Cryptocurrency is often portrayed as a revolutionary and democratic technology that can empower people and change the world. But is it really? Or is it just a massive scam that exploits the ignorance and greed of millions of people?
The COVID liquidity injection from central banks created a monumental everything bubble in 2021. Nowhere was this more evident that crypto. New ideas like NFTs and DeFi were thinly disguised get-rich-quick schemes which naturally attracted fraudsters.
An NFT, or a non-fungible token, is a unique digital token that is stored on a blockchain and can be used to certify ownership and authenticity of various assets, such as art, music, videos, and more. NFTs took off in 2021 to verify ownership of various digital images, the most famous of which was the Bored Ape Yacht Club collection. This was a collection of drawings of apes wearing different attire. It was particularly popular among celebrities who paid hundreds of thousands of dollars for these NFTs. The hype has since disappeared, and the price of Bored Apes has plummeted 99%.
Decentralised Finance (DeFi) was supposed to revolutionise the archaic world of finance. Instead, it turned out to be mostly a fraud. Yield farming promised investors high interest rates on their cryptocurrency holdings, at a time when bank deposits yielded nothing. However, to pay interest rates of 18% on your cryptocurrency holdings, DeFi projects would speculate on the price movements of cryptocurrencies. If this didn’t work, they used the new money coming in to pay the interest they had promised on the old money. If this sounds like a Ponzi scheme to you, that’s because it is.
FTX, founded in 2019 by Sam Bankman-Fried (SBF), rapidly ascended to become one of the largest cryptocurrency exchanges, enabling users to trade various digital assets, including Bitcoin, Ethereum, and a plethora of other coins and tokens. SBF, a MIT graduate and former trader, became a crypto wunderkind, advocating for ethical trading and effective altruism, and promising to usher in a new era of safe and regulated crypto trading. SBF was a significant donor to the Democrats. Meanwhile, FTX had paid $135m for naming rights of the Miami Heat’s basketball stadium. At this point, SBF could do no wrong.
However, the intrinsic volatility of the crypto market, combined with speculative trading practices, laid the foundation for a dramatic downturn. In 2022, the bubble began to deflate as the market faced liquidity crises, with several tokens and coins plummeting in value. Amidst this chaos, FTX appeared as a beacon of stability, partly due to SBF's promises of transparency and liquidity. He was compared to the legendary US banker John Pierpont Morgan, and even the famous author Michael Lewis was in the process of writing a complimentary biography about the newly minted billionaire.
The beginning of the end came swiftly and unexpectedly. A series of investigative reports revealed that FTX had been using customer funds to make risky bets through Alameda Research, a trading firm also founded by SBF and closely associated with FTX. Panic ensued, and customers rushed to withdraw their funds, leading to a liquidity crunch. SBF's empire crumbled in a matter of days. FTX filed for bankruptcy, and SBF resigned as CEO. The legal and financial repercussions reverberated globally, affecting millions of customers and numerous investors who lost billions of dollars.
At trial, SBF plead not guilty to fraud, however, his defence was vague and evasive. Recently, a jury found him guilty on all counts and he faces a maximum sentence of 110 years in prison. Given the poster child of crypto turned out to be a complete scam artist, the evidence continues to mount that crypto was the biggest delusion in human history.