"Easy Money"

Cryptocurrency entirely fell off my radar after my initial vague suspicion about it. Little did I know it became so distastefully huge before all the chickens (or maybe not all yet) came home to roost. Ben McKenzie & Jacob Silveman did a really good job distilling economic concepts and pinning down exactly why the whole 'ecosystem' isn't to be trusted.

• The only thing needed to own a piece of the “future of money” was a willingness to part with the current version of it.
• research from fields such as history, sociology, anthropology, psychology, marketing, literary criticism, and perhaps most fittingly for our purposes, epidemiology. He defined an economic narrative as “a contagious story that has the potential to change how people make economic decisions, such as the decision to . . . invest in a volatile speculative asset.” His first example? Bitcoin... Narrative Economics was published in 2019, prior to both the current viral spread of cryptocurrency and the COVID-19 pandemic. Given that, it is remarkable to observe how intertwined these two viruses would become in the following years.
• Before the crisis, the Fed’s assets were $900 billion. By early 2010, they were $2.3 trillion. <> It didn’t end there. Originally intended as a short-term response to an immediate crisis, these policies became entrenched.
• consensus algorithm is a process by which people with differing views can reach limited agreement about an outcome over time. Bitcoin’s innovation is to do this without trusting any clock. Every block in the Bitcoin ledger has to conform with the rules of Bitcoin... However, they can’t reach this agreement worldwide instantly, and so there are additional rules. These rules have the effect of increasing the certainty of the right current block, and its predecessors, over time. The network targets a new block every ten minutes or so, by dynamically adjusting the degree of difficulty required in the winning block; the more participants, the harder the process gets, and the more energy is required to guess the next block correctly.
• his administration refused to acknowledge the depth of COVID crisis in early 2020, other branches of the federal government panicked. Fearing economic immolation, Congress and the Federal Reserve unleashed a fire hose of money meant to keep the economy from burning to the ground. In response to the threat of COVID-19 shutting down the economy, some $5 trillion flooded into the US economy.
• a Ponzi scheme does not need to have a central administrator to fit the broader definition of one. Instead, a “naturally occurring Ponzi” can form simply in response to a rise in price.
• The first problem I had with cryptocurrency was the word. They were using the wrong one... currencies do things: They are a medium of exchange, a unit of account, and a store of value.... The more a currency fluctuates in value, the less useful it is... Cryptocurrencies didn’t do any of these things well.
• Bitcoin is able to handle only five to seven transactions a second; it can never go above that. Visa can process 24,000. To operate, Bitcoin uses an enormous amount of energy, the equivalent in 2021 of Argentina—the entire country.
• Well, you put real money into them and hope to make real money off of them through no work of your own. Under American law, that’s an investment contract. More precisely, it’s a security.
• In terms of protecting investors, the primary purpose of those laws was to require disclosure on behalf of the issuer;... Cryptocurrencies have no disclosure requirements, effectively by design; the pseudonymity of the blockchain conceals who owns what. Much like the 1920s, this left the door wide open for deception and scams... There were now potentially 20,000 unregistered, unlicensed securities—more than all the publicly listed securities in the major US stock markets—for sale to the general public.
• But cryptos don’t make stuff or do stuff. There are no goods or services produced. It’s air, pure securitized air.
• Let’s break down five of the biggest red flags for Tether and explain their significance. The first red flag for Tether was the fact that it had never been audited... The second red flag for Tether was its size relative to its workforce. Twelve employees (maybe even fewer) are running a business that deals in tens of billions of dollars?... The third red flag was the personal histories of executives running the company... And over time, they added other language to their terms of service that practically gave them the right to refuse redemptions for any reason. This is the crimson flag when it comes to fraud, especially Ponzi schemes.
• Wash trading is the practice of buying and selling an asset back and forth among accounts you control in order to give the appearance of demand for that asset. Crypto is perfectly suited for this sort of manipulation. There is no limit to how many addresses an individual or company can own, but their identity is masked by the pseudonymity of the blockchain... A working paper published by the National Bureau of Economic Research from December 2022 found that 70 percent of trades on unregulated exchanges were fake...
