Like Tom Brady, looks like I barely made it a few weeks before un-retiring from blogging. But unlike Tom Brady, at least I didn’t pump FTX (protip for pro athletes: stay in your lane and stick to endorsing Cheerios).
In Brady’s defense, he wasn’t alone. Jim Cramer christened FTX founder Sam Bankman-Fried (SBF) “the new J.P. Morgan.” Shark Tank guru Kevin “Mr. Wonderful” O’Leary frequently boasted about being a shareholder and paid shill spokesman of FTX. In a glowing cover story, Forbes crowned SBF “the next Warren Buffett.” Sequoia Capital bet (and lost) $210M on FTX in what has now turned into a major embarrassment for the firm.
Then there was SBF himself—Scam Bankrupt-Fraud, as I now call him.
Obviously he isn’t a dummy in the conventional sense. The guy holds a physics degree from MIT. Many top FTX execs also hailed from SBF’s alma mater or Jane Street Capital, a high-powered quantitative trading firm. These were not dummies.
Yet, I contend that it really took a genius NOT to see the incredible scam afoot.
Unpacking the DeFi Scam
Around this time last year, I started getting curious when social media influencers and clowns such as O’Leary were yammering about how you could earn these incredible yields in crypto “savings accounts.”
In my November 2021 article on the subject, I displayed a screenshot from BlockFi that advertised a 9% APY. Others such as FTX were offering similar deals (side note: the WSJ just reported that BlockFi is preparing to file bankruptcy). Apparently very few finance professionals pumping this crapola stopped to consider a simple question: how could a crypto firm offer double-digit APYs when real interest rates at the time were close to zero?
In my follow up article in December of last year, I deconstructed the DeFi bubble that kicked off this madness and the hidden leverage that fueled it. Recall my handy dandy flowchart from last year.
TL;DR: this is a giant pyramid scheme.
Anyway, the moral of the story is that you didn’t need to be a genius to uncover this fuckery. I’ll be the first to admit that in terms of raw intelligence, people like SBF are way out of my league. All I do is ask simple questions, like what are his/her incentives? and where is the money coming from?
Generally speaking, if you can’t figure out how someone is making money, then chances are it’s fraud. Legit businessmen like Jeff Bezos and Warren Buffett clearly explained in multiple shareholder letters how their business models worked and made money. Fraudulent crypto bros, on the other hand, tried to make people feel stupid with incomprehensible technobabble (if only I had a dollar for every time I heard “you just don’t get it”).
So really, any ordinary Joe with a bank savings account yielding 0.06% could have immediately seen that the whole thing was a crock of shit...even without diving into the mechanics of DeFi.
Oh, and friendly reminder that if you need to ask if something is a Ponzi scheme, then it’s probably a Ponzi scheme.
happy you're writing again, I'm a big fan of the newsletter! i get that, financially, it probably isn't worth your time but your content is super helpful in understanding safe ways to think about investing. if you have any reading recommendations while you take a break from writing, please share them.