TLDR:

SBF has been giving lots of money to EA. He admits it's a massively speculative bubble. Crypto crash hurts the most vulnerable, because poor uneducated people put lots of money into it (Krugman). Crypto is currently small, but should be regulated and has potential contagion effects (BIS). EA as a whole is getting loose with it's money due to large crypto flows (MacAskill). An inevitable crypto crash leads to either a) bad optics leading to less interest in EA or b) lots of dead projects.

Recommendations: 

 - We should fund more projects that have the potential to quickly adjust their funding if it were to dry up (i.e. less diversity in project funding).


Is anyone concerned about the crypto market and 1) it’s optics for EA 2) it’s effect for EA funding?

A lot of EA funding is now coming from FTX, especially longtermism funding.

But Sam Bankman Fried has admitted that some cryptocurrencies like Bitcoin are a massively speculative bubble:

SBF: You start with a company that builds a box…Maybe for now actually ignore what it does or pretend it does literally nothing…So far what we've described is the world's dumbest ETF…And then you say, alright, well, you’ve got this box…anyone who goes, takes some money, puts in the box, each day they're gonna airdrop, you know, 1% of the X token pro rata amongst everyone who's put money in the box…and they’re like ‘10X’ that's insane…So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Matt: (27:13) I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.

At the same time, Paul Krugman has this really nice NYT piece about how crypto brings us back to an era where we had lots of bank runs:

As a number of analysts have pointed out, stablecoins may seem high-tech and futuristic, but what they most resemble are 19th-century banks, specifically U.S. banks during the “free banking” era before the Civil War, when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

In the past, he’s also mentioned that the people affected by a crypto downturn are the poor and uneducated:

crypto-investors differ from those who typically put money in risky assets, like stocks. Stock market investors tend to be college-educated white people, with 77% of college graduates and 65% of white people owning stocks, per the most recent Gallup research. In contrast, 44% of those invested in cryptocurrency are non-white and 55% don’t have a college degree, per a survey by NORC.

Sam Bankman-Fried, despite calling for greater regulation, has been hiring ex-CFTC employees, including a former acting chair of the agency.

See also this BIS paper on potential contagion of cryptocurrency markets into the broader economy and the need for regulation.

“crypto exchanges”…provide platforms on which participants can trade and store cryptocurrencies and remain largely unregulated to date, essentially forming a “shadow crypto financial system”.5 Compared to existing regulated exchanges for “traditional” financial assets, the regulatory and supervisory oversight of crypto exchanges – encompassing consumer protection, market integrity, trading, disclosure, prudential and addressing anti-money laundering (AML), combatting the financing of terrorism (CFT) – remains patchy at best.6 Moreover, these new crypto exchanges offer very different products from existing regulated exchanges and have mushroomed over the past years, supported by strong customer demand.

Institutional investors, such as hedge funds and other asset managers, are becoming an increasingly important source of revenue for crypto exchanges. These investors account for a rising share of trading volume and assets under management (Graph 8). One implication of this trend are adjustments to the services provided by crypto exchanges. Margin financing, which some crypto exchanges offer to fund the execution of investors trades, is likely to gain in importance. Another implication is rising expectations regarding the creditworthiness of crypto exchanges, given their growing importance as counterparties. This could require crypto exchanges to strengthen their liquidity positions and loss- absorbing capacity, thereby spurring consolidation among the industry – a trend observed among exchanges of more traditional assets as well.

What's more, EA seems to be adjusting to its current funding situation with the assumption that these pools of cash will be a new norm (Will MacAskill):

Effective altruism has done very well at raising potential funding[3] for our top causes. This was true two years ago: GiveWell was moving hundreds of millions of dollars per year; Open Philanthropy had potential assets of $14 billion from Dustin Moskovitz and Cari Tuna. But the last two years have changed the situation considerably, even compared to that. The primary update comes from the success of FTX: Sam Bankman-Fried has an estimated net worth of $24 billion (though bear in mind the difficulty of valuing crypto assets, and their volatility), and intends to give essentially all of it away. The other EA-aligned FTX early employees add considerably to that total.[4]

One has to recall that the subprime crisis from Ben Bernanke’s memoir:

I had come to believe that, during the housing boom, the FOMC had spent too much time debating whether rising house prices reflected a bubble and too little time thinking about the consequences, if a bubble did exist, of its bursting spectacularly. More attention to the worst-case scenario might have left us better prepared to respond to what actually happened.