• We had heard of people being forced to use Tether in places like Afghanistan, where the banking system was broken, and Argentina, which experienced an inflation rate as high as 83 percent in 2022.
• Tether’s sketchiness was obvious to us all, and we assumed its inevitable undoing would take down the entire crypto industry—if all the chips disappear from the casino, how are you going to keep gambling? Yet Tether seemed unstoppable: Over the first couple years of the pandemic, its market cap went from $4 billion to $65 billion. Eight-figure settlements with the New York Attorney General and the CFTC weren’t enough to slow it down.
• Investing in fraud is like that, but for equities; you’re trying to find Springtime for Hitler in the form of a stock.
• It had the feeling of a generational hallucination that would lead to widespread financial ruin. Tulip mania, the Wall Street Crash of 1929, Albania’s Ponzi-inspired civil war—take your pick. But all day, from Twitter to CNBC to the guy running a nearby postal store, I heard how wrong I was. Economic fundamentals didn’t matter. The proof was in the charts: Number go up.
• The victim finds (misplaced) comfort in the deceptively sympathetic remarks of the very people who perpetrated the fraud. It’s a time-honored con man tactic updated for our pseudonymous digital age. <> The contortions involved in such verbal cosplay can be impressive, but they are predicated on a familiar psychological foundation. Responding to feelings of alienation and disaffection from traditional finance, government institutions, and a rigged economy, many coiners really do feel that they are part of a like-minded community, albeit one that reflects a certain strain of libertarian, escapist politics.
• Most crypto investors were effectively putting their trust in the people running FTX, Binance, Bitfinex, or any one of the more than 500 exchanges in existence by 2022. While it was possible to hold the cryptocurrencies you owned off an exchange (referred to as self-custody), practically speaking this could be complicated and, therefore, was not done by the vast majority of crypto investors.
• there’s an alluring simplicity in the idea that open-source computer code could free humanity of oppression. Unfortunately, creating money that’s trustless is impossible in practice, for it goes against the very nature of money itself.
• In that sense, the stated goal of cryptocurrency—to create a trustless form of money—is literal nonsense. You cannot create a trustless form of money because money is trust, forged through social consensus.
• In 1932, Congress belatedly passed the Glass-Steagall Act, injecting $1 billion of cash into the banks by designating government securities as assets eligible to back the US dollar in addition to gold. But by then it was too late; credit kept shrinking at a rate of 20 percent a year. As Ahamed notes, “A similar measure in late 1930 or in 1931 might have changed the course of history. In 1932 it was like pushing on a string.”
• One man told us that he belonged to at least four DAOs—decentralized autonomous organizations—from which he earned several different cryptocurrencies... We asked how he juggled all of the different digital currencies. “Well, there’s another DAO that helps with that,” he said.
• (CIA) that while crypto was being used by the bad guys for money laundering, he had also found it useful to pay informants. Easy to move across borders.
• (Near Austin:) The abandoned Alcoa aluminum plant had been transformed into the Whinstone Bitcoin facility, the largest crypto mine in the United States
• In another warehouse a short drive over, we found the opposite: near silence. Hundreds of Antminer machines were immersed in mineral oil, which acted as a coolant. The noise was faint, murmuring beneath the viscous liquid. There was no miasma of heat rising from the machines, no otherworldly noises. But there was a sense of experimentation and vague horror,
• I couldn’t help but notice the flimsy underpinnings of this otherwise sturdy mining operation. This company was using enormous amounts of electricity to mine speculative digital assets to keep a zero-sum game of chance going. Texas’ notoriously over-worked electric grid
• If you are a Chinese billionaire, there are numerous ways to get around this, but one of the less expensive ones is crypto. Either buy crypto with yuan and cash out into dollars or other currencies overseas, or perhaps better yet, invest in Bitcoin mines (often using electricity stolen from the grid) and then move the mined Bitcoin via crypto trading elsewhere. Mining exploded in China in 2016 and 2017, and as the value of Bitcoin and other cryptos rose, the country quickly became the dominant player in the industry, accounting for approximately 75 percent of global mining capacity.
