S2E12 - Is this the end of Crypto? WTF Happened? Who is SBF and FTX?

So what exactly is happening now in the world of crypto? I've seen some bankruptcies go across and people losing money.

Yeah. As Warren Buffet likes to say, and I love quoting this, a rising tide lifts all ships, but it's only when the tide goes out that you see who is swimming without trunks.

Right. . And that's never been truer than the last few months. People are calling in like the crypto winter or whatever, but basically what happened is you know, they. You have highs and you have lows, and everything has to at some point come down. Everything that goes up, comes down.

And as things came down, what ended up happening is we got to see who was operating. On the level who was taking appropriate risk management, who was being fiscally responsible with the trust that their customers had placed with them and who just didn't understand what they were doing and were taking on excessive risk.

And what I think is important to understand for our listeners who may not know what crypto is or how it all works, This analogy from from the guy who, who just Ftx that just crashed. He describes it as this. Imagine you have a box and you decide that this box has value and you give it value, and people see that you give it value.

So they put in more money in it. Now people are buying and selling this box that may or may not actually, do anything, but they give it value. That's what cryptocurrency is based on. It's that people collectively come together and decided that something had value. Now, Ordinarily if you wanted to buy and sell this box and trade it among each other, right?

It's a complicated technical thing. And so these companies have come along over the last few years to facilitate these transactions. They facilitate people buying the boxes and people selling the boxes. Like when you go to, TD Ameritrade or the New York Stock Exchange, or you go to your bank, right?

All these people are part. And the financial system, and they serve a purpose, right? Either they hold your money or they help you buy, and they help you sell. In the US right? In our normal, traditional financial system, everything is regulated. Everyone's got, their role to play and people oversee and make sure that they do what they're supposed to be doing.

 Crypto is non-regulated, right? It's the wild west. And so what you end up having is you end up having people who are mixing and matching what they. Some people are taking on the job of TD Ameritrade and some people are taking on the job of traders and some people are taking on the job of, banks and they start, it starts becoming a mingle of what exactly they're doing and how they're doing it, but, All the average investor knows is they're giving me 16% return on my money

They're giving me like these outrageous returns, so I wanna keep getting it right. And nobody really was looking under the hood of how these things were working and. As the assumptions underlying their business model kind of, changed because, it's not always sunshine and rainbows.

They companies that weren't built to withstand the volatility they started crashing. What happened in the eighties with the stock market in the nineties when the.com bust, right? In 2000 where you had even more and you had the housing cr crash. All of that was people made outsize bets on the market based on false assumptions.

And when those assumptions came to be realized that they were false and the market pulled their money or wouldn't take the other side of their transactions, they went bust. Except we're dealing with a. A very small economy here. We're not dealing with a huge, international, dozens of countries on, trillions of dollars.

We're dealing with, billions of dollars. It is billions, but it's a very small segment of the economy.

We're talking with libel, sternbach, and we're talking about crypto. So how is it possible that all of these crypto exchanges are going bankrupt at roughly the same time?

, it's what happened with the financial crisis?

Or maybe a better analogy would be, the market crash of the 1920s, where what happened was, you had the stock market. People were buying companies and they were investing in them, but nobody had any real insight into what these companies were doing or whether they were valuable.

So much so to the point that like a whole bunch of companies that were listed on the New York Stocks Exchange were fictitious. They were just scams set up to take investors money and kind of in the crypto world, what you have is, you have a lot of that going. Where you don't have any transparency, you don't really know what it is that's out there.

And then you have companies being built upon this kind of these companies that may or may not exist, these tokens that may or may not exist, and they're trading them and they're making money, and money is changing hands, or this virtual money is changing hands. That at some point translates to real money and.

What ends up happening is there's inter-party interrelated risk. So one company takes an outsize bet, but five other companies are part of that bet. And so that first company goes bankrupt. The second company, you know the other five companies, they take a hit on their balance sheet. One of them, one of those next five companies may not be able to withstand the hit and they go bankrupt, and then the next one goes bankrupt, and it becomes a domino, except there was something else that also happened.

It wasn't just financial insolvency, it wasn't just risky trading. What you also have are mismanagement and misappropriation of client funds. Everyday average investor, they think of traditional finance and they try to translate that to the crypto market. They the crypto world, right?

They say I have a bank. And the equivalent of that in the crypto market is, the wallets and exchanges. And they try to act as if those things are the same thing as they are in the regular market, but they're not regulated. And so what you have is, Institutions, companies that are holding themselves out to be banks, they're holding themselves out to be trading firms or to be exchanges, and to have the same kind of protections and safeguards that traditional banks and traditional stock exchanges have.

