Merged Bitcoin - Part 3

Chanakya said:
Woof. Just saw this bit of news, elsewhere. Came back here to see if there's any interesting insights posted on this.

Saw this thing referred to as perhaps the biggest destruction of wealth ever, in terms of how much was lost in how little time. Most of it this guy Bankman-Fried's apparently, poor guy.

One mustn't generalize from single instances to the entire class of assets, of course, but this seems very similar to gambling. When the going's good, boom, you go from hundreds or maybe low thousands to the tens of thousands. Then you put together all kinds of strategies, some of which seem to work to an extent. And then, boom again, something like this happens, and you realize it was all just ...tissue thin illusion, all along.
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One of the big problems seems to be with these exchanges. It's risky to hold your bitcoins personally; we've all read the stories about bitcoin fortunes lost when a hard drive crashed or was thrown out. So you store it with someone else, but now you're susceptible to theft if the exchange is run by a crook (as this one was), or it's hacked as in the famous Mt Gox case.
 
Brainster said:
One of the big problems seems to be with these exchanges. It's risky to hold your bitcoins personally; we've all read the stories about bitcoin fortunes lost when a hard drive crashed or was thrown out. So you store it with someone else, but now you're susceptible to theft if the exchange is run by a crook (as this one was), or it's hacked as in the famous Mt Gox case.
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If you store crypto in a cold wallet it's safe from exchange, counterparty risk.

Until a week or so ago, FTX touted itself as the best of the best in terms or low risk. What I didn't know is that FTX, and likely most others, use deposited customer funds to create "other opportunities." This is unlike stock brokerages that are required to segregate customer funds in separate accounts that they cannot pledge as collateral for "other opportunities." Brokerages make money by taking a small commission from buys/sells. Crypto exchanges should do the same. Apparently that wasn't enough for FTX.
 
Brainster said:
One of the big problems seems to be with these exchanges. It's risky to hold your bitcoins personally; we've all read the stories about bitcoin fortunes lost when a hard drive crashed or was thrown out. So you store it with someone else, but now you're susceptible to theft if the exchange is run by a crook (as this one was), or it's hacked as in the famous Mt Gox case.
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marting said:
If you store crypto in a cold wallet it's safe from exchange, counterparty risk.

Until a week or so ago, FTX touted itself as the best of the best in terms or low risk. What I didn't know is that FTX, and likely most others, use deposited customer funds to create "other opportunities." This is unlike stock brokerages that are required to segregate customer funds in separate accounts that they cannot pledge as collateral for "other opportunities." Brokerages make money by taking a small commission from buys/sells. Crypto exchanges should do the same. Apparently that wasn't enough for FTX.
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Oh, the FTX promoter was a crook, was he? I hadn't caught on to that, in my admittedly superficial reading of this bit of news. All I saw was that all this wealth is wiped out, and in this case it is the billionaire founder that took most of the hit; and I actually felt kind of bad for the poor guy (although I realize that, even wiped out, he's probably way richer than I am, given that he must have squirreled away some parts of that fortune for a rainy day such as this).

But if the exchange used depositors' money to play around like this, then they must have been either crooked to the extent of being outright thieves, scheming to just disappear with the money; or else they must be completely stupid. A child would know that it is stupid to play around with others' money, given that crypto is very volatile. I mean, the one word, the one descriptor, that first pops to mind when you say the word "crypto", is: "Volatile!", right? So what kind of idiot plays the super-high-risk game of playing around with this highly volatile thing that others have deposited with them? That's crazy stupid, unless like I said the intention had all along been to simply disappear with the money --- which somehow seems unlikely, given how high-profile this guy, whatsisname, let me look it up again, yes, Bankman Fried --- haha, juvenile cryptic clue for FTX, man playing at bank gets fried! --- was.
 
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According to something I read (and maybe didn't understand) at CNN: https://edition.cnn.com/2022/11/12/business/ftx-missing-funds?utm_source=business_ribbon

The exchange’s founder Sam Bankman-Fried secretly transferred $10 billion of customer funds from FTX to Bankman-Fried’s trading company Alameda Research, the people told Reuters.

A large portion of that total has since disappeared, they said. One source put the missing amount at about $1.7 billion. The other said the gap was between $1 billion and $2 billion.
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Brainster said:
One of the big problems seems to be with these exchanges. It's risky to hold your bitcoins personally; we've all read the stories about bitcoin fortunes lost when a hard drive crashed or was thrown out. So you store it with someone else, but now you're susceptible to theft if the exchange is run by a crook (as this one was), or it's hacked as in the famous Mt Gox case.
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Almost makes you wish for some kind of deposit insurance.
 
Best article yet on the problems with FTX; get this part:

And then the basic question is, how bad is the mismatch. Like, $16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable. $16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad. $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!
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As someone who stares at balance sheets all day, that was quite enjoyable to read.
 
psionl0 said:
Not if a private carrier is willing to insure your holdings (but getting them to insure against your negligence such as losing your thumb drive might be tricky).
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Wouldn't using a private carrier just kick the can from potential failure of exchanges to potential failure of the private carrier? The benefit of federal deposit insurance is the extreme unlikelihood of default.
 
gnome said:
Wouldn't using a private carrier just kick the can from potential failure of exchanges to potential failure of the private carrier? The benefit of federal deposit insurance is the extreme unlikelihood of default.
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You could maybe get your insurance insured.

It's sort of amusing how many new internet innovations are mostly an exercise in why regulations exist.
 
gnome said:
Wouldn't using a private carrier just kick the can from potential failure of exchanges to potential failure of the private carrier? The benefit of federal deposit insurance is the extreme unlikelihood of default.
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I don't understand the question.
 
psionl0 said:
I don't understand the question.
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Now I get it. You are worried about a private insurance carrier going broke before you can make a claim.

This is no bigger a worry than home/auto/health insurance. It can happen but it seems that the risk is less than that of a crypto exchange biting the dust.
 
Brainster said:
Best article yet on the problems with FTX; get this part:



As someone who stares at balance sheets all day, that was quite enjoyable to read.
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I like this bit:
If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?”
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:D
 
psionl0 said:
Now I get it. You are worried about a private insurance carrier going broke before you can make a claim.

This is no bigger a worry than home/auto/health insurance. It can happen but it seems that the risk is less than that of a crypto exchange biting the dust.
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I'm not sure. A big crypto exchange failing, millions in claims... it might take out the insurance carrier too. The risk is vastly greater than something like FDIC defaulting.
 
gnome said:
I'm not sure. A big crypto exchange failing, millions in claims... it might take out the insurance carrier too. The risk is vastly greater than something like FDIC defaulting.
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You are assuming that everybody has their holdings insured (with the same carrier) and that the carrier didn't calculate their premiums correctly.
 
Apparently bitcoin is worth 25% of what it was a year ago. Should I buy the dip?


Haha.


In my humble opinion the bitcoin has no inherent value.


At least the US dollar has an army, a navy, an air force and nuclear weapons to back it up. Does bitcoin?
 
Puppycow said:
Apparently bitcoin is worth 25% of what it was a year ago. Should I buy the dip?


Haha.


In my humble opinion the bitcoin has no inherent value.


At least the US dollar has an army, a navy, an air force and nuclear weapons to back it up. Does bitcoin?
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They have an army* of online fanboys. Does that count?



* well, an army of accounts claiming to be individual fanboys, anyway
 
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