain something else: public key cryptography
Public Key Cryptography
When you want to send your credit card number or bank number to some institution, how do you know it is secure? You could send it via some sort of message, but what if someone intercepts it? You need to encrypt it in such a way that only you and the bank can figure out.
You might encrypt your number into some sort of cypher, scrambling the numerals. But this ultimately defeats the purpose of encrypting it: how is the bank to decode it without you sending them the key?
Public Key Cryptography fixes this problem. Instead of having a secret key between you and the bank, the bank gives you a mathematical padlock, that you can lock and only they can open. This works since you are the only one who has to lock it, and they the only one who needs to unlock it.
One sort of Public Key Cryptography is RSA, which uses the principle that the product of two large prime numbers is really hard to factor.
Another sort (used by Bitcoin) is Elliptic-curve, which uses⦠a curve on a graph. It is harder to understand than RSA, but it is easier for computers to work with, because they are rational and not irrational.
What the heck is Bitcoin?
Bitcoin is a digital currency that uses blockchain as a public ledger to record transactions.
This (see below) is not a bitcoin, it is a piece of metal with a βBβ on it.
The easiest way to explain bitcoin is to explain a transaction using bitcoin. This is an explanation of a real bitcoin transaction, not a Coinbase transaction (which I will explain later).
Bob has 1 bitcoin (weβll discuss how he got it later), and he wants to send it to his friend, Joe.
The first thing Bob does is get Joeβs public key or his bitcoin address. This is a long stream of numbers and letters like the ones we discussed with Public Key Cryptography.
Bob then declares on the chain that he wants to send 1 bitcoin to Joe.
The bitcoin network then needs to verify that Bob has this bitcoin he wants to send. They do this by looking at the blockchain ledger. They can see that he has that amount, because it was recorded on a previous transaction.
After the network has given the okay, a new block is recorded on the chain, declaring that Joe has received 1 bitcoin from Bob.
And they lived happily ever after.
This explanation glosses over volumes of complexity, which this next part of the article is about.
Bitcoin never changes hands
The first thing to understand is that bitcoin is not some sort of digital token in the sense that you can send and receive it. It is basically a figure recorded on a digital ledger. Nothing has really changed hands (or servers).
Before you throw up your hands and declare bitcoin a Ponzi-scheme for not being real, let me remind that banks do this all the time to their customers.
Money does not change hands a lot in this society. Merely agreements that money has changed hands changes hands.
In my article about the Federal Reserve, I explain the basic principle of Fractional Reserve Banking (more aptly called George Bailey Banking).
How did (and does) bitcoin come into existence?
Now, bitcoin has been around since 2009, when a guy called Satoshi Nakamoto wrote the code and _____ the first block (youβll understand in a second).
But there is no central bank or anything controlling the money supply. How does new bitcoin come about, who makes it?
This is where the βdigital goldβ analogy comes in useful. Bitcoin is digital gold. How do you get it? You digitally mine it.
Remember our example with Bob and Joe earlier? The bitcoin network verified the transaction. In this process, more bitcoin was mined.
This is how it works. In order to keep the chain honest, it has to be verified every time there is a transaction or someone might pretend they have a bitcoin, and try to sell it. There has to be an incentive for people to be on the network. The way it is incentivized is through mining.
Every time a transaction is proposed, there is a mathematical problem generated. This problem is based on a few things, but the goal is to find the hash (which is not, if you remember, a pound sign or a drug, but a number) of the new block on the blockchain.
The bitcoin βminersβ get to work with their large computers trying to solve the problem. When the problem is solved, the transaction is verified and the winning miner awarded a piece of a bitcoin. This is called Proof of Work (or PoW).
How do you verify that you are you?
We are at the end of our little transaction. The ledger says that Joe has his bitcoin, but how does the network know that Joe will be the one deciding what to do with the bitcoin?
The last piece is called verification. Think of it like King Arthur and the Sword in the Stone: there is only one person who can pull the sword out of the stone and that is the Pendragon1.
As a side note, it is interesting to note that the men in this cartoon look a lot more masculine than modern Disney franchises.
Bitcoin uses Public Key Cryptography to confirm a personβs identity. Remember how there are two keys: a public and private key? If you encrypt your message with a public key, the only way to decrypt it is to use the private key.
