Alex Brommer: Cryptocurrency is exposed as a multi-billion dollar pyramid scheme

The flight from the Bahamas and first court appearance for FTX founder Sam Bankman-Fried provide a dramatic end to the cryptocurrency bubble book.

This follows a guilty plea to similar fraud charges by two associates. The entire crypto system is exposed as a multi-billion dollar pyramid scheme.

Firms that bought the myth shored up their balance sheets by swapping crypto-backed instruments, allowing them to take on more leverage.

It is remarkable that even with the collapse of the entire structure, crypto-evangelists still preached the virtues.

Bitcoin has pulled back well from the revolving highs of $69,000 in November 2021, as the market cap hit $3 trillion. This is greater than the size of the UK’s GDP.

Still, it’s still an astronomical level, nearly $17,000, even after a string of bankruptcies and revelations built on lies, alleged fraud, and money laundering.

Those who drank Kool-Aid find it difficult to leave the sect. Most recently, this week, backers of the ethereum blockchain have been teasing how upgrades, and the creation of a more energy efficient architecture, mean that the appetite for the crypto asset will return in 2023.

The massive energy consumption involved in ‘mining’ of cryptocurrency was a huge let down for those focused on climate change.

To think that he will be fine next year is pure, unadulterated delusion.

There is difficulty getting the message across via this cryptography, and non-fungible tokens (NFTs) do not meet any of the currency criteria.

It cannot be used as a medium of exchange to trade goods nor is it a store of value.

Many smart people have played bitcoin as a one-way bet at the roulette table. They bought some chips from the dealer, watched them go up in value as the wheel spun and stopped, and managed to cash in before the final stop.

Those on the winning side, including the hot New York lawyer I know, can’t believe their good luck, or stop talking about it.

The unfortunate ones are customers of exchanges like FTX who have been saddled with deposits frozen in Chapter 11.

One group of FTX clients is asking Delaware courts to declare £1.3 billion in cryptocurrency held with the defunct company a ‘custodial’ asset that should be given priority over commercial creditors and banks. Good luck with that.

The treasury already looks bare after some $10bn (£8.3bn) of $16bn (£13.3bn) on FTX’s balance sheet mysteriously passed to another Bankman-Fried organisation, Alameda Research.

It is not difficult to understand how cryptocurrency fell to the ground. As in any financial meltdown – liability driven investments (LDIs) being an example – leverage or borrowing is a factor.

When the ‘reddit’ generation was able to borrow at very low interest rates, to fund bitcoin trading, everything was fine and wonderful.

As the cost of borrowing rose, in response to runaway inflation, there were margin calls (a demand for more assets by lenders) and financing became very expensive.

It also became clear that the edification of cryptocurrency was built on flimsy ethical and legal grounds.

CEOs of a few exchanges, including FTX, Binance, and Tether, have been busy exchanging assets with each other, inflating valuations.

The most disturbing aspect of the cryptocurrency crash (NFTs won’t be far behind) is the way massive scams have been allowed to damage mainstream finance.

The price of bitcoin is being promoted on financial broadcasting outlets, along with respected asset classes like oil, gold, and the dollar, giving it a false respectability.

The adoption of crypto and blockchain by respected and regulated savings providers, such as Fidelity and JP Morgan (with half a dozen crypto funds), is nothing short of a stigma.

Cryptocurrency, in its many forms, falls into the shadow banking or non-banking category, so it is outside the realm of mainstream financial regulation. But it must be asked – where are the checks and balances?

The enthusiastic reception to initial public offerings of bitcoin and cryptocurrencies suggests that the stock markets, investment banks that sponsored the offerings, regulators and auditors (FTX has been named the biggest accounting scandal since Enron) have all failed to do their job.

The American court system will deal with Bankman-Fried and his cult.

The guilt does not end there.