Transcript: Inside the crypto hype machine

This is an audio transcript of the Unhedged podcast episode: ‘Inside the crypto hype machine’

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Robert Armstrong
Sam Bankman-Fried 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 FT and 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?

Joshua Oliver
It’s going well. Thank you for having me, because the world needed one more book about crypto.

Robert Armstrong
It does. Well, it needs your book in particular, Josh, and I wanna talk about your book in a second. But first, I want to talk a little bit about the sentencing, which is gonna 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 wanna tell us a little bit about that and what it means?

Joshua Oliver
Yeah, absolutely. So, I mean, to catch folks up, sentencing hearing’s 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 defence lawyers are arguing about how long the sentence should be. And just to give people the pulse on that, the theoretical maximum they may have heard, more than 100 years. The government has asked for 40-50, the defence has asked for six and a half. So that’s the fight they’re having. 

Robert Armstrong
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.

Joshua Oliver
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 defence 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 gonna get paid back 100 per cent in quotes, but it’s not actually 100 per cent 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-Fried 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 soundbites. And they know how to write these things, to have the, you know, the headline phrase. And I think this one, it was “life of delusion” that, you know, Sam is sort of a 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.

Robert Armstrong
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 disorganised and in over his head, and things went sideways. And that’s the defence’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. You’ve met this guy. Where on that spectrum does the truth lie?

Joshua Oliver
I have to admit, like, 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. The 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 and 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. I see it as really an indictment because it’s . . . 

Robert Armstrong
Yeah. It strikes me as awful and chilling.

Joshua Oliver
Yeah. He’s arrogant 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 gonna 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 behaviour and reconciled . . . You know, there are always caricatures on both sides. But when I heard that, I remember sitting in court thinking like, that sounds about right.

Robert Armstrong
Josh, what do you think’s gonna happen next week?

Joshua Oliver
I 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 this 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 defence side, their filing is really, really long and it’s like the kind of throw-everything-at-the-wall strategy of like mental health issues, which are 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.

I 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 . . . Even without being a lawyer, I haven’t seen a reason I think would be convincing to this judge why it will 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 non-violent crime. But that’s, you know, the US justice system.

Robert Armstrong
When was the last time you saw Sam?

Joshua Oliver
Last time I saw him was at his parents’ house in California. But 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 give his version of events. And then we were kind of halfway through that, actually, when people may remember he got sent to jail kind of unexpectedly for violating the bail conditions. And 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.

Robert Armstrong
Josh, I wanna turn to your book Hype Machine. And one of the themes of the book is that Sam Bankman-Fried, who is 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?

Joshua Oliver
Yeah, I mean, I don’t know about more or less nefarious, but certainly in line in terms of nefariousness. And part of what I wanted 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 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.

Robert Armstrong
I 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.

Joshua Oliver
I mean, I think I’m not gonna 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. The way I would look at it is like one of 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 but the market being manipulated. Plus, the long tail of coins when you get past bitcoin and ethereum stuff, a ton of them are just outright scams. So that’s not great.

Robert Armstrong
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 and . . .?

Joshua Oliver
Every time. Yeah. And there’s always, you know, fees to get in and fees to get out. And actually, I think those are underestimated by most people, you know, that 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. And I don’t know how much I’m gonna have to pay till I get this back. And you’re like, OK, it’s kind of still not great.

Robert Armstrong
Next thing.

Joshua Oliver
Yeah. Next thing, the derivatives trade, which is the majority of the volumes and it certainly was during the sort of 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 but, you know, the retail traders would lose their money. And so that’s why you had the offshore venues that people were going offshore to trade on FTX International.

Robert Armstrong
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? 

Joshua Oliver
Well, the exchange just makes transaction fees so they, you know, they make money win, lose, draw. They just sit there and take their percentages. And it’s a money-printing machine. But then, you know, on the other side you have also, you know, the retail traders up against the kind of high-frequency traders and the hedge funds who have more sophisticated set-ups to, you know, who are gonna tend to win, I’d think. It’s hard to imagine how you’re gonna compete as an individual, particularly in a 24-hour market where either you don’t sleep or you close your positions so you can sleep or, you know, it’s very hard to kind of be up all the time and to be competitive in that market.

Robert Armstrong
Yes.

Joshua Oliver
And then the last piece, the depositing/lending yield piece, you know, 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 and 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.

Robert Armstrong
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 are in a second crypto boom. It’s almost as if people didn’t get hurt badly enough the first time around. They’re back for seconds. What’s going on here?

Joshua Oliver
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 cryptosphere 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 gonna work because we’ve just sort of on the upswing here. But, you know, the vehicles that seem to be driving it are the bitcoin ETFs, which were, you know, 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, you know, broadly reputable asset managers and . . . 

Robert Armstrong
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?

Joshua Oliver
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. And 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 gonna 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.

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Robert Armstrong
Yes. We’ll be back in just a minute with Long/Short.

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Welcome 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?

Joshua Oliver
Yes. I don’t like it, but I do believe in it. I am long crypto money laundering.

Robert Armstrong
Yes. You’re gonna be a rich man, Josh. Tell me how you’re gonna do it.

Joshua Oliver
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. Just read it.

Robert Armstrong
Josh, I have a controversial long. I am going to go long reclining your seat in coach class on an airplane.

Joshua Oliver
Wow, this is controversial.

Robert Armstrong
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.

Joshua Oliver
Rob, I couldn’t agree more. And doubly, if the listeners don’t know, Rob is about nine feet tall, so we should all have . . . 

Robert Armstrong
Yeah. So it’s not like I’m some short person whose knees don’t get crunched.

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All right. Thank you, Josh. Congratulations on Hype Machine and listeners, we will be back in your feed on Tuesday.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, 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/unhedgedoffer. I’m Ethan . . . Oh, sorry, I’m not Ethan Wu. I’m Rob Armstrong. Thanks for listening.

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