Well, it works the same way in reverse. If you encrypt something with your private key, the only way to decrypt it is with your public key. This might sound like a weird thing to do until you think of this: if you are the only one who can encrypt data with your private key, it is a way to verify that you are you.
Arthur was able to pull the sword out of the stone because he was the son of the Pendragon, and therefore a king. He had the private key. He pulled the sword out of the stone (used his private key to verify the transaction). People were able to verify that fact by watching him do it and trying to do it themselves (checking the verification with Arthurβs public key).
Just like Arthur used his kingliness to pull the sword out of the stone, someone who encrypts with their private key possesses the key.
And the beauty of this is that the fact that it was encrypted with the private key can be shown by decrypting it with a public key!
It is the reverse of Ronald Reaganβs βtrust but verifyβ: verify, then trust.
In action
The way this works with bitcoin is that you create a transaction and sign it with your private key. Everyone on the network can check and see relatively easily whether you actually did it by checking with your public key.
Remember, your public key and private key are inverse operations of each other, can only be discovered from each other by a lot of computing power.
If you did not understand that or want to find out a little more, watch this video. It is really helpful.
Okay. Now with thatβ¦
Ethereum and smart-contracts
There are other crypto coins and blockchains that have come since bitcoin. One of these is Ethereum. It is a computing platform built for creating applications using blockchain.
It was founded (or itβs original code was written) by a young Russian named Vitalik Buterin. Lots of the crypto-ish things you might hear of are from code running on the Ethereum blockchain.
In order to host your code on the Ethereum blockchain, it requires Ether, which is Ethereumβs currency. Ether is sometimes referred to as βgasβ, not because it shares a name with an actual gas, but because it βfuelsβ the code.
The Ether you give goes to the miners who verify your code on the blockchain.
What type of code would you put on this blockchain? Code for smart contracts. It might sound technical, but it isnβt really.
When you take out a mortgage or rent a house, you sign a contract that says how much you are going to pay and when. If you do not pay, your lender or landlord might get a lawyer to make you pay.
A smart contract is set up to automatically pay out the exact amount at the exact time required. It is secured by the blockchain like bitcoin is, through mining.
This sounds real good, if it is true, but some worry it is not so all-fired great.
Stablecoin
Before we move on, I need to explain what stablecoins are.
Some people (a lot) think that since Bitcoin is not backed by anything (like gold, the US Government, or something else) it is risky. This is true. Bitcoin is backed by the βtrustless verifyingβ of the bitcoin network.
So, some enterprising cyber-geeks have made so-called βstableβ coins, that are pegged to something more tangible like the US Dollar.
Stablecoins are easier than dollars to trade for other crypto like Bitcoin. Think of them like poker chips. You buy them to play the crypto game. When you are done, you can cash them in for real dollars again.
Or, well, that is the way it is supposed to be. We will get into what happens when it goes wrong in a few ticks.
Exchanges (like FTX)
You want to get into the crypto world, but donβt want to mine the bitcoin, which is the only way we have seen so far aside from just getting it sent to you.
You want to exchange your dollars ($) for bitcoin (ΰΈΏ). To do this you sign up for a crypto-exchange that is attached to a wallet. This wallet is what generates your public and private keys.
Some places, like Coinbase and FTX, handle the public key stuff on their own. This makes it easier, but defeats the purpose of having crypto, since it requires trust.
Coinbase is actually a beginners platform. You cannot do advanced trading, like limit orders, on Coinbase2.
This is where a platform like FTX comes in.
Think of FTX like Fidelity or TD Ameritrade for crypto. This platform is for advanced traders who are looking to make money by playing the market, not HODL-ing3 forever.
Here is what the founder of FTX said about his company:
And then it happened.
FTX Collapse
The biggest perk of crypto is that you have complete control over your bitcoin. When you exchange coins on the bitcoin network, you can verify that whoever you sent the bitcoin to got it. You can verify the validity of the network relatively easily, but it takes an impractical amount of computing power to invalidate the network.
This IS NOT how Coinbase and FTX work. You never touch a private key with these exchanges. They handle all of that. It is the equivalent of giving Ring doorbell a key to your house, and letting them open and close it for you. This might be good if you are dabbling in crypto and donβt want to get technical, but you are not getting the full benefit of a decentralized crypto currency.
