- Here in the world of crypto, we've seen a thing or two.
Stablecoin collapse, major hacks,
frozen funds, defaulted loans.
It's been a weird month
- and in our darkest hour, a hero rises.
Kind of.
Two struggling crypto firms, Voyager Digital
and BlockFi received massive loans.
See, the crypto industry is kind of on its last
leg and these loans are meant to help prevent total
collapse and possibly some personal gain as well
that we're going to discuss in a minute.
The loans were supplied by companies owned by
Sam Bankman-Fried, FDX and Alameda Research.
What's interesting about this is a lot
of people are saying this story sounds
awfully similar to a fellow named J. P. Morgan.
I don't know about you, but it's been a
while since I read my high school history textbook.
So I don't remember much about another guy
who single handedly attempted to save an industry.
But before we dive into this fascinating comparison,
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Now, before we start looking into whether this
comparison between Sam Bankman-Fried, let's just call him SBF,
and J. P. Morgan is accurate, let's review
some highlights or "lowlights", is that a thing?
of what's happening in this horror show lately.
A few crypto VC firms like Three Arrows Capital,
found themselves unable to pay back loans
that they had taken out, usually unleveraged positions.
It's almost always leveraged positions.
Crypto exchanges like Celsius ran into
liquidity issues, so they prevented customers
from removing funds from the platform.
It's a bit like watching dominoes fall.
Each time a new exchange, crypto project or VC firm
ran into a problem, the more panic ensued and the
worse this tailspin gets for the entire crypto market.
- Oh my God.
Okay, it's happening.
Everybody stay calm.
- What's the procedure?
- Stay the f**k calm!
- This is what's called
Only so many bad things can happen
in an industry before everyone's like, "Aight, I'm out"
and the whole industry just collapses.
Or sometimes even the whole
economy collapses for a while.
Clearly, Celsius and Three Arrows Capital aren't
the only crypto companies in trouble.
The whole space is in rough shape.
BlockFi, everyone's favorite way to pay with
a credit card and get Bitcoin as reward,
was also running into liquidity issues.
To help solve this problem, BlockFi announced
that they had received a $250 million loan
from FTX, Sam's Crypto Exchange.
Just three days before that, Alameda Research,
Sam's Crypto Trading firm had agreed to loan Voyager Digital
nearly half a billion dollars in crypto assets.
So you might be asking yourself,
Well, he actually had a really good reason.
In a recent interview, SPF said, "I do feel we
have a responsibility to seriously consider stepping in, even if
it's at a loss to ourselves, to stem contagion".
Here is where the
comparison to J. P. Morgan comes in.
SBF appears to be bailing out the crypto industry by
keeping major players in business, because if they failed, it
would lead to a mass sell off of assets, further
depressing prices, and making things worse and worse - Contagion.
So it turns out J. P. Morgan did
something pretty similar back in his day.
See, this company called United Copper went bankrupt in 1907
because of a failed attempt by these two Wall
Street bankers trying to corner the copper market.
When their attempt failed, people began to
withdraw funds from any banks or trusts
associated with those two copper fanatics.
Then, in the same weekend, two brokerages
and a bank imploded on themselves.
This was extremely bad back then because no bank
account had FDIC insurance like we have now.
So news spread, and there was complete panic.
People yanked their money out of the stock market
and banks in fear of losing it all.
And because banks don't keep 100% of deposits on hand,
they can completely run out of cash and collapse.
This is what's called a bank run.
And here's a fun fact I just learned.
Banks actually used to use this sneaky tactic
to slow the draining of money out of
the bank, where tellers would intentionally give customers
back their money as slowly as possible.
The whole thing got so bad that President Roosevelt
became involved in trying to find a solution.
So he phoned up the richest guy he knew, J. P. Morgan.
He was like, "Yo, Pierpont! Can you fix this?"
I don't know how Roosevelt sounded.
And Morgan was like, "Sure, I guess
I got nothing else to do."
So J. P. Morgan pledged his own capital and
called together the most influential banks and trusts
to all meet at his private library to
work together and solve this issue. Think, Tony Stark
calling together the Avengers or
Captain America, maybe, or Samuel L. Jackson.
Anyway, the dude had some sway.
He suggested that the largest banks invest in
their smaller competitors, decide which banks would have
to be sacrificed, and work together to make
concessions for the good of the country and
probably make money while they're at it.
So he locked them inside the library until
they could come up with a plan to
reestablish faith in the banking system while he
played solitaire in another room by himself.
In the end, crisis was averted, and people
began putting money back in their bank accounts.
And the thing is, this was the second time
J. P. Morgan helped to avert a total economic collapse.
The first time was during the Panic of 1893.
This time around, the US.
Treasury was running out of its
gold reserves, which backed the US Dollar.
At the time, gold could be exchanged for dollars at any bank,
and many foreign investors were doing just that.
This spooked the American citizens,
and things were falling apart.
And mind you, the unified US Dollar,
was only around for like 30 years at that point,
so it was kind of new.
So with the permission of President Cleveland and a
loophole created by the Civil War, J. P. Morgan gathered this
team of international investors who agreed to buy US
gold bonds in exchange for gold, and this reestablished
trust for the dollar and avoided economic collapse.
