I feel like the commentariat want to make the FTX implosion more legible by slapping the fraud label on and putting them in the same bucket as familiar stories like Enron and Theranos. But there are some critical differences that are getting glossed over. FTX was genuinely a highly profitable firm with a great and differentiated product. While the story is still getting written, it seems likely that the actual fraud started rather late, after taking big trading losses (perhaps from the Terra/Luna meltdown in May), and was basically a case of gambling for resurrection. If that's the case you can hardly blame VCs for missing a fraud that hadn't yet started when they invested.
We don't know the full story yet, but it's worth noting that some of the things people really loved about FTX may have been related to loss making trades by Alameda.
Alameda was a major market maker on the platform, and some of what may have drove the perception of FTX as a great place to trade may have been just Alameda regularly losing money while providing liquidity. The best example might be their mechanism for liquidating accounts that didn't meet margin calls. They have a bunch of complicated verbiage about how this works, but it seems likely the actual underlying mechanism was just Alameda bought you out so as to avoid impacting the rest of the market - in the process catching a bunch of falling knives that they were probably losing a lot of money on.
You're probably right about the liquidation engine, although it was just a small part of what made FTX an attractive product. FTX charged very competitive trading fees, didn't charge fees on most withdrawals (in an industry where gouging customers with inflated withdrawal fees has sadly become normalized), had responsive customer support, rarely had downtime, had low API latency, and had a web site that just felt more professional than its peers. I've heard the theorizing that FTX was attracting traders by having Alameda lose a lot of money but I hardly find it plausible. Maybe very early on, but FTX had clearly reached critical mass some time ago.
This is a good point, also why I don't blame the investment per se. And note I do differentiate the cases, with this one being hubris. Though from the lack of any basic hygiene on any of those financial reports I'm not sure how the last few rounds got done - that's pretty YOLO at large double digit billion valuations.
I feel like the commentariat want to make the FTX implosion more legible by slapping the fraud label on and putting them in the same bucket as familiar stories like Enron and Theranos. But there are some critical differences that are getting glossed over. FTX was genuinely a highly profitable firm with a great and differentiated product. While the story is still getting written, it seems likely that the actual fraud started rather late, after taking big trading losses (perhaps from the Terra/Luna meltdown in May), and was basically a case of gambling for resurrection. If that's the case you can hardly blame VCs for missing a fraud that hadn't yet started when they invested.
We don't know the full story yet, but it's worth noting that some of the things people really loved about FTX may have been related to loss making trades by Alameda.
Alameda was a major market maker on the platform, and some of what may have drove the perception of FTX as a great place to trade may have been just Alameda regularly losing money while providing liquidity. The best example might be their mechanism for liquidating accounts that didn't meet margin calls. They have a bunch of complicated verbiage about how this works, but it seems likely the actual underlying mechanism was just Alameda bought you out so as to avoid impacting the rest of the market - in the process catching a bunch of falling knives that they were probably losing a lot of money on.
You're probably right about the liquidation engine, although it was just a small part of what made FTX an attractive product. FTX charged very competitive trading fees, didn't charge fees on most withdrawals (in an industry where gouging customers with inflated withdrawal fees has sadly become normalized), had responsive customer support, rarely had downtime, had low API latency, and had a web site that just felt more professional than its peers. I've heard the theorizing that FTX was attracting traders by having Alameda lose a lot of money but I hardly find it plausible. Maybe very early on, but FTX had clearly reached critical mass some time ago.
This is a good point, also why I don't blame the investment per se. And note I do differentiate the cases, with this one being hubris. Though from the lack of any basic hygiene on any of those financial reports I'm not sure how the last few rounds got done - that's pretty YOLO at large double digit billion valuations.