Earlier this month I wrote an article about the global scandal concerning the Crypto exchange, FTX. In the latest news surrounding the Ponzi-like Scheme, various celebrities who were hired to endorse the company are being sued for endorsing the fraudulent company.

This raises and interesting debate among the growing industry of influencer marketing. Obviously, no reasonable person would expect Larry David, of all people, to know a single thing about Crypto, even the commercial itself leans into that notion. However, if celebrities are going to make livings off “endorsing” products, and “influencing” their followers in regard to what they should consume, it would make sense that they should understand what it is they are endorsing.

Especially with hindsight, it is hard not to laugh at the overwhelming irony that this commercial graced us with. While I do feel bad for the unsophisticated investors who were victimized, Larry David getting sued for endorsing a company in an ad where he only said negative things about sounds like it was written by Larry David.

While it may seem unfair and erroneous I do think that David and the other celebrities who endorse this: Tom Brady, Stephen Curry, and more, should be held accountable and made an example of for other celebrity and influencer endorsers in the future. If you are going to endorse something you should at least have to perform some level of due diligence to try and verify if it is a legitimate company and something you would want to recommend to your followers. On the flip side, you shouldn’t blindly buy or invest in something just because Larry David told you not to.

Let us know your thoughts on the FTX scandal!

Unless you’ve been living under a rock, you’ve probably heard of the latest crypto scam surrounding FTX.

WHO? Sam Bankman-Fried and Changpeng Zhao

Just a few short months ago, American entrepreneur and guy-who-looks-like-he-should-be-an-SNL-cast-member, Sam Bankman-Fried. was being hailed as the next Warren Buffet and the JP Morgan of cryptocurrency. He became one of the youngest American billionaires, seeing his net worth peak at $26 Billion.

Some basic facts:

• FTX is a Bahamas-based crypto exchange founded by Bankman-Fried and Gary Wang in 2019.

• Alameda Research is a quantitative trading firm specializing in cryptocurrencies co-founded by Sam Bankman-Fried together with Tara Mac Aulay in 2017.

• Binance is the main competitor of FTX and the largest cryptocurrency exchange platform by volume. Its CEO and founder is Changpeng Zhao.

WHAT? FTT Tokens

FTT is the exchange token used by FTX.

FTX was expanding at an impecible rate. Established in 2019, FTX grew to become the third-largest cryptocurrency exchange platform executing $9.4. billion worth of trades each day. The investments of Bankman-Fried extended its global reach while expanding further its core business to become an all-around financial services provider. FTX was reinvigorating the cryptocurrency market.

Bloomberg published an article in September 2022 underscoring the relationship between FTX and Alameda Research. Alameda Research functioned as a market maker during the early stages of FTX. According to the article, these two firms would be subjected to scrutiny under the regulatory oversight applied to companies in traditional equities markets.

Alameda evaluated cryptocurrencies such as crypto-coins and crypto-tokens using quantitative finance and other tools and techniques in applied mathematics in its trading decisions. Its specific strategies include arbitrage, market making, yield farming, and trading volatility.

CoinDesk published another story at the beginning of November reporting that a significant portion of the assets of Alameda Research were held in FTT. The tokens worth $5.1 billion were in circulation and the balance sheet of Alameda Research held “unlocked” FTT tokens worth $3.66 billion and “locked” FTT tokens worth $292 million.

Alameda Research had held assets and funds from the customer base of FTX. FTX channeled a huge chunk of FTT tokens to Alameda Research. Lenders allowed Alameda Research to use these tokens as collateral. There was a commingling of assets between the two companies. Bankman-Fried was further accused of using FTT as collateral to borrow billions of dollars that he spent to expand his cryptocurrency empire.

Some of the deals made by Bankman-Fried resulted in severe losses. These investments exposed Alameda Research, as the FTT tokens the trading firm held had low liquidity. It had a hard time converting them into cash assets to supplement its finances and pay its creditors.

