FTX was in talks two months ago to raise 1Billion equity at 32Billion valuation. Binance threatens to sell its holdings of FTX tokens and it all crumbles? How isn’t this a big Ponzi scheme?
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Well, there’s no lender of last resort for nongovernmental/unregulated currencies. The intrinsic values is what the next person is willing to pay. When people lose confidence high volatility things crash fast.
Oh wait, you said ELI5. Yeah, it’s a Ponzi scheme.
FTX bailed out other Many people, including economists, will tell you it IS a ponzi scheme (or pump and dump).
But basically what happened is more people wanted to withdraw money than FTX had available. It’s basically akin to a run on a bank. Banks don’t have enough cash on hand to give everyone all of it at once, or even most of it, for the most part that’s fine, people don’t usually withdraw lots of cash all at the same time, especially these days with credit cards, debit cards, digital payment, etc. but when it DOES happen a bank could theoretically borrow money from a larger bank or as a last resort the government.
FTX doesn’t have as many options for a few reasons.
First crypto is highly volatile with the value changing dramatically in a short period of time. So maybe they had enough cash on hand last week, but now say the value of a crypto currency doubles and suddenly your cash on hand is basically cut in half.
Second, the crypto economy is not nearly as big as the dollar economy, so there are fewer options for a bailout if needed.
Third, the government doesn’t back crypto. Unlike a bank, they won’t step in to help a crypto exchange or its customers if the exchange goes belly up.
At the end of the day crypto is volatile, has limited utility without being exchanged for another currency, has little history, and has very little support in case of troubles. It’s highly risky, probably a scam.
FTX is primarily an exchange. You put in either actual money or crypto tokens, and FTX lets you trade them with other people.
Exchanges charge transaction fees when you trade, so in theory, they could just hold people’s assets, facilitate the trades, make money, and call it a day. In that hypothetical world, every dollar in someone’s FTX account is backed by a dollar in FTX’s corporate account, and all the crypto tokens are backed 1:1.
However, they look at all this money, especially the dollars, and say, “hey, let’s reinvest this, and we’ll earn some interest on it and boost our profits.” So now, they’re not holding dollars 1:1, they’ve got some other assets they bought.
Now, we don’t know what all they bought with people’s dollars, but since they’re a crypto company, they probably bought crypto.
Ok, so what seems to have happened is people got spooked, and wanted to take their money out. When a lot of people do this, FTX doesn’t have the dollars, and needs to sell their crypto. At the same time, people were losing confidence in FTT, which is a token that FTX had a lot of. Both these things drive down the price of crypto meaning that FTX was having trouble getting enough real money to pay the withdrawals.
This isn’t a classic Ponzi scheme where new investors money goes to pay returns for old investors; more like your gambling-addict stepdad losing the rent money.
> How isn’t this a big Ponzi scheme?
Wrong scam. Ponzi schemes work by paying existing investors with the money taken from new investors, creating the illusion of profit, to lure in more new investors. There is no value, just money moving around
Bitcoin and crypto are pump and dump scams. Something absolutely worthless is created, you convince a bunch of people it is worth something and will get more valuable over time, you trade it amound other pump and dump scammers at ever higher prices creating the illusion of value growth and driving up the price, and then unload the worthless item to a bunch of suckers for the artificially inflated price. There is no value, just preying on uninformed, greedy people.
Crypt is a pump and dump scam, not a ponzi scheme.
It sounds more like Enron where they offloaded their assets off Enron balance sheet into shell companies and recordEd these as sales.
Yes, when it comes to crypto currency, it’s all one big ponzi scheme
These aren’t meant to be used as actual currency, they’re meant to be traded and due to the nature of crypto, the early investors and and creators will get rich over everyone else. What happened to FRX was designed to happen exactly the way it did
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