Or again, in a separate book, Bernanke and Tim Geithner:

Still, at the time, the subprime mortgage market did not look like a threat to burn down the financial system. Subprime mortgages made up less than one seventh of all outstanding mortgages in the United States. And the defaults and delinquencies that triggered the crisis were mostly concentrated in subprime mortgages with adjustable interest rates, which accounted for less than one twelfth of all mortgages. Straightforward calculations suggested that even if every subprime mortgage holder defaulted, the losses would be modest and easily absorbed by the capital buffers of most major banks and other creditors. What such calculations missed—what almost everyone missed—was the way mortgages were poised to become a vector of panic throughout the financial system.


I see the main way this could go poorly as 

  1. crypto markets crash → SBF gets bad reputation → spillover to EA getting bad reputation → lower long term buy-in for EA causes / community
  2. FTX / others engage in more spending based on crypto wealth and guaranteed funding  → new projects get started → crypto markets crash → funding evaporates → lots of good projects that have to be ended

 

Recommendations?: 

 - We should fund more projects that have the potential to quickly adjust their funding if it were to dry up (i.e. less diversity in project funding).

 

I’ve seen very little talked about this, and yet I’m beginning to become very concerned. 

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22 comments, sorted by Click to highlight new comments since: Today at 6:00 PM

Saw this post for the first time after it was linked from one of the recent FTX  posts, and wanted to say thank you for having taken the time to write and express these concerns, which clearly weren't very popular but turned out to be...prescient.  I'm a bit frustrated this didn't get more karma or engagement at the time. 

I'm also frustrated that I probably just scrolled past without clicking or considering because it didn't have that much karma and seemed 'against the mood.' It feels important for everyone (like me) who was caught off guard this week to recognize that this was not, actually,  unforeseeable. It's humbling to realize how much work our cognitive biases must have been doing . Anyway, thanks! 

Thanks for taking the time to comment. The details of the interaction between Alameda and FTX were very hard to pinpoint. And the timing was such that it was very hard to profit off of the collapse, even if you were very skeptical of cryptocurrencies to begin with. Hence, the whole misplaced discussion on the forum of, "Institutional investors, who have a profit motive, didn't foresee this. How could we have?" For example, exchanges like Binance have not experienced similar meltdowns.  

But to make money, you not only have to be right, but be right at the right time. Imagine you saw  the COVID pandemic in 2018 and shorted the market starting in 2018. By 2020 you would be broke and have no more cash.

On the other hand, EA is not trying to make money. So, the EA community doesn't care about the timing as much as a trader does. EA cares about preparation. If we know that the COVID pandemic is going to happen in 2018, we start preparing in 2018, and when it does happen, in 2020, we are prepared. 

Thus, for the EA community, what was really more salient to prediction was the quotation by Paul Krugman:

stablecoins...resemble 19th-century banks,...when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

Word to @SaraAzukuike.  That aged well.

Cryptocurrency is 99.9% ponzis, frauds, and bubbles, and that's a generous number. The underlying technology is pretty useless at actual applications (It's essentially always more efficient to have centralisation in any app, in which case the blockchain becomes redundant) , but it is very useful for scamming people out of their money with get rich quick schemes, so that's what it's chiefly used for. 

I think tying the EA movement to cryptocurrency is a great way to discredit all of your rationality and trustworthiness. If you didn't foresee crypto being useless, how can we expect you to foresee anything else?

don't see where you get the 99.9% number, but yes, it does seem crypto is commonly used in scams.

I hereby name you Effective Cassandra. You should brag as much as you like.

FTX is in trouble with the FDIC: https://www.fdic.gov/news/press-releases/2022/ftx-harrison-letter.pdf

I'm guessing this isn't a huge deal, they just have to stop saying either (a) false things about customer deposits being FDIC-insured, or (b) true statements about customer deposits being FDIC-insured without specifying which bank, both of which the FDIC seems to prohibit.

