FTX: Whatever dies makes us smarter

In a time of genuine crisis, the temptation is to channel unspecific but uplifting sentiment because no-one wants to hear that heading into end-of-tax-year territory, we’re not all going to make it (to the moon, wen?) but we’re all going down to hell in a handcart.

Whether this is actually a time of genuine crisis, I’m not sure, and anyways I don’t deal in sentiment.

Still, I like it that ETH is up today but I also expect this is meaningless in the medium term if FTX and Alameda Research are going to have to liquidate all their holdings on the open market as part of the bankrupcy process that seems to have been triggered.

Probably a hard fire sale in such terms is unlikely as various crypto institutions will step in and take advantage with OTC deals that don’t collapse public prices. Still, in the medium term, if ETH doesn’t break through the $1,000 floor and/or BTC down through $15,000, we will have gotten off lightly.

As is often the case, we could do much worse than measure our personal confidence (or lack of) against Buffett’s barometer – are you still fearful or can you be greedy?

But sidestepping that particular dichotomy, I’m also drawn to my favourite probablistic brain-twister, the Monty Hall problem.

For, if nothing else, the past week has provided new information about how crypto assets perform in a crisis.

So even if we can’t yet summon up avarice, we have nevertheless learned something valuable, notably about the connection of Solana to FTX, but also about the relative performance of assets ranging from BTC, ETH and MATIC at the top end, to the stability of stablecoins, which to-date have proven pretty stable, etc.

Of course, this is easier if you remember the basic rule of investing – and this is investment advice – only invest what you can afford to lose, especially true in crypto.

I also think that these situations are a feature – not a bug – of what blockchain offers, which is a self-contained global system of internet money. By definition, this means velocity is accelerated, and hence it’s hard to argue the demise of FTX isn’t justified, given the information about how it and sister company Alameda Research structured their collateral assets.

In this context we could even argue the fact that more bank runs haven’t happened in the fiat world is a bug arising from a system lacking in transparency and backed by governments obsessed with fiduciary stability.

Philosophically I’d also postulate that a decision which turns out to give the correct outcome – if made for all the wrong reasons – was not actually a good decision. It was a lucky decision.

As a collorary, I’ve enjoyed today’s juxtaposition of Tyler Cowan’s criticism of the Diamond-Dybvig model of bank runs and the Wall Street Journal’s view that crypto has reinvented bank runs.

As ever, Tyler is correct: bank runs are usually rational and crypto banks runs are just a quicker version of that rationality; better rationality in other words.

Which is to underline my fundamental thesis that for all its many faults, blockchain is an accelerated – and hence better – version of the future that if it didn’t exist, we’d eventually get to through other (worse) means.

Jon’s Gamestx Substack is home to his on-going thoughts on the collision of gaming and player-owned value networks and is sponsored by HiroCapital.

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