Inside the crypto hype machine

0:05Pushkin. Sam Bankman Freed is back in the news. Sentencing in his fraud trial takes place next week in Manhattan. Today on the show, we are wondering how long he will spend in prison and if anyone has learned anything at all. This is Unhedged, the markets and finance podcast from the FTN Pushkin. I'm Rob Armstrong in New York, and I'm joined today by Josh Oliver in London. Josh has written an entire book, Hype Machine, about SBF, the so-called crypto ecosystem, and how it all went terribly wrong. Josh, how's it going? It's going well. Thank you for having me, because the world needed one more book about crypto.

0:53It does. Well, it needs your book in particular, Josh, and I want to talk about your book in a second. But first, I want to talk a little bit about the sentencing, which is going to be the big news next week. I was really struck by the letter from John Ray to the judge in the case. Ray is the caretaker of FTX as it works its way into bankruptcy. And he wrote a scathing and spicy letter to the judge. You want to tell us a little bit about that and what it means? Yeah, absolutely. So, I mean, to catch folks up, sentencing hearings next week and the process that we're in now is there's like a back and forth of filings where the government and the defense lawyers are arguing about how long the sentence should be.

1:39And just to give people the polls on that, the theoretical maximum they may have heard more than 100 years, the government has asked for 40 to 50. The defense has asked for six and a half. So that's the fight they're having. And the point of the fight, you know a lot better than I, is SBF's team says, look, you know, some things went wrong here, but nobody really got hurt. And Ray's letter said, oh, yes, they did. Yeah, absolutely. I think Ray was jumping in in some ways because they're trying to respond to this notion that no one really lost money, which is an argument that the defense team had kind of picked up and run with based on some technicalities of the bankruptcy process and this kind of line that went around that, you know, certain of the creditors are going to get paid back 100 % in quotes.

2:28But it's not actually 100 % and it's not all the creditors. So, you know, it's more complicated than that. But I do feel like that idea that there was no loss clearly just really annoyed John Ray, who obviously already has no love lost for Sam because Sam Bankman-Free has been attacking the bankruptcy since the beginning. This has been a huge feud. And this is just sort of John Ray taking his last chance to kick Sam on his way down, frankly. And the letter was, you know, just full of these incendiary little sound bites. And they know how to write these things to have the, you know, the headline phrase.

3:04I think this one, it was life of delusion that, you know, Sam was sort of narcissistic, evil genius who was always lying and misleading everybody around him. And it kind of captures like the two visions of who this person is. You know, that's the question of the sentencing. That's just the point I wanted to get to. There are these two ideas of who this guy is. And one of them is that he was a sort of semi-genius kid who had big ideas, was sort of disorganized and in over his head, and things went sideways. And that's the defense's picture. And then at the other end of the spectrum, here is a deeply wicked fraudster who had no intention of making a real business and systematically took everyone for a ride.

3:58You've met this guy. Where on that spectrum does the truth lie? I have to admit, you know, it's probably not a good thing to say out loud, but I always found like talking to Sam to be interesting and even sometimes enjoyable. I mean, by times it was frustrating because there were certain questions he would never answer. But he was a captivating person, and that was key to his success. But, you know, you kind of learn more and more as we go through the process. First time I met him was in the Bahamas when he was the king of the world. The next time I met him, he was under house arrest, you know, at his parents' house in California.

4:29And the whole world had turned against him. My read of it, and at the end of the day, you never know what's inside somebody's head. The line or the assessment that kind of rang most true to me was at the trial when Caroline Ellison, who is Sam's sort of number three lieutenant and ex-girlfriend, also star witness for the prosecution, high drama. She said, look, Sam's world is completely utilitarian, greatest good for the greatest number. And he doesn't believe that rules like don't lie and don't steal are valid that really apply to him. And I think there's a way in which you could see that as, oh, he has a higher sense of ethics.

5:11I see it as really an indictment because it's his. It strikes me as awful and chilling. Yeah. It's his arrogance to believe that he's smart and he's worked out the world, you know, works in a different way than other people think. And he just doesn't, he's not going to buy your pedestrian ethics. And so I do think it speaks to the arrogance and that kind of, to me, most explained the pattern of behavior and reconciled, you know, there's always caricatures on both sides. But when I heard that, I remember sitting in court thinking like, that sounds about right. Josh what do you think is going to happen next week?