Here's a news article on this: https://www.msn.com/en-ca/money/topstories/crypto-exchange-ftx-ordered-to-halt-false-and-misleading-claims-by-us-bank-regulator/ar-AA10QJdY

An excerpt:

The Federal Deposit Insurance Corporation said a July tweet by Brett Harrison, head of FTX's U.S. operations, contained misleading claims that funds held at and stocks purchased through FTX were FDIC insured, and ordered the company to remove any misleading language from its social media accounts and websites.

In the tweet, which Harrison has since deleted, he stated that direct deposits from employers to the crypto exchange are “stored in individually FDIC-insured bank accounts” and that stocks purchased via FTX US “are held in FDIC-insured” brokerage accounts. The FDIC said in its cease and desist letter to FTX US that those statements implied that FDIC insurance was available for cryptocurrency and stock holdings, and that the agency does not insure brokerage accounts.

In a tweet on Friday, FTX CEO Sam Bankman-Fried emphasized FTX is not FDIC-insured, and apologized if anyone misinterpreted previous comments.

This NY Post story also struck me as  odd: https://nypost.com/2022/07/06/sam-bankman-fried-has-few-billion-to-help-crypto-industry/

On one or two occasions, Bankman-Fried, who made billions arbitraging cryptocurrency prices in Asia beginning in 2017, said he has used his own cash to backstop failing crypto companies when it didn’t make sense for FTX to do so.

“FTX has shareholders and we have a duty to do reasonable things by them and I certainly feel more comfortable incinerating my own money,” he said.

Since when do people go to such lengths (including their own personal cash!) to bail out other people's Ponzi schemes or securities fraud

I don't believe it's accurate to say:

"Sam Bankman Fried has admitted that cryptocurrencies like Bitcoin are a ponzi scheme"

I don't think he was talking about Bitcoin specifically or about all cryptocurrencies in that exchange with Matt Levine. 

At this point, I think the risk of good projects being terminated if crypto declines further is fairly low, given that current EA spending is a small percentage of EA wealth.

I share your concern about reputation risk from people associating EA with crypto, but that has to be weighed against the benefits (e.g. possible further wealth creation, and opportunities for SBF and others to spread EA ideas).

I agree that SBF wasn't talking about Bitcoin or all crypto, but it's still worth noting that he did describe yield farming as a Ponzi scheme. 

Here's the conversation in more detail. The gist is that when asked to explain something called yield farming, SBF describes it as a Ponzi scheme with no underlying value, leaving his conversation partners stunned. I'm liberally adding bold and underline to make it easier to skim:

Matt Levine: (21:17)
Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there's a more sophisticated understanding than that.

Sam Bankman-Fried: (21:28)
Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box. So what this protocol is, it's called ‘Protocol X,’ it's a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.

So far what we've described is the world's dumbest ETF or ADR or something like that. It doesn't do anything but let you put things in it if you so choose. And then this protocol issues a token, we'll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven't exactly given a compelling reason for why there ever would be any proceeds from this box, but I don't know, you know, maybe there will be, so that's sort of where you start.

And then you say, alright, well, you’ve got this box and you’ve got X token and the box protocol declares, or maybe votes by on-chain governance, or, you know, something like that, that what they're gonna do is they are going to take half of all the X tokens that were re-minted. Maybe two thirds will, two thirds will offer X tokens, and they're going to give them away for free to whoever uses the box. So anyone who goes, takes some money, puts in the box, each day they're gonna airdrop, you know, 1% of the X token pro rata amongst everyone who's put money in the box. That's for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It's probably not zero. Let say it's, you know, a $20 million market

Matt: (23:56)
Wait, wait, wait, from like first principles, it should be zero, but okay.

SBF: (23:59)
Uh, sure. Okay. Completely reasonable comments.

Matt: (24:04)
I mean, that's not quite true, but, like, when you describe it in this totally cynical way, it sounds like it should be zero, but go on.

