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Confused by the stories about FTX, SBF, CZ, and the demise of a cryptocurrency powerhouse? Read this piece by Jim Geraghty at National Review. Some highlights:
Back in 2017, Sam Bankman-Fried noticed that Bitcoin was bought and sold at significantly different prices in different countries’ markets — sometimes 60 percent more than the lowest priced markets. He bought Bitcoin in the markets where it was the cheapest, and then resold it in South Korean markets at a much higher price, what he nicknamed “the Kimchi Premium.” After a month, he launched his own trading house, Alameda Research.
Bankman-Fried founded FTX, which is short for “Futures Exchange,” in 2019. “In creating FTX, I wanted to build a platform for professional traders like me, while also bringing crypto trading to the mass market and first-time users,” he later said. He and his team had considerable experience with a lot of other big-name financial firms and tech companies such as Optiver, Susquehanna, Google, and Facebook. In other words, those who invested in and with the exchange believed that this team knew what they were doing.
As a cryptocurrency exchange, FTX allowed customers to trade cryptocurrencies for other assets, such as conventional — some would say, “real”– money or other cryptocurrencies. As with all currencies, the value of any given cryptocurrency is determined by what people — the market — collectively believe it is worth. If you have bought your morning coffee with U.S. dollars for your entire life, you likely feel confident that the coffee shop will accept payment in U.S. dollars tomorrow.
Every currency is maintained by a sufficiently widespread belief that the currency is currently worth something and will continue to be worth something in the foreseeable future. A currency’s value crashes when people no longer believe it is worth much, or worth anything at all.
Which might offer a lesson for the American dollar.
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