5:46I mean now you're asking me to break the unhedged rule and make a concrete prediction about something falsifiable but I do think personalities matter you know this judge I sat in his courtroom for the whole trial he's a tough character he seemed to have very little sympathy for Sam's arguments and generally to be a kind of stickler I mean obviously on the defense side their filing is really really long and it's like they kind of throw everything at the wall strategy of like mental health issues, which obviously legitimate, but you know, his mother loves him and he was nice to small animals and just like, you know, everything they could think of.

6:23I don't necessarily see why this judge would give less of a sentence than the government has asked for. I haven't seen a reason that I think would be convincing to, without being a lawyer, I haven't seen a reason I think would be convincing to this judge why it would be less than the 40 or 50 years that the government has asked for. And I mean, that to me, by the way, like from a personal point of view, it seems an extraordinary sentence for a nonviolent crime, but that's, you know, the US justice system. What was the last time you saw Sam? Last time I saw him was at his parents' house in California.

6:53But then we spoke right through into the summer of last year before the trial when I was working on the book. He was, when he was under house arrest, he had quite a lot of time and was actually quite eager to talk. And so I would kind of wake up in London and phone him in California. So it would be like the middle of the night for him which is when he liked most to talk and we would kind of talk sometimes for hours and even to the point where i would have to be the one to be like you know this is so interesting but i like literally have to go i have to leave my house and go do stuff and he really wanted to explain himself or try to and and give his version of events and then we were kind of halfway through that actually when um you people may remember he got sent to jail kind of unexpectedly for violating the bail conditions.

7:41And so then, you know, it's been impossible to be in touch with him. I just get kind of readouts through people who are going to visit him, but there's no like ability to have any direct contact. Josh, I want to turn to your book, Hype Machine. And one of the themes of the book is that Sam Bankman Freed, who's kind of this figure that everyone has focused on and has drawn everyone's attention actually fits into a larger crypto system that is much bigger. And I don't know if this is too strong a word, but more nefarious than the acts of a single person. Am I getting that right? Yeah. I mean, I don't know more or less nefarious, but certainly in line in terms of nefariousness.

8:28And part of what I want to do in the book is just pull the camera back because I felt so Sam's personality has a tendency to like absorb all the light in the universe. And obviously, you know, it's an incredible story. And I told many times, including in the book, but I felt like the bit that wasn't being filled in was the crypto world around him and how it worked as a system, basically to rip people off, like beyond the specifics of this fraud or that fraud, how the whole thing was an ecosystem that took money off the amateur kind of retail investor slash person on the street who got convinced that crypto was amazing.

9:08I have a maybe more benign view of the crypto ecosystem than that, which is that it's a totally empty speculation machine, right? That just kind of whirls around and, you know, it's like betting on a sport or some kind of carnival game. But I don't know that it's a machine designed to rip people off. It's a game, I would have thought, but you're taking a stronger view. I mean, I think I'm not going to argue with you that it's an empty speculation machine. But I think if you look at the inputs and outputs of the empty speculation machine, who wins and who loses, reliably, the ordinary amateur investor loses and a smaller group of kind of crypto elite people were winning until the crash.

9:48The way I would look at it is like, what are the three things that people were being asked to do? When you come in off the street, you're sold that crypto is exciting. There's kind of three activities during the boom that people were being asked to do. Spot trade, derivatives trade, or deposit crypto into these kind of yield bearing, interest bearing institutions of one type or another. And I think, you know, if you go through those, you know, in spot trading, which is maybe the most innocent, it's very hard to time the market well. And a lot of people lost money and there's a lot of arguments about the market being manipulated.

10:23Plus the long tail of coins when you get past Bitcoin and Ethereum and stuff, a ton of them are just outright scams. So that's not great. Well, let me ask you, is somebody taking you for transaction costs while you're spot trading? Is there somebody scraping a penny every time? Every time, yeah. And there's always fees to get in and fees to get out. And actually, I think those are underestimated by most people. It's usually quite cumbersome to get your money in and out. I was just talking to someone the other day, like all this time later, who said, yeah, I have money in crypto still. And I actually have made money now, but I don't know how to get it out anymore.

10:56And I don't know how much I'm going to have to pay to get this back. And you're like, OK, it's kind of still not great. Next thing. Yeah, next thing, the derivatives trade, which is the majority of the volumes, It certainly was during this at a peak of it. And then this is just this like super, super leveraged contracts on top of crypto. So it's speculation on top of speculation where it makes it much more volatile. And it's, I think, incredibly hard to succeed as a DIY trader. It's kind of set up to fail. And there's a reason why, by the way, like in the UK, this trade was banned because it was considered to be too likely that everyone would, you know, the retail traders would lose their money.

