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FTX held less than $1B in liquid assets against $9B in liabilities

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Re: FTX held less than $1B in liquid assets against $9B in liabilities

#11

Post by aeternum »

"Currently, all U.S. banks are subject to a balance sheet leverage ratio, which requires them to maintain a ratio of tier 1 capital to balance sheet assets at a minimum level of 4%. In order to be well-capitalized, banks must achieve a 5% minimum leverage ratio"

So FTX had an 11% leverage ratio, pretty good.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#12

Post by VagueMag »

nonstopdev wrote: post #9
guardiangod wrote: post #4

Is this normal? I would assume that no bank has 100% liquid assets against liabilities (same as stuffing all your money under your mattress.) So what is the "right" ratio for an exchange? Close to 100% since you are not supposed to invest an exchange's money?

Fractional reserves exist in finance and are held in various assets that can be hedged and also redeemed. Based on the liabilities that FTX revealed like funding Alameda for their investments in un-hegable bets like “Donald Trump losing” is not normal where they could never get those funds back if there was a bank run.

Setting aside arguments about whether it actually fixes the moral hazard issues with fractional reserve banking, banks also have FDIC deposit insurance and there is an understanding of the possibility of loss of funds which exceed the insurance limit.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#13

Post by VagueMag »

aeternum wrote: post #11

"Currently, all U.S. banks are subject to a balance sheet leverage ratio, which requires them to maintain a ratio of tier 1 capital to balance sheet assets at a minimum level of 4%. In order to be well-capitalized, banks must achieve a 5% minimum leverage ratio" So FTX had an 11% leverage ratio, pretty good.

FTX was not an FDIC-insured bank with the ability to borrow funds at the Fed discount window, and it did not tell its customers it would be lending out their funds.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#14

Post by ttul »

aeternum wrote: post #11

"Currently, all U.S. banks are subject to a balance sheet leverage ratio, which requires them to maintain a ratio of tier 1 capital to balance sheet assets at a minimum level of 4%. In order to be well-capitalized, banks must achieve a 5% minimum leverage ratio" So FTX had an 11% leverage ratio, pretty good.

Ahh, but FTX is not supposed to be a bank.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#15

Post by JonathanBeuys »

There should be more discussion about how to store value without counterparty risk.

Most people think it is as easy as ordering a hardware wallet, following the process the wallet software suggests and - hurray! - your keys, your coins!

But it is not that easy. You also have to cut the wallet manufacturer and the software developer out of the loop.

I have yet to see a description on how to safely create a wallet that really does away with counterparty risk.

The way I understand Bitcoins signatures, there could be a way. But it would involve to somehow put your secret key into multiple air gapped, RFC-6979 compliant hardware wallets. And then create addresses and sign transactions with those hardware wallets without ever connecting them to a computer. And compare the addresses and signatures between these wallets to make sure they match. Because otherwise, the wallets could taint the output in a way that signals data back to the manufacturer.

I don't even know if there are fully operational air gapped hardware wallets on the market.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#16

Post by tyre »

aeternum wrote: post #11

"Currently, all U.S. banks are subject to a balance sheet leverage ratio, which requires them to maintain a ratio of tier 1 capital to balance sheet assets at a minimum level of 4%. In order to be well-capitalized, banks must achieve a 5% minimum leverage ratio" So FTX had an 11% leverage ratio, pretty good.

You must consider what the banks are lending with that ratio. It’s mostly mortgages, which are far less risky than what FTX was doing.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#17