Translation: Bankman-Fried was using his funneling FTT tokens to his own firm, and using them to borrow money, but the tolkens are very hard to quickly convert to cash

WHEN? November 7th

Binance, announced on November 7th that it would offload all of its entire FTT holdings. It was a supporter of FTX. However, its founder and chief executive, Changpeng Zhao, induldged into a series of tirades with Bankman-Fried.

News about Binance selling its FTT tokens, as well as the Twitter exchanges between Zhao and Bankman-Fried, resulted in the prices of FTT and other cryptocurrencies plummeting. Zhao announced the next day that it entered into a non-binding agreement to purchase FTX to address its liquidity crisis. However, Binance took to Twitter on November, 9th to announce that it would not move forward with the deal.

Binance cited two key reasons for refusing to acquire FTX. These include the reported mishandling of customer funds in line with its commingling issue with Alameda Research, and the pending investigations involving the possible legal liabilities of the cryptocurrency exchange platform. The website of Alameda Research was taken down on the same day and Bankman-Fried announced that his trading firm would wind down trading and close.

Several employees from the legal and compliance team of FTX resigned. Other employees from entities related to FTX also resigned. FTX, Alameda Research, and more than 100 affiliate companies filed for chapter 11 bankruptcy on November 11th. Bankman-Fried resigned as chief executive and was replaced by corporate restructuring specialist John J. Ray III. Anonymous sources said the FTX owed as much as $8 billion.

The events during the first and second weeks of November resulted in FTX customers rushing to withdraw from the platform. However, because of the liquidity crisis and due to the fact that the exchange used FTT as collateral, they were not able to withdraw funds. Investment advisors have been warning people about the risks of leaving their assets unclaimed on cryptocurrency exchange platforms that use crypto-tokens as collateral.

Reports about missing funds worsened the situation and aggravated further the distressed customers. Some $473 million worth of funds were removed from the platform. An FTX general counsel explained that their system logged an unauthorized transaction. In addition, between $1-$2 billion customer funds could not be accounted for as of November 12th Several institutional investors stand to lose their money due to their stakes in FTX.

WHY? Crypto Regulation Sucks

Doesn’t this all sound familiar? It should because a very similar situation happened earlier this year when the cyrpto-exhange platform Celcius filed for bankruptcy after it too, was well over leveraged, and was essentially exposed as operating a ponzi scheme.

Bankman-Fried, being hailed as a crypto-savior and someone that would be writing the crypto-regulation, was allowed to get away with structuring his companies in ways that would have not been allowed under traditional equity regulations, but because the Crypto market does not have the proper regulation yet, it has enabled scam-artists like Bankman-Fried to utilize investor hype and confusion to over leverage their companies and exposing creditors that include ma and pa investors, who end up being hurt the most.

WHAT NOW? Bankman-Fried is Still Sipping Pina Coladas in the Bahamas

Anonymous sources cited by Reuters stated that Bankman-Fried had transferred at least $4 billion from FTX to Alameda Research, without any disclosure to insiders or the public, earlier in 2022. The sources said that the money transferred had included customer funds, and that it was backed by FTT^. An anonymous source cited by the Wall Street Journal stated that Bankman-Fried had disclosed that Alameda owed FTX about $10 billion which were secured through customer funds stored in FTX when FTX had, at the time, $16 billion in customer assets.^[According to anonymous sources cited by the Wall Street Journal, the Chief Executive of Alameda Research Caroline Ellison told employees that Bankman-Fried was aware that FTX had lent its customers’ money to Alameda to help it meet its liabilities.

One day after FTX declared bankruptcy, on November 12, Bankman-Fried was interviewed by the Royal Bahamas Police Force.

On November 17th, John J. Ray III, the CEO brought in as a liquidator, stated in a sworn declaration submitted in bankruptcy court that according to the firm’s records, Alameda Research had lent $1 billion to Bankman-Fried.