• For an hour he frantically tried to get out, but just as for Kim, the app wouldn’t work. “I saw my position get liquidated,” said Ahmed. Rather than allowing Ahmed time to rectify the situation by providing more funds, in what’s referred to as a margin call, Binance’s liquidation engine was triggered and Ahmed’s money disappeared instantaneously. “It was right in front of my eyes.” Just like that, Ahmed’s eight-figure crypto fortune was gone... The response from Binance was of little help to users. It nevertheless revealed something fundamental about how cryptocurrency exchanges exist as murkily operated casinos that are essentially unaccountable to their customers.
• Peter Thiel, the arch-capitalist fifty-four-year-old cofounder of PayPal, was throwing one-hundred-dollar bills from the main stage, trying to signify their unimportance. When members of the crowd rushed to grab them, Thiel appeared shocked. “I thought you guys were supposed to be Bitcoin maximalists!”
• Big and energetic, full of boozy salesmen talking about how Bitcoin had changed their lives, with sponsorships adorning every surface, it was a Potemkin village of American consumerism and gambling addiction masquerading, in typically humble crypto fashion, as the future of the entire financial system.
• “In Miami we have big balls,” said Francis Suarez, Miami’s Bitcoin bro mayor, who has toyed with the idea of abolishing taxes and funding the city through a nearly worthless token known as MiamiCoin.
• As Jacob liked to joke, one sign that Tether was a fraud was that the company had never sued anyone for calling it a fraud. (As Tether’s leadership surely knows, the discovery process goes both ways.)
• My hunch was that crypto, which was born out of the ashes of the Global Financial Crisis, was now, ironically, recreating the circumstances that had led to the previous crisis. Risk-tolerant crypto traders and exchanges owners were stacking leverage on leverage
• The day before, while watching a government presentation about the new Chivo Wallet system, Mario noticed something odd. There was a QR code on one of the slides in the deck, and when you scanned it, it took you to an address that had previously been used to scam people. In 2020, approximately 130 high-profile Twitter accounts had been compromised and used to promote a Bitcoin scam... The government was using a scam wallet address in the promotional materials for the new Bitcoin monetary system they had developed in secrecy and were about to deploy.
• Under the state of emergency introduced by Bukele and his Nuevas Ideas party, civil liberties in El Salvador were suspended in the name of fighting rampant gang violence... Police were given triple-digit daily arrest quotas.
• The government’s disastrous rollout of the Chivo Wallet system left them with few good options, but Bukele, ever the gambler, refused to concede defeat. In November 2021, Bukele announced what he called Volcano Bonds. Half the money raised would be used to purchase Bitcoin, the other half would finance the construction of Bitcoin City, a tax-free paradise for coiners in eastern El Salvador... It didn’t make much sense, economically, environmentally, or politically. El Salvador is the largest net importer of electricity in Central America,
• Wilfredo would rather fish, farm, eat mangos, and live in peace. He was proud that for forty-two years he had provided for himself, needing nothing from the government. Why did they need to take his land?.. I listened as he spoke clearly, simply, and convincingly. Sitting in peace under his mango tree, it was hard to understand why any of this needed to happen.
• In the recordings, Marroquín admitted he coordinated the clandestine release from prison of a top-level gang member and escorted him to Guatemala to show his “loyalty and trustworthiness” to the gang. <> The historic peace between the gangs that the new president had boasted of so proudly? It was predicated on a lie.
• a dollar-pegged stablecoin called TerraUSD (UST) and another token called Luna (LUNA). The two were bound together via an arbitrage system designed to keep Terra, a so-called algorithmic stable-coin, at one dollar. This was accomplished via a trading mechanism, allowing Terra holders to exchange one UST token for one LUNA token at any time. The LUNA token was then “burned,” or destroyed, helping to drive up the value of the remaining LUNA by decreasing its supply.