I don't know about you, but after looking at how
much J. P. Morgan actually did and the amount of influence he
was able to wield, it kind of seems like this
comparison is falling apart a little bit. Yeah.
SPF loaned some money to a few competitors to
slow bleeding, but J. P. Morgan saved the freaking economy twice.
However, as I dug deeper into the bailouts,
I began to see more and more similarities.
They both used chaotic circumstances
to build their own empires.
Throughout both the Panic of 1893 and
1907 J. P. Morgan gave out loans
to banking competition rival railroads.
The man was super into
railroads and even industrial competitors.
Through this process of swooping in when
others were struggling, he established America's first
billion dollar company, US steel.
And the plan was simple, offer a loan to
struggling competitors, but include some stipulations, like if you
go bankrupt, I get full control of your company.
The consolidation became so popular that
the process became known as Morganization.
SPF seems to be doing something similar,
just in a more narrow space.
In addition to extending loans to Voyager,
Digital and BlockFi, FTX also acquired the
Japanese crypto exchange Liquid Global.
And it turns out in August, FTX
had loaned Liquid Global $120 million following a
hack where Liquid lost $90 million.
Then in August 2021, FTX US acquired LedgerX.
In May 2020, they acquired Blockfolio.
Then Sam acquired a 7.6% stake in Robinhood.
This acquisition boosted Robinhood stock by 36%.
Bloomberg actually reported that FTX was on the verge of
buying RobinHood, but they since responded that there are
no active M&A conversations with Robin Hood.
Note the word "active."
Now, while writing this video, news was released
that Morgan Creek Digital is raising money to
counter FTX's offer to BlockFi.
It turns out that FTX would be able to acquire BlockFi
for next to nothing if they were to go bankrupt.
Sound familiar?
And Morgan Creek, as an early investor in
BlockFi, would get the short end of the stick
if that were to happen.
Also interesting is that BlockFi chose to work with
FTX, as they were the only offer that protected
clients funds, which is totally nice to hear.
Update: While this video was being edited,
some news came out that FTX could
soon purchase BlockFi, exactly what we expected.
Now, this could be closed
by the time you see this, the purchase price
would be up to $240 million, depending on performance.
And this is down from their previous valuation
of $3 billion just a year earlier.
Update on the update: The deal went through.
Now, the similarities between how both of
these guys got even richer in the
middle of chaos seems pretty clear.
And you find this all over.
Rich people tend to set up their base to make
money in bad times when the opportunities are there.
But the most compelling similarities I
found between these two required an
understanding of their character and goals.
This helps highlight their real intentions.
J. P. Morgan was born into the business world.
His dad was this prominent banker.
However, he was really sickly as a child and
couldn't go outside and play with the other kids.
So we just stay indoors, playing
solitaire, studying and reading financial statements.
He was either going to be a mogul or
a supervillain, and one of those two happened.
But as a titan of banking and
railroads and steel industries, J. P. Morgan believed that
consolidation of these industries under the guidance
of an honest and capable person would
improve efficiency to the benefit of everyone.
Morgan, even to his detractors and competitors, was
widely known as being pretty, honest and direct.
While SBF's parents were not banking masters, they
are both law professors, and they did instill
in him some of his core business values.
Barbara Fried, SPF's mother, describes her husband and
two sons as "take-no-prisoners utilitarians".
She says the ethical goal of utilitarians is
to maximize the total well-being of the world's
people( and for some animals as well)...
That the goal leaves utilitarians to focus their efforts
on helping people in the direst straits and on
policy interventions that will lower the risk of existential
threats to present and future generations".
Sounds pretty good.
SPF has adopted an ethos of
that urges people to use their time and resources to bring the
greatest good to the greatest number they can.
He believes that by creating the most wealth
possible, he can help the most people possible.
So not only do SBF's goals seem to reflect J. P. Morgan's
belief that consolidation and expansion of one's business
empire can be moral good, but like Morgan, he
is also known for being pretty earnest and truthful.
SPF's college friend Adam Yedidia, said that SPF is
charismatic and that people knew he meant what he said.
It seems like a pretty chill billionaire.
However, even though FTX has sponsored my videos,
I can't quite let them off that easy.
I buy it that wealth in the
right hands can promote ultimate good.
And I totally believe SPF will
do good things with his money.
But we can't ignore personal desires as well.
Bailing out crypto companies, is in Sam's own interest.
If the crypto market totally collapses, he's going to lose
far more than the billion that he loans out.
Plus, if those companies go under, he
gets assets for pennies on a dollar.
And of course, he just wants to win as well.
When you're a billionaire, having money isn't even
remotely a problem, but you can still win
new battles and win new business.
That's what he's doing.
And it's not necessarily bad, it's just human.
If I were SPF, I'd say, yes,
I'm helping to save this industry.
Yes, it's probably good for all of us,
but I'm also protecting myself.
I don't want to lose either.
And people would be like, Yeah, bro, I get it.
I like money too, and they'd move on with their day.
So overall, I think that these loans to crypto
companies are a net win for the average investor.
I'm glad that FTX and Sam did this.
It's just going to mean more consolidation to a
few key players, for better or for worse.