Sam Bankman-Fried, the face of cryptocurrency and crypto derivatives, has been compared to John Law, the Scottish economist who mishandled financial innovations and created a market bubble in the early 18th century. Both men manipulated the market, spewing false promises and lies, and left investors with losses. Investors must be prudent and learn from past market bubbles and manipulations, looking for patterns of the past before investing in any financial venture. The stories of Sam Bankman-Fried and John Law highlight the importance of a solid plan after financial innovation implementation. Fast-paced decision-making and a “Game-of-Thrones”-like attitude in finance omit the lessons of history.
Echoes of Past Market Bubbles in FTX Scandal
History repeats itself, and this couldn’t be more accurate in the case of FTX and SBF’s scandal. Sam Bankman-Fried, the “JP Morgan of cryptocurrency,” was lauded as a financial genius and innovator who revolutionized the industry. Investors were enamored with the potential winnings from SBF’s crypto derivatives on FTX, but little did they know that they were being lied to, manipulated, and left with nothing.
This situation echoes the story of John Law, a Scottish economist appointed by the French monarchy in the early 18th century to revive the French economy. Law created Banque Générale, which allowed him to issue bank notes, and the Mississippi company, which utilized France’s resources in North America. Law sold the idea of investing in the company to the French society, and citizens bought shares with bank notes, becoming millionaires overnight.
However, Law’s promises fell short, and the liquidity traded for bank notes to buy Mississippi company shares was mishandled. Law spent on his ventures, purchased the right to collect French taxes, and expanded trade and government debt. He also issued more and more shares to pay for increasing losses. Eventually, the citizens realized the potential losses and ran to buy back gold, but there was far less gold than bank notes. A bank run and financial bubble occurred, leading to an unbalanced balance sheet with more liabilities than assets.
FTX and SBF’s scandal demonstrate the importance of understanding history and learning from past market bubbles. Technology may change, but the basic principles of finance and economics remain the same. Investors must be vigilant and do their due diligence before investing in any financial venture.
The Similarities Between FTX and John Law’s Story
Sam Bankman-Fried was hailed as the face of cryptocurrency and crypto derivatives, just like John Law was the Scottish economist appointed to revive the French economy in the early 18th century. Both men used their influence to manipulate the market and create financial bubbles.
Investors fell for the false promises and invested heavily in FTX’s asset side of the balance sheet, hoping to make easy money. However, Bankman-Fried used the funds for separate ventures, including his quant research firm (Alameda Research), risky investments, and more mishandled operations. This situation echoes John Law’s story, where he spent on his ventures, expanded trade and government debt, and issued more shares to pay for increasing losses.
When Binance, the world’s largest crypto exchange, saw Alameda and FTX’s balance sheets, it liquidated hundreds of millions in FTT shares, triggering a bank run on FTX. Investors lost confidence and immediately sold their positions, leading to an asset-side contagion on FTX’s balance sheet.
The stories of Sam Bankman-Fried and John Law highlight the importance of learning from past financial bubbles and market manipulations. Innovators in finance may have an idea, but without a solid plan after implementation, it can lead to mishandled operations and financial losses.
Investors must be prudent and always look for patterns of the past before investing in any financial venture. The lessons of history should not be ignored in the fast-paced decision-making world of finance.
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