• But what I couldn’t believe, even by the rock-bottom standards of crypto, was that weeks after Do’s TerraLuna empire blew up, he tried to do it all again, barely pausing to catch his breath, or to take accountability. And he had much of the industry’s support. <> On May 28, Do Kwon launched what some called TerraLuna 2.0. There was no algorithmic stablecoin this time, but there was a new coin with the ticker LUNA, though, confusingly, it was called Terra. Its decimated predecessors were renamed Terra Classic (LUNC) and TerraClassicUSD (USTC) and remained widely tradeable.
• Leverage + Rigidity + Complexity + Bank Run = Crash
• FTX was considered the leading force pushing for the underfunded Commodity Futures Trading Commission to assume greater regulatory authority over crypto, rather than the better-heeled, enforcement-ready Securities and Exchange Commission. There were other political battles at play—over derivatives regulation, over stablecoins and banking—and SBF seemed to have his hand in all of them.
• Reportedly, Sequoia was blown away by Sam’s grand vision of FTX during a Zoom call with him, only to discover afterward that he had been playing the video game League of Legends while on the call. While normies like us might think that to be a bright red flag, that is not the mindset of VC firms in Silicon Valley seeking enormous returns. This guy was that brilliant and playing a video game at the same time? Quick, give him as much money as you can!... it raised another $420.69 million from sixty-nine investors (get it?), including the Ontario Teachers’ Pension Plan.
• Recall that Excapsa was the holding company of Ultimate Bet, the online poker site that had a secret “god mode” where insiders could see other players’ cards. So FTX/Alameda’s top lawyer worked with Tether’s top lawyer at the parent company of the card cheating website. Huh. <> Another bright red flag was how small the circle of trust appeared to be at FTX. Remember that when running a con, controlling access to information is crucial.
• Sam pointed out that Bitcoin can only process 5–7 transactions per second. By his own admission, Bitcoin was “four orders of magnitude” away from accomplishing this.
• “. . . yeah, in the spring. I asked him how much real money is in crypto and he said 10 to 15 percent.”
  “And by real money, I’m guessing you’re saying dollar, or euro, or yuan inflows into the ecosystem?”
  “I didn’t need to explain to him what real money is. If I was going to explain it to you, yes.”
• “And you mentioned on Twitter, you said, ‘The system was transparently going to falter.’”
  “Yes.”
  “But FTX listed Terra.”
  “So, again, part of this was it wasn’t until after this happened that I did as deep of a dive—”
  “But you said it was transparently going to falter—”
  “Transparently, what I meant by transparently there was that there was publicly available information that implied that.”
  “So transparently to someone else, but not to you?”
  “Transparently—”
  “Not to you at the time—”
  “Transparently, to the world, to anyone who chose to do—”
  “To ‘do their own research.’ ”
  “Right.”
  “But that didn’t include you at the time?”
• In this roundabout of favor trading, dealmaking, and citizenship shuffling, Sun may have been seeking both profit and political protection. <> Sam said he hadn’t done a deep dive into USDD, but he was “pretty skeptical of it.” Still, Sam’s own trading firm was a key player on the project.
• On the surface, Bankman-Fried seemed to have all the angles covered—a major exchange, his own personal crypto trading firm, a deep portfolio of investments, political influence, the benefits of living and doing business in an overseas jurisdiction, and a public reputation as a madcap mogul on the make... Seemingly every strange market movement or diabolically savvy trade was attributed to him, usually just on the strength of rumor. Sometimes these tilted into anti-Semitism
• According to Bloomberg, “donations from people working in digital assets reached $26.3 million” in 2021 and the first quarter of 2022, more than donations from execs in big pharma, big tech, or even the defense industry.
