reaction
10:15
Elites have started saying the quiet part out loud
from Gregory Barker
Mike Novogratz infamously compared Bitcoin to a pyramid scheme
This week we saw the latest – and perhaps more striking – sign that crypto may not be the future of finance. On Tuesday, Sam Bankman-Fried, Founder of FTXa giant crypto exchange, has opened a can of worms describe “Yield Farming” – Krypto’s makeshift alternative to traditional bank loans – as a pyramid scheme.
“You start with a company that builds a box,” he said on the latest episode of Bloomberg Odd lots podcastand “maybe for now just ignore what it does, or pretend it literally doesn’t do anything… pour another $300 million in the box and you get a psycho and then it goes to infinity… then everyone makes money.”
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A stunned guest presenter and journalist Matt Levine replied: “That was so much more cynical than I would have described farming. You’re just like, ‘Well, I’m in the Ponzi business and it’s pretty good’.”
Yes, that actually happened. Here was the most prominent figure in the crypto space on a highly reputable financial podcast who openly admitted that much of the crypto ecosystem was a sham.
Defining whether or not something is or has become a Ponzi scheme has long been forgotten; It is about finding out whether the underlying structure of an investment a negative sum game. With regulated securities like stocks and bonds, investors receive a combination of interest payments, dividends, and cash flows, making this at least a zero-sum attempt. However, with crypto, investors don’t get any of this, they only benefit from a potential price increase – the so-called greater fool theory.
This inequality, among other things, has led many financial commentators to even label the number one crypto, Bitcoin, as a negative-sum Ponzi scheme (one FT Story suggested it was even “worse” than that). If Bitcoin’s ecosystem collapses, the funds cannot be returned to holders as the price drops to zero, meaning there is nothing to recover. But with a Ponzi scheme, funds can be recovered and returned to investors. After the collapse of the infamous Madoff Ponzi $14 billion out of the original $20 billion invested has been recovered from offshore accounts.
For now, Bitcoin’s Ponzi status is irrelevant. Bankman-Fried has simply joined the growing list of crypto nobility who have inadvertently delighted in profiting from shady financial structures. Mike Novogratz, CEO of Galaxy Investment Partners, notorious compared Bitcoin to a pyramid scheme, although the main function of his company is cryptocurrency investments. In the meantime, points of sale in the crypto media have also been adopted ponzinomicslike CoinDesk Publishing an article with a Lede reading: “Yes, it’s a Ponzi scheme. But who cares?” Not the regulators, it seems.
These candid boasts are akin to those of the subprime era, when contemptible real estate agents wrote risky loans to the weak, knowing they could never make payments, and sold them to the banks. In a scene from the classic film The great short film, fictional hedge fund manager Mark Baum and his crew interviewed a couple of shady agents, who jokingly revealed that they were “leaving the income section blank” in order to underwrite a larger number of mortgages. During a brief pause, Baum asked his associate why these real estate agents would admit so.
“They don’t confess,” he replied. “They brag.”
It is now clear that we have entered a similar boasting phase in the crypto bubble. When will this bubble burst?
Greg Barker is an independent journalist and quant who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.
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