But they didn't put the infrastructure in place to actually have those protections. And in the, in this case ftx, which just collapsed, it collapsed because they loaned out money to a related party to accompany the owner of ftx, the majority shareholder. Owned a trading company and then he made a loan to that trading company cuz that trading company should have gone bust.

But he made a loan to them of 10 billion. Oh my goodness. Yeah. 10 billion to his own company. But he, Where did that money come from? It came from customer deposits, which is not something that could have happened. It can happen. It just, it's, the laws and the regulations are against doing that in the financial markets, and there's oversight and audited financials, none of which exists in crypto.

So the way this got discovered was because somebody leaked the balance sheet that was actually months old.  and somebody started asking questions. Questions that would've been asked in the traditional market, that never would've come up because everyone was, would be looking for it. You know what, what happened?

Why are these going, bust, it's. The analogy I like to lose use is, number one, taking on too much risk. Number two, you're dealing with something that fundamentally is based, it doesn't have any intrinsic value, right? The US dollar is tied to the US economy. It's based on the faith of the United States government, on the people that live in the United States of our manufacturing capacity, right?

People believe in our country as a whole. And our government as in a whole, and part of, and that's, very materialistic. There, there are actual things that you can point to, whereas, let's say Iran right? They their currency, right? Nobody cares about their currency. Nobody wants their currency or, some pod North Korea, right?

You're not, you can't use North Korean dollars to do anything  or whatever it is that they use there, right? Nobody cares about it. But in the crypto world there's, hundreds, thousands of these tokens, of these currencies that come into existence and people give them value. So you had that going on.

And then when you add into it the fact that there's just this, this kind of incestuous in no insight, it's literally you're letting the fox into the he house and then you're wondering why your money goes missing, right? Why your chickens aren't there the next day. In there. And that's what happens.

So does this mean that crypto is dying? Will the patient survive? I'll put

it. Yes. So I think and this is something that I've been saying for a long time, that crypto, that at some point somebody was, something was gonna happen. Either was gonna be a government was gonna be threatened enough by crypto, or there was gonna be a fiasco like this, that, in that, that caused enough people to lose money that would cause governments to start regulating it.

So in this case, we have literal. It's thousands, tens of thousands of average Americans. People can own this in their 401K accounts, right? So average Americans, average investors just lost billions of dollars of what should have been secure, right? It should have been low risk. It's things that. Nobody in their right mind would've thought the, this is what would've happened to their money.

They thought it was safe. They thought it was just in the custody of, FTX or in these, high yield savings accounts and they didn't read the fine print. And as a result, they lost all their money, which this is what causes regulation to occur, right? The stock market crash, 1929 1929, right?

Stock market crashed. The s e c got created as a result of that cuz Congress ordered a probe and said a commission, and they investigated and said, Come back with what caused the market crash. They came back with a report that said, the, these were the underlying causes. Our recommendation is to create a commission, an agency that will, protect the public and we'll make sure that these things can happen.

Same thing's gonna happen in crypto. The, there's going to be something, especially when you have so many large investors, institutional investors, people like, Kevin O'Leary, BlackRock, Sequoia, right? These are the. These are, kind of pillars of the financial community when they got taken in these scams.

And it is a scam, right? It was embezzlement, it was every bad word that you can use in finance. Oh my. That's what happened, right? They're gonna call for regulation because or it won't get regulated and there just won't be any more money put into it. But yeah, it this is what's gonna happen and I think it's going to.

Unfortunately what, when? Once it starts regulating, it means that everything that has come beforehand, it's probably gonna get destroyed. And it's gonna be something new moving forward. And this is why you, It's very hard to pick the winners in the beginning, right? Everything looks like a winner until the winter comes.

We're just about out of time. Less than a minute or so. But do you have a report or more information that we can get once this program

is. So if you go on our website I'm actually putting together a detailed article on, if you wanna get the basics of, hey, this is what happened, this is what my outlook is for the future, and this, just so you can understand.

So when your grandkids come home for the holidays and they're talking about you knowd, and sbf and all these guys, right? You know what these words are, you know what's going on and you. You know how to protect yourself from, when they say, Oh, you should go buy, Luna or Dogecoin or whatever.

You'll have some basic understanding. So go again on the, on our website that article's coming out. So subscribe to our email list and you'll get that website