Sources

Explained: Causes of the FTX Collapse and Bankruptcy

The other day I was scrolling through my Instagram feed and noticed a post from an “investor-influencer” account. It read, “Hustling my way up the corporate ladder made me my first $100K, working in tech was my first $1M, building a real estate portfolio made me my first $10M, investing in crypto will get me to $100M, don’t doubt what hard work and consistency do.”

There’s a lot to unpack here. While there was probably no malicious intent, the ripple effect this “influence” could have, may lead to serious repercussions for the young audience consuming it down the road.

The post was made by Richard Garcia, an influencer with more than 315,000 followers on Instagram. He appears to be a successful business man and investor. According to his website, Garcia began his career working in finance, then moved to tech where he worked for notable companies like Google and Tesla. He also claims to have a real-estate portfolio of $8M (just 20% off from what he said on his Instagram post). Richard, if you’re reading this I believe you worked very hard to make it as far as you and I mean no disrespect, but I do caution against posts like these, because they can be very easy to misinterpret the actual hard work you put in to arrive at your success.

What jumped out to me immediately, as I’m sure it did for most of you, is that the post appeared to start off as a realistic tale of personal and wealth growth, but then it suddenly takes a sharp turn down a road built on the hopeful need of perpetual rising crypto prices. Taking $10M and turning it into $100M is quite the return on investment (ROI), and it accounts for 90% of the wealth created by Richard’s “hard work and consistency” theory.

While it’s plausible for certain cryptocurrencies to eventually be worth 10x their current prices, that ROI requires the least amount of effort compared to all of the other activities Richard listed. In fact, making an investment in crypto (with no research) doesn’t require any work, just money. Therefore, someone reading this post could say, ‘well if I can just skip to the investing part and I can get a 10x ROI, I can just skip the hard parts of Richard’s journey and still make a lot of money.’ However, those steps were important for Richard’s development, as they provided him with the capital to invest, as well as his business/investing knowledge and experience.

This is not an anti-crypto post. As a matter of fact, I do believe that cryptocurrencies (in one form or another ) will indeed be the future of monetary transactions across the globe. However, it is impossible for anyone right now to be sure as to what that one form (or another) will be. Maybe it’s Bitcoin or Ethereum that eventually become a universal dollar, or maybe it’s something that hasn’t even been invented yet. The upside for investing in the potential future of the global economy has brilliantly high ceiling, however, unlike investing in a blue-chip stock, it comes with a pitiless downside risk. The dangerous “Crypto-is-the-future-no-ifs-ands-or-buts” attitude can lead to something very similar to what most Gen-Zers are too young to remember: the 2008 Global Financial Crisis.

Richard is not a Gen-Zer, he’s a millennial like me, but I’m sure a large portion of his following are younger. If you are younger than me or Richard, or you want a good old reminder of what happened, I’ll give you a very brief history of what caused the The Global Financial Crisis of 2008:

In the early to mid-2000’s, following the economic resurgence from the dot com bubble (we’ll talk about that another time), house prices were rising exponentially year after year. If you bought a house in 2002 for $300,000, you could have sold it in 2005 for $700,000 (these aren’t actual numbers or percentages but it’s about the concept). Even if you didn’t have $300,000 or any potential to make that, a bank would happily lend it to you (even if you had terrible credit). Millions of people took out these loans known as adjustable-rate mortgages (ARMs) with the notion that, although they wouldn’t be able to pay it back if they kept the house forever, they could sell the house within a few years and stand to make a substantial ROI. And they did… until they didn’t.