11:34And so that's why you had the offshore venues that people were going offshore to trade on FTX International. And those offshore venues, are they just collecting the money that the overmatched retail Bitcoin options trader are just sort of leaving on the table? In other words, is there somebody on the other side making a kind of riskless scrape on this speculative activity? Well, the exchange just makes transaction fees. So they make money, win, lose, draw. They just sit there and take their percentages and it's a money printing machine. But then on the other side, the retail traders up against the kind of high frequency traders and the hedge funds who have more sophisticated setups who are going to tend to win.

12:20I just think it's hard to imagine how you're going to compete as an individual, particularly in a 24-hour market where either you don't sleep or you close your position so you can sleep. It's very hard to kind of be up all the time and to be competitive in that market. And then the last piece, the depositing, lending, yield piece, there were all these institutions people may remember like Celsius and BlockFi and Voyager, all gone in the crash. you know, not a one left standing really. And they were taking in deposits from DIY investors, paying them a really attractive interest rate in a time of super low, you know, interest rates.

13:03And then using those deposits to fund loans that were then often going to the hedge funds and HFT firms who are then trading back into the market. So in some sense, you're lending the guy the money to trade against you and rip you off both times. That not only makes my head hurt, but it makes my head hurt in the way that genuinely nefarious rigged games make my head hurt. But it appears, Josh, that nobody learned anything. Bitcoin last week was back at an all-time high. Maybe it's off a shade from there, but it seems like we're in a second crypto boom. It's almost as if people didn't get hurt badly enough the first time around.

13:47They're back for seconds. What's going on here? Yeah, I mean, continuing my record of underestimating crypto bullishness, I would not have thought we would be back here this quickly. I mean, that everybody would just forget and move along. I mean, I think the crypto sphere has really invested a lot rhetorically into like blaming individuals like Sam, which is part of why I thought this kind of like systematic look at crypto is really important. And it's not the same system that's up and running again. It's maybe early to tell how this system is going to work, because we've just sort of on the upswing here.

14:23But, you know, the vehicles that seem to be driving it are the Bitcoin ETFs, which were finally approved by the SEC, have grown at a record speed, and are now the sort of big movers and shakers. And so look, you know, there's points of improvement, like, you know, at least these are run by big, broadly reputable asset managers. Is that a point of improvement? I mean, I would have thought that handing, if you take the view that Bitcoin is fundamentally empty, putting it in a reputable and grown up wrapper could be dangerous. No? I agree. No, I mean, I think the improvement is at least the vehicle is sound, but I agree with you completely that if you don't believe as I don't believe in the asset and you don't believe in the market as being free from manipulation and funny business, then sticking it into a reputable box and encouraging people to invest in it because it is apparently on the up and up is bad.

15:27And you can't just stick Bitcoin in a regulated wrapper and then declare victory. So I think, you know, it's early to tell how everyone's going to lose their money this time around. But if I was a betting man, you know, I just think crypto is not done with us yet. Yes. We'll be back in just a minute with Long Short.

16:00Welcome back. This is Long Short, that part of the show where we go long things we like and short things we don't like. Josh, do you have a long or a short for us? Yes, I don't like it, but I do believe in it. I am long crypto money laundering. Yes, you're going to be a rich man, Josh. Tell me how you're going to do it. The one proven real world use case, widely accepted and always present for crypto. This is really just an excuse to plug an amazing piece in the FT Magazine this week by my colleagues about this Bitcoin money laundering case in the UK. It is an absolutely fantastic read. True crime, billions in Bitcoin, Chinese scams, police investigation.

16:42Just read it. Josh, I have a controversial long. I am going to go long reclining your seat in coach class on an airplane. Wow, this is controversial. I had an epic fight with a friend of mine last night about this. My view is very clear. There is a button on the side of the chair you can press that reclines your seat. It is our God-given right to deploy that button. I lean back. You lean back. We all end up with the same amount of space we had in the first place. No more grousing about people leaning back in coach. Rob, I couldn't agree more. And doubly, if the listeners don't know, Rob is about nine feet tall.

17:24So we should all have sympathy. So it's not like I'm some short person whose knees don't get crunched. All right. Thank you, Josh. Congratulations on Hype Machine and listeners, we will be back in your feed on Tuesday.

17:45Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We have additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan. Oh, sorry. I'm not Ethan Woo. I'm Rob Armstrong. Thanks for listening.

18:33Thank you.