The tide is going out in crypto. Let’s see who is naked. Today, BlockFi declared bankruptcy. They pointed the finger at FTX. I pulled this from their blanket email.
This action follows the shocking events surrounding FTX and associated corporate entities (“FTX”) and the difficult but necessary decision we made as a result to pause most activities on our platform.
I don’t have any assets at all there. What little I have in crypto is at Coinbase.
This is 2001 for crypto. Virtually every crypto company is going to come under a lot of stress. In 2001, you could pick up a lot of internet businesses for super cheap. Fortunes were made.
But, the biggest difference between the two instances that I see are that all the internet businesses that survived had core businesses that you could point to. Amazon had a core business. Apple had a core business. They did something that an end user valued and paid for. They made a margin.
In crypto, virtually everything I have seen is speculative.
I am seeing a lot of stuff that is being written about how FTX would never have happened had it been decentralized and the DeFi exchanges are better. Yet, hackers have hacked into plenty of DeFi projects and lifted millions of dollars out of them.
At the same time, you can bitch about the traditional centralized exchanges all you want. But, the companies or products listed on them create value for end users.
Not one crypto effort is creating value for end users yet at any scale. It is a pure speculative instrument. I hope that changes, soon.
Crypto won’t have to worry about US regulation if it doesn’t build anything of value. The market will sweep it away on its own.
I have blogged that matching trades is the easy part of being an exchange. Clearing and settlement are the backbones of an exchange and critical to execution. You can’t get the full faith of customers without it.
The most important feature of a market is a transparent price. As Milton Friedman has said, the price system makes supply and demand work. It forces the invisible hand to perform.
When I traded, there was real price discovery going on. On the open, there would be orders from all over the world that came in. Locals that had positions would try and move the price to their advantage on the open if they could. Everyone would look at indicators and the cash market to see what was going on there. Then, they’d reach deep down into their brain and use some intuition and figure out a price. The opening bell would ring and off the market would go.
Is there any real price discovery going on at DeFi exchanges or are they just pulling prices off other exchanges and making trades?
When I go online and read about various DeFi efforts, it’s algorithms that are sucking in data and posting prices. That’s not real price discovery. It currently looks like a boutique OTC swap market, not an exchange market. I am open to being corrected about that opinion.
Price discovery is a core feature that must be part of an exchange in order for it to have any value. Otherwise, it’s just a front-running scheme or a liquidity leech. Old time market makers will understand this. Market takers will be confused. In my experience, when the shit hit the fan, market takers were always confused. In electronic markets, they shut down their algorithms. Those that know, know the difference.
These virtual exchanges remind me of the promises on EnronOnline. Enron created a virtual trading pit where they acted as a market maker. If you used Enrononline, you gave away your position to Enron. They justified their market making as "price discovery" although in reality it was nothing more than market manipulation.
Taxpayers are naked.
"Let’s retell this story using entities of the U.S. government. The Treasury is like FTX, issuing tokens that it calls bonds. The Fed is like Alameda Research, taking these tokens on its balance sheet to try to support their price."
https://arnoldkling.substack.com/p/the-government-as-a-crypto-scammer