FTX and madoff, simlarities and differences

In a previous post about the FTX collapse I wrote:

An important aspect of the FTX collapse is just how many creditors there are and just how large the losses will be. This will no doubt have a huge impact on the entire crypto space. I'd expect this to put downwards pressure on things like the price of Bitcoin.

With more information being revealed I feel like the statement I made here is likely to be far less correct than when I wrote it. Specifically because of the specifics of how FTX was structured I think there will be less downwards pressure on crypto prices than I first estimated.

It turns out that the FTX scandal is far deeper and far worse than I first assumed. Initially, perhaps as a direct result of extremely favorable press coverage, I'd conceptualized FTX's problems as a liquidity issue. In that way of thinking about the problem a liquidity problem could cause forced selling of collateral, like BTC for example, to cover the obligations to customers. Forced selling in liquidations, especially from a large entity, can put very severe downwards pressure on prices.

But then I came to find out that the FTX situation is far more like the Madoff scam than it is a liquidity problem. FTX simply stole the depositors money, and an important detail of the fraud is that they didn't buy the underlying assets that the investors thought they were buying. So if you were a customer and you thought you were buying BTC on the FTX exchange you were at best getting a derivative contract but the actual BTC markets themselves would not have seen any volume created from that transaction. While high profile exchanges like this failing look terrible I think the impacts on some of these larger coins is likely more just due to the collapse in sentiment and the overall terrible state of the economy in the broader sense. Since FTX didn't have really any crypto assets there's no real way to liquidate them. As a result the counterparty risk has just screwed all their customers but probably hasn't driven down the price of various coins as much is I'd have initially imagines.

Similarities with Madoff and FTX

In some senses I think there's a lot of similarities between the operation run by Madoff and that of FTX. The main one being that the businesses were entirely fraudulent.

Another thing in common is that the people involved were popular in the financial media before the frauds unravelled.

The customers who left funds in these companies are likely going to lose heavily. These situations are a very good example of how counterparty risk operates.

Differences with Madoff and FTX

For a while I was very interested in the Madoff scam, much like the Enron scandal there was an enormous amount of money involved in the scam and when there's that much involved there's often a number of people involved which leads to a bunch of interesting dynamics. At this point the FTX scandal is looking like it will be even bigger in monetary terms than Madoff.

FTX was supposedly running an exchange while Madoff was supposed to be running an investment fund, both of course were entirely fraudulent but the stated aims were different and I think this has some interesting implications.

A huge difference is that the media was brutal on Madoff after the scam was revealed.

At the moment as of early December 2022 the media has been incredibly soft on the FTX scam. There's been a number of news articles that are just gaslighting and just outright misinformation. I find this to be a very notable difference between these two.