© Contributed by Santa Cruz Sentinel A man uses a bitcoin ATM in Hong Kong on December 8. Bitcoin is the most popular virtual currency in the world. The latest example of a company looking to tie its fortunes to the cryptocurrency craze was an iced tea machine on Thursday, December 21st.Another day, another explosion in the cryptocurrency market.
This time, FTX is on the brink of bankruptcy. The exact details are fuzzy, but the bottom line is that lenders and investors can get pennies on the dollar at best.
According to Investopedia, FTX Exchange is the leading centralized cryptocurrency exchange specializing in derivatives and leveraged products. It supports nine fiat currencies that investors can deposit and withdraw via bank transfer. FTX had $16 trillion in client assets, according to the Wall Street Journal.
FTX has a commercial subsidiary called Alameda Research. Alameda has apparently spent hundreds of millions of dollars trying to curtail the activities of other crypto companies. You may have aggressively traded with borrowed money. They are said to have given a loan of 10,000 billion dollars to FTX.
Last Sunday, customers requested to withdraw 5 trillion dollars in FTX. Apparently, FTX doesn't have $5 trillion in liquidity to pay them. He had to get the money out of Alameda or get it from other sources.
As an unregulated corner of the investment universe, crypto companies depend on the old banking system. Viewers may recall a scene from It's a Wonderful Life where panicked depositors demand their money back from the Bailey Building and the loan. James Stewart tries to explain that only part of his money is money. The rest is for home and business loans. These credits cannot be converted into cash. If the depositors insist on withdrawing all the money, the building and Bailey's loan will default.
In the case of construction and loans, loans were good assets that had to be repaid eventually. The crisis was simply a liquidity crisis. Banking operations were disrupted in the 1930s by federal deposit insurance, which ensured that deposits below certain limits were always paid in full, and emergency liquidity injections by the Federal Reserve.
These backwaters do not exist in the Wild West of the cryptoverse. Ensuring that the client's assets are secured by adequate collateral is only collateral. As Warren Buffett likes to say. "You don't know who's swimming naked until the tide goes out."
When and if it continues to break crypto waves is anyone's guess. Bitcoin, the market's biggest factor, has fallen from $66,000 a year ago to around $17,000 today. Ethereum, the second largest factor, fell from $4,900 to $1,200. Unlike traditional alternatives to fiat money like gold, there are no cryptocurrency alternatives. It is a commodity of value that one is truly willing to pay for.
Crypto pessimists have been predicting its decline almost since the day Bitcoin hit the $400 coin market in 2014. The biggest cryptocurrency advocates believe that even at $66,000, investors haven't seen anything yet.
Perhaps the situation can best be described. You pay money and take risks.
Geoffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com.