Time will tell on the matter of Sam Bankman-Fried and FTX. The view expressed in my new book The Money Confusion is that with any new commercial sector, there’s always lots of failure in the early stages. This was true with cars and the internet, so it shouldn’t surprise anyone that the crypto or private money rollout would be littered with mistakes.
That progress is messy explains the reluctance here to vilify Bankman-Fried, or FTX’s primary investor, venture capital firm Sequoia. While any new business that succeeds is a bit of a miracle in consideration of the dynamic nature of the U.S. economy, the ones bent on inventing an all-new future are particularly miraculous. In Bankman-Fried’s case, his desire to bring crypto or private money into the mainstream had him taking on the dollar; the latter easily the world’s most trusted and circulated currency.
While opinions expressed about Bankman-Fried will evolve more negatively if he in fact stole from his customers or investors, for now the view of him is a positive one. We need more intrepid producers bent on creating a different tomorrow, and we also need investors like Sequoia with the means and the willingness to lose enormous sums of money on frequently borderline crazy individuals out to try something different.
Sadly, the media analysis of Bankman-Fried and his investors has been all about heaping pejoratives on the “disgraced” FTX founder, in concert with expressions of wonderment that Sequoia and others would back such an oddball to begin with. This kind of analysis on its own has been disappointing. See above. We need more of this kind of investment in the outlandish, not less.
Worse, the analysis has given new meaning to braindead. Consider a recent New York Times report that referenced more flush times for FTX when Bankman-Fried “found ways to inflate the prices of digital coins to benefit his companies.” Ok, but if Bankman-Fried had been capable of “manipulating” markets in a way that lifted certain coins in artificial fashion, why didn’t he continue to do that in order to keep FTX afloat? The Times article didn’t say, and with good reason. Really, what could it have said?
The aforementioned Times report further indicated that FTX hedge fund subsidiary Alameda Research would buy certain coins “to prop up their value,” then use “FTX’s influence in the crypto industry to drum up interest in those coins and persuade other investors to also buy significant amounts.” Please re-read what’s in quotes a few times, and then stop and think.
If Alameda was buying certain coins, and if some buyers were buying them alongside Alameda in “significant amounts,” then some coin holders were selling them in “significant amounts.” Contra the implied analysis of the Times, in every market there are buyers and sellers. As in right as Alameda and FTX were allegedly drumming up interest in certain coins, sellers were selling. Markets “manipulated”? Apparently not. Not everyone bought into the hype that the Times imagines Bankman-Fried et al manufactured.
The post-decline analysis of FTX and Bankman-Fried at least for now reveals reporters searching for something amiss, only for them to happen on happenings that would only read as “amiss” to those who lack even a basic understanding of markets. A market by virtue of being a market is comprised of bulls and bears. If what FTX’s sleuths imagine existed had in fact existed, then there would have just been buyers. Think about it. Information moves fast in markets, and if FTX could crown winners just by creating fever about certain coins, then there quite simply wouldn’t have been sellers.
Which leads us to the other popular narrative: Sequoia was blind, or it was tricked, or it was careless. Combining a wide range of opinion pieces about Sequoia, the rising consensus seems to be that even basic due diligence on the part of investors could have exposed the FTX “scam.” Are the chattering classes serious? Do they honestly think that the world’s most successful venture capitalists (Sequoia - $85 billion under management) don’t have internal systems in place, and instead that they rush blindly into investments that commentators with no investing background wouldn’t.
The reality is that entrepreneurs and those who invest in them are not like you and me. While we understandably search for established commercial concepts that we can buy shares of for the long term, venture capitalists are as a rule in hot pursuit of what by any reasonable analysis is impossible.
That Sequoia’s critics don’t understand the above truth only to claim FTX was “obvious” doesn’t indict Sequoia, but it does expose the VC’s critics as hopelessly unaware of the business venture capitalists are in. By the “due diligence” standards claimed by those well outside the proverbial arena, they would never have the mind or the nerve to put capital to work in the technology space.
Which is the point, or should be. While the truth about FTX, Sam Bankman-Fried and Sequoia has yet to be told, reasonable minds can hopefully agree that at least for now, the truth is being mangled by individuals with noses pressed firmly against the glass.
