The Bezzle and FTX

 

It is hard to get a full handle on what happened to the FTX exchange and the crypto market in the last week. We know that FTX filed for bankruptcy. We know from filings that the liabilities exceed assets which may be at inflated levels. We know that customer funds are frozen, and they were used to support the FTX trading arm. We know that FTX is both a cause and casualty of a crypto-bubble popping. 

We should not be surprised by this story. We have seen it before. It has occurred during other periods of market excess. The bezzle is the period when an embezzler has his gain, and the victim has no loss. Charlie Munger would refer to this financial illusion as the febezzle or functional equivalent of the bezzle when psychic wealth is created even without illegality by mistake or self-delusions. This was the period before the FTX failure. 

We have moved from Galbraith's bezzle to bankruptcy. As Buffet would say, the tide has moved out, and we will find out who is wearing swim trunks. There was Ponzi, the Match King, Madoff, and assorted other characters during bubble who made wild promises only to generate a house of cards. Sam Bankman-Fried may be added to this list, a persona based on a flim-flam mixed with hubris, poor management, and hucksterism.

We will now have an investigation. There will be more regulation which is late to solving the problem. Participants of the exchange who had funds at FTX will take losses as general creditors, investors in the company will write-down investments, and we will ask how this happened and tell tales of greed and excess which will serve as a warning for future investors. It will happen again. 

Once again - greed, FOMO, and ignorance play a key role with investors parting with their money. The big tale of crypto taking over finance is over. The only story will be about a bubble and its aftermath.