Before we get into the collapse, here is a Dramatis Personae:
FTX: a crypto exchange
Alameda Research: an investment company with ties to FTX
Sam Bankman-Fried (a.k.a. SBF): the founder and CEO of the latter two
Binance: another crypto exchange, the largest in the world
Changpeng Zhao (a.k.a. CZ): founder and CEO of Binance, arch-nemesis of SBF
In 2019, Bankman-Fried launched FTX, and it was an immediate hit. It quickly became the forth-largest crypto exchange in the world.
FTX was backed by Alameda Research, which also invests on FTX. According to a recent financial report, Alameda Research had about $14 billion on itβs balance sheet.
Earlier this year, they were doing so well that they had enough money to make this Super Bowl commercial:
Larry Davidβs irony is heightened by the fact that he is, in fact, right this time.
FTX had a stablecoin, called FTT, which was traded on the FTX exchange. They provided trading discounts for holders of the coin and they were even able to use the coin as collateral, since it was implied that you could redeem your coin for dollars.
FTT was listed on many exchanges, including Binance, the largest crypto exchange in the world.
Back then, things were all nice and sunny for FTX, FTT owners, and Sam Bankman-Fried.
But one thing that investors did not know (but soon did) was that a lot of the $14 billion that Alameda Research had was in FTT, not in cash. This did not sound good.
There had always been a rivalry between SBF and the owner of Binance, Changpeng Zhao. It was then that CZ and Binance decided to cash in their $2.1 billion of FTT:
He goes on in his thread to say that they βtry to minimize market impactβ and that βBinance always encourages collaboration between industry playersβ and that they βtypically hold tokens for the long termβ, but it is clear: they are out and they want their $2.1 billion.
Now, if SBF and FTX had been doing things like they said (or maybe implied?) it would seem that they would have enough money to pay it off.
But no. It turned out that FTX had been sending a lot of that money over to Alameda, who had gambled and lost it.
FTX was insolvent, which meant they had more liabilities than assets, they had a negative net worth.
In desperation, FTX tried to sell part of itself to itβs rival, Binance, to raise the money. While Binance originally agreed (non-bindingly) to the deal, they backed out after looking at FTXβs books.
This left Bankman-Fried with only one option: bankruptcy.
What is up with FTX?
There is now a lot of speculation being thrown about concerning FTX, Alameda, and SBF.
One thing is the long twitter-thread that Bankman-Fried sent out trying to explain himself. In it he implies that he had been lied to about Alameda and FTXβs finances. He also declares that he will try to pay back the money owed to his creditors.
A writer at Vox allegedly had a conversation with SBF via Twitter DMs, in which SBF declared among other things that he regrets filing for bankruptcy.
While all this makes the former-crypto-billionaire like a victim of ill-luck and other misfortunes, there are other things against him other than he gambled with money he basically stole.
WEF-ties
Sam Bankman-Fried was a speaker at this yearβs Davos meeting4. FTX was also featured as a "partner" on the WEF website (a fact that has since been cleaned off, though it can still be viewed on web archives).
2022 Midterm Money
After the GOAT of sketchy-candidate-funders George Soros was the FTX Tycoon SBF. Most (92%) of this money went to democratic candidates.
But, interestingly enough, he did not go fully traditional in his sketchy-candidate-funding. National File reported that he spent $750k on the Congressional Leadership Fund.
Guess who controls that?
Non-other that McLeadership Member Kevin McCarthy.
But wait, it gets better.
The Gateway Pundit reported that $2.5 million went to the Senate Leadership Fund. Which is controlled by the McLeadership Member Mitch McConnell.
Some of the money also went to more traditional places. FTX Chief Engineer gave $1.1 million to help a democrat woman by the name of Becca Balint win a Vermont State Senate Seat.
Here is what Bankman-Fried said about it:
In total, Sam Bankman-Fried spent around $37 million on the Midterm Election.
Oh, and also he bragged that he would spend $1 billion on 2024, especially if Trump ran.
Money to Ukraine
There is also a money trail to Ukraine and their last-stand-of-freedom against the evil Putin and his evil Russia.
SBF tries to explain himself
After FTX filed for bankruptcy, Sam Bankman-Fried took to twitter to try explain himself, and what he planned to do.