In order to sell that house for $700,000 there must be a buyer who believes that the price of that same house will continue to rise and be worth $1 million in another few years. But what happened when that sentiment died down and suddenly the buying market wasn’t as bountiful? The person who took out the $300,000 loan got stuck with a house they couldn’t afford, and a bank who wanted their money back. So what happens to banks when most of their customers can’t pay them back? They can’t lend out anymore money. This further accelerated the dwindling amount of home buyers. What a lot of consumers start going bankrupt? They liquidate their other investments (stocks). That’s when the market crashes. While I skipped over a few major details, this brief history lesson is a description of a familiar market phenomenon known as a bubble. Once the vast majority of people were stuck with homes they both couldn’t afford nor sell, the growing bubble of housing prices burst and created a tsunami over the global economy.

Now let’s think back to our friend Richard’s post. Although he may not have meant to say this, his words can be interpreted by a young audience, naïve to bubbles, as ‘hey put your savings into a crypto investment and then one day you’ll be able to sell it for a lot more money and be rich like me (but also work hard)’. This could be true for a certain time period, but what happens when an entire generation too young to remember the effects of the housing bubble all have the same bullish sentiment that they can buy crypto and eventually sell it to someone else for a steep profit in the future? A bubble grows. And what happens to bubbles that grow and grow? They burst. And what happens when bubbles burst? Yup, the tsunami thing.

So let’s take our average Gen-Z investor who sees Richard’s advice and says to themself, “well if I can make 10x on my crypto investment, why would I even subject myself to the struggle of climbing a corporate ladder when I can generate way more wealth by not even working?” Maybe that person passes up on a $100K job opportunity which Richard worked so hard to achieve. Instead, to make that $100k, they take all $10K of their savings from their summer internships and jobs from college and invest in crypto. This act alone has multiple ripple effects on the economy. For starters, it becomes harder for a company like Google or Tesla to hire talented young minds like Richard, because all of a sudden it isn’t worth it for them to take the job. Eventually those company’s begin to incur larger labor costs in order to entice skilled workers to come work for them. Suddenly it becomes way more expensive for Google and Tesla to keep innovating at the same level of profitability, and technological advancements in general begin to slow down. Not only that, but as these major company’s bottom lines begin to fall so do their stock prices. What happens to the older investors in those blue-chip stocks (like ya boi)? Their wealth begins to dwindle as well.

With a declining market, it becomes harder for people even younger than our hypothetical Gen-Z investor to generate that initial $10K of savings. There are fewer stocks for them to invested in, and there are fewer jobs for them to get (because the company has to pay more for the experienced workers, they have less money to pay entry-level positions). Not only that, but the local restaurant owner doesn’t have enough money to offer that kid a waitering job for the summer. All of a sudden when Gen-Z-investor-person looks to sell their crypto assets for $100K, there aren’t any of the buyers that Richard said there would be. No cap. As a result, this investor lost out on creating self-value by passing up on working for an innovative company out of college, AND has lost all of their savings. Now imagine a whole generation of people like this: broke and jobless. What happens to the economy then? Tsunami.

I hope I’m wrong; some of my exes would probably agree that I often am. While I understand the general concept of cryptocurrencies, I am far from an expert. I am also not an economist either (I just read a lot of their books). What I DO have are two eyes and history to refer back to. As I look at these patterns of the past and see posts like Richard’s, I worry that the unleashed Crypto bullish investors of Generation Zed can unknowingly be led down a path to creating a bubble that can burst one day and send the global economy back under water.

Allow me to reiterate that I definitely can be wrong (and so can Richard). That’s why I’m invested in crypto myself. Before you start laughing, let me tell you that it only accounts for roughly 5% of my total investments. If Richard is right and it 10xs, I’ll be pretty happy (and will probably be called a dumb millennial by Gen-Zers (at least I’m no boomer though right?!)). On the contrary, if the whole tsunami thing happens I’m more diversified than the poor Gen-Z kid who sunk all of their savings into it. Who’s laughing then, huh?

The point being: I don’t want to dissuade you from taking risks, but when it comes to investing in new/unpredictable advancements in technology, take any advice (including this) with a massive grain of salt and do your own research before you put your entire financial stability on the line.