SBF: (24:10)
Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it. In the world that we're in, if you do this, everyone's gonna be like, ‘Ooh, box token. Maybe it's cool. If you buy in box token,’ you know, that's gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven't been $20 million dollars that have flowed into it yet. Maybe that's sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it's not totally clear that this thing should have market cap, but empirically I claim it would have market cap.

Matt: (24:57)
I agree.

Joe: (24:59)
It shouldn't have any market cap in theory, but in practice, they always do. Okay.

SBF: (25:03)
That's right. So, and obviously already we're sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we're gonna move on from that for a second. So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that's interesting. Like if the total amount of money in the box is a hundred million dollars, then it's going to yield $16 million this year in X tokens being given out for it. That's a 16% return. That's pretty good. We'll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone's like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they're wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that's it? Like that market cap for this box? And it's been like 48 hours and it already is $200 million, including from like sophisticated players in it. They're like, come on, that's too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.

SBF: (26:43)
And they’re like ‘10X’ that's insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it's $130 million market cap token because of, you know, the bullishness of people's usage of the box. And now all of a sudden of course, the smart money's like, oh, wow, this thing's now yielding like 60% a year in X tokens. Of course I'll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.

Joe Weisenthal: (27:27)
At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I'm going to too, and then it's more valuable. So they're gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?

SBF: (27:42)
So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that's one framing of this. And I think there's like a sort of depressing amount of validity…

Matt: (27:53)
Can you comment on like the sustainability of that? Because, you know, on the one hand you're like, well, a trillion dollars of institutional money is going to come into Bitcoin. And on the other hand you're like basically there are a lot of Ponzis that have done really well.

SBF: (28:06)
Right. So let me, okay, cool. I'll stay on the cynical route, think about like cynically, what could happen here? Well, okay. So you've got this boxes and it’s kind of dumb, but like what's the end game, right? This box is worth zero obviously. And like that, you know, you can't like keep this smart cap or something. But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses. And you know, at some point if the world never decides that we are wrong about this in like a coordinated way, right? Like you're kind of the guy calling and saying, no, this thing's actually worthless, but in what sense are you right?

Tracy Alloway: (29:15)
Can I just ask on this point, I mean, so are you saying that the value has to derive from everyone agreeing that it's worth something? And I know like on the one hand, that seems like a simple point about crypto, but on the other hand, throughout crypto's history, there have been these different arguments about how it actually gets value, you know, use cases for the underlying technology — for blockchain. Everyone's gonna start migrating stuff on blockchain, and then you're gonna have a real economic use attached to these assets. And that's where the value's gonna come from. But are you saying that it depends more on everyone just agreeing that these are worth something?

SBF: (29:53)
So really what I'd say is that it could come in theory from either. You can sort of get a market cap either because of cash flow and then Warren Buffett's like f*ck this. Like, I'm going to buy this if it's at too cheap of a price, because I'll just buy it and own it and get cashflow from it. And that's great. Or you could see something get market cap in the way that, I don't know, Doge coin or SHIB coin have, where people are just kinda like ‘ha ha’ and then they buy it. And if you're like, that's dumb, it has no cashflow flow. I'm gonna short sell it. You lose all your money. And, you know, those like, at least like over the last few years, those have both been ways that assets have gotten market cap. And I sort of like think that this starts to hint at like, at least some interesting angles on this, because it's not just cryptocurrencies that have had this dynamic, right? How about like, you know, AMC or Hertz or GameStop or meme stocks in general have like a very similar pattern to this and the sort of concept of maybe people will pay something for it even though it doesn't seem traditionally valuable, is not a crypto specific concept. Although it certainly has become like…

Perhaps it was intentionally provocative, but from the transcript of the interview, you can read SBF admitting that cryptocurrencies are like a useless box that gains value because other people want to profit off of said useless box...

current EA spending is a small percentage of EA wealth

I would tend to disagree. This is like saying to an individual that donates 5% of their income that since 5% of annual income is a small percentage of their total wealth (which might include their house and other assets) that a 90% decline in their income would not affect future donations. Of course it would.

I agree that there are massive benefits to having big donors on EA's side. But that's like saying of a politician there are massive benefits to have pharma or oil donating to your election campaign. I don't really have a particular solution here, but one can simultaneously be cognizant of the risks and benefits at the same time.