He goes on to explain his position, saying that his goal is βto do right by customersβ. It would seem a little weird that someone who apparently pulled off a multi-billion dollar ponzi-scheme is trying to explain with a 30-tweet thread.
Maybe he really thinks he can?
Maybe he was played by a Davos-uniparty-Democrat-establishment who told him he was a good guy who could do good things. He talks that way in his interviews.
He follows this belief called Effective Altruism. Altruism is wanting the happiness of others. Effective Altruism is basically trying to make tons of money so that you can make others happy. Kinda like the WEF, eh?
Other Stablecoins?
In a recent article, Darren Beattie at Revolver News pointed out that there might be a new crypto crash on the horizon, concerning the stablecoin Tether, which is supposed to be pegged to the US dollar.
Originally, when the coin was first listed, the company behind it (yes, there is a company selling this stuff, and it is based it the Hong Kong) claimed for each USDT (tether) there is a dollar of cash in their vaults (or maybe accounts). They have since retracted this, stating that there is a cash or an equivalent.
Sounds sketchy, eh?
Furthermore, Tether has never been audited by anyone. The one time they nearly got audited, they backed out.
That is sketchy.
Tether is the third largest crypto currency, having a market cap of around $60 billion. It is in high demand, since it is seen as a βsafe wayβ to get into crypto.
But is it a ponzi-scheme?
A earlier this year, a website called Protos reported that two-thirds of the Tether has seeped "into the crypto ecosystem" via Alameda Research and another firm called Cumberland Global5.
Okay, this is weird.
The Fed and Eurodollars?
Finally, can we relate this to one of my favorite subjects, the Federal Reserve.
I wrote two articles on the subject for this newsletter (here and here).
In the first article, I explain what Eurodollars are and why they matter:
One of the biggest exports of the United States is the dollar itself. Almost all transactions around the world are in Eurodollars (US dollars circulating outside the US). The United States (obviously) is the only country that can produce US dollars.
When someone in a foreign country deposits US dollars in their own account at home (making them Eurodollars), the bank is obviously going to loan those dollars out (as the Building and Loan did) which are then borrowed and deposited, which are then borrowed and deposited, and so on. The catch is that none of these banks are insured by the Fed. When there is a bank run, the Fed will not be there (necessarily). Sometimes they do come to the rescue, but that is going to be changing.
Another way Eurodollar can βget outβ and expanded (called the Offshore Dollar Market or ODM) is through these stablecoins.
Think about it. I decide to issue BonifaceCoin6, which is pegged 1-1 to the dollar. You buy my BonifaceCoin, and use it in the crypto market as dollars to buy crypto. The people you pay it to might sell it to someone else for actual dollars, but the BonifaceCoin is still acting as dollars. In essence, more dollar have been made, since BonifaceCoin is being used as dollars and I am using the dollar you gave me for BonifaceCoin.
Now, Tether says they have the money you gave for their coins in their vaults, but that is under suspicion. FTX sure did not have the funds to cover their FTT that they threw about.
Is it that long of a shot that these ponzi-schemes are actually attempts by Davos to expand the Offshore Dollar Market?
Remember, use of the dollar is hyper-important to Davos. It is how they fund things.
In conclusion
I hope that that did not go over yβallβs heads. It was a lot of fun researching it. As I said, I have been interested in crypto ever since 2019, when I read George Gilderβs book Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy.
But, as I always say, I donβt know anything. Donβt listen to me you fools! Listen to the people I listen to!
Speaking of those people, here are a few articles and videos that helped me understand the whole FTX thing:
These help with the basics:
These go deeper (and give better analysis):
I must remind you that I am just an 18 year old young man who is trying to figure things out. I am not a doctor, lawyer, financial advisor, or theologian. I read the doctors, lawyers, financial advisors, or theologians and try to understand what they are talking about, and then write about it. Donβt listen to me! Listen to the people I listen to.
Who shall one day come back to rule England again.
Coinbase does have an advanced trading platform, but the main one is not made for day traders.
Trading lingo. It is the intentional misspelling of βholdβ to make it an acronym that stands from Hold On for Dear Life.
In case you are new, these Davos meetings are basically a billionaire hang-out where you go and discuss how you are going to run the world. Hosted by billionaire Klaus Schwab and the World Economic Forum, it is the hub of the super-rich elite.
Which is a subsidiary of a larger firm known as DRW.
This is such a good name I might do it.