• This is why things like currencies and interest rates are regulated as commodities. Basically anything that involves a derivatives contract on an underlying asset can be deemed to be a commodity, unless it’s already been classified as a security. The broad definition of commodities created a gray area between the legal definitions of commodities and securities that could be exploited.
• the reality is that Bitcoin’s ownership is actually extraordinarily centralized, concentrated in a tiny group of whales and mining pools. In fact, just two mining pools account for 51 percent of its global hash rate, meaning just two large groups control the majority of new Bitcoin created. Additionally, just because we don’t know who came up with Bitcoin originally doesn’t mean no one did. Whoever Satoshi Nakamoto is, it’s a real person or real people. Once again, code does not fall from the sky.
• (That’s not to overlook the efforts of SEC Commissioner Hester Peirce, whose enthusiasm for the industry is legendary. In late May 2022, after the spring collapse was already underway, she complained: “We’re not allowing innovation to develop and experimentation to happen in a healthy way, and there are long-term consequences of that failure.”)
• Some customers might have known that the promised yields were based on juiced numbers, but in crypto, the word Ponzi had been practically rehabilitated. Ponzinomics were suddenly everywhere. The dollar was now considered a Ponzi—only a bad one.
• For Celsius the corporation, its “community” was paramount. It was mentioned in nearly all of their tweets, press releases, ads, and rambling speeches by executives in Twitter Spaces events. Even the company’s press release announcing its bankruptcy filing contained a few nods to its community—clearly an attempt by the company at cooling the mark.
• These monetary networks are not as transparent as one might be led to believe. Some tokens are more private than others; there are ways to mask transactions or swap out “dirty crypto” for “clean crypto” via what’s known as a mixer.
• But Mashinsky had been careless, rarely obscuring his tracks. James was able to discover Mashinsky-controlled wallets that had profited from several ICO scams run by former Mashinsky business associates. In one instance, James used Mashinsky’s Twitter profile picture to track down another of his many wallets. The profile picture was an NFT—a stylized image of Mashinsky in the form of a Roman bust. The picture was linked to the wallet that owned it. <> It was startlingly simple, just clicking on a profile photo to find one of Mashinsky’s wallets, but no one had bothered to look.
• James summed up the situation, emphasizing the role of the company’s FTT token: “It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties. Almost as if he discovered a financial perpetual motion machine.” <> That financial perpetual motion machine looked a lot like the Celsius “flywheel” concept that James had previously investigated, and that Professor Hilary Allen had warned about in February of that year. Create a token out of nothing; pump its value; put it on your balance sheet (look, you’re rich!); use that loaded balance sheet to raise real dollars in investment capital; then take those dollars and buy some companies, some politicians, and naming rights to a sports stadium. Repeat the cycle—keep the flywheel spinning—until it all falls apart.
• Things went sideways, and it was hard not to feel the industry was fumbling toward an existential reckoning. Several crypto whales died within weeks of one another, their deaths alluding to the industry’s seamy underbelly.
• The market crash of the previous year exposed his fraud, as his clients rushed to withdraw their money only to find it wasn’t there. Almost exactly fourteen years later, on December 12, 2022, Sam Bankman-Fried was charged with similar crimes after the crypto markets experienced a similarly precipitous drop
• The original computer code that would become Bitcoin included a poker lobby, a framework from which a virtual poker game could be built. ... One day we may find out Satoshi’s true motivations. For now, all we know is that they were initially interested in poker. The fact that the creation of a new form of digital money coincided nearly perfectly with the impending destruction of online poker may be a historical coincidence. Then again, this is a book about money, lying, gambling, and fraud. It would only be fitting if online poker lay at the foundation of it all.
• At the time of its closure, Signature held approximately $100 billion worth of assets, and $16.52 billion in digital asset–related client deposits. While the speed of the failures was alarming, I couldn’t help but notice that two of the three collapsed banks had significant exposure to the volatile world of cryptocurrency, and the third (SVB) counted as clients the crypto companies Ripple, BlockFi, Circle, Avalanche, and Yuga Labs, among others.