I've listened to SBF on several podcasts, and I haven't gotten the impression that he thinks all cryptocurrencies are useless. I would recommend this one in particular  https://clearerthinkingpodcast.com/episode/038. I'm personally skeptical about the value of cryptocurrencies (relative to their current valuation), and my opinion on some things differs from SBF's, but I find him to be one of the few people who work in the crypto space that articulate balanced and insightful views on crypto. 

Also, SBF did not use the work "Ponzi." That was Matt Levine's interpretation. I think what SBF was describing would be better characterized as a speculative bubble, since "Ponzi" implies an intent to defraud. A well intentioned founder might have a crypto-based idea they are excited about. If investors/speculators bid the value of their coin/token to unreasonable values, that doesn't mean the founder has devised a Ponzi scheme. Note that SBF said "ignore what it does or pretend it does literally nothing" about the "box," which implies that he thinks most crypto projects are at least trying to do something.

I would respectfully recommend editing your post where it says that SBF admitted cryptocurrencies are a Ponzi scheme. I believe strongly that it is not accurate as stated.

As for current EA spending vs. wealth, I think we are in a situation where, as a rough guess, 40% of EA wealth is in crypto, and current spending is 2-3% of wealth. If the crypto portion were mostly wiped out, current levels could be sustained by donors who are less invested in crypto. In the event of a crypto crash, fewer new projects would be funded, and the bar for continuing to fund existing projects would be higher, but I think non-crypto donors would step up to continue to fund projects that are going reasonably well. In the meantime, there is benefit from funding some new things and learning about what works well. If current spending were 5% of wealth, and if it seemed unlikely that new EA-aligned donors would emerge, I would be more concerned.

I mean, ok, to be more technical SBF is "charging commissions to people in the ponzi and trading against them"

This is like being the owner of a casino, which is itself a perhaps benign thing. Let's say poor uneducated people lose billions of dollars of wealth at said casino. Regardless of the casino owner's admitting that his business is a speculative bubble or a ponzi scheme or whatever, he's still profiting off of peoples' losses at said casino. 

most crypto projects are at least trying to do something.

But whether something amounts to anything is the true question, right? There are so few uses for cryptocurrencies, and nearly none of the people that invest in them are truly invested in the mission of decentralized finance. 

as a rough guess, 40% of EA wealth is in crypto

Woah...if 40% of wealth were wiped out, that would have no impact on investment? I think we have different assumptions about the elasticity between wealth and donations (my prior is that it's fairly elastic). This is an empirical question, but I would tend to be more biased in favor of over-estimating the negative effects of wealth depletion on investment. 


I think whether crypto is a bubble--whether crypto is a ponzi scheme--are irrelevant. The key is that crypto is an extremely volatile asset that is now a significantly sizeable portion of EA wealth, and has negative optics implications (all of which you agree with), and when it falls, has negative implications on future funding flows (which you disagree with). 

On future funding flows, I specifically said "[i]n the event of a crypto crash, fewer new projects would be funded, and the bar for continuing to fund existing projects would be higher," so I don't think we disagree about that. But I disagree with the "lots of good projects (would) have to be ended" statement in your original post.

fair. let's agree to disagree.

Woah...if 40% of wealth were wiped out, that would have no impact on investment? I think we have different assumptions about the elasticity between wealth and donations (my prior is that it's fairly elastic).

This Open Phil blog post is interesting in this context. (Though note in this case the underlying wealth change was, I believe, not driven by crypto and instead mostly by the bear market for tech stocks.)

I think we should develop a reputation for banking on innovative high-risk high-reward technology. This is what drives progress and creates wealth.

I think this ignores the central thesis of this post. 

Your post was right, to understate it, and I was oblivious. I didn't read very closely, I arrogantly substitution heuristic'd your claims for general anti-crypto takes, and didn't think about the actual risks you were noticing. I didn't become curious about using this as a launch point for noticing ways that FTX could collapse. There was a low chance I could have personally done anything constructive if I had, but I contributed to our cultural problem that prevented us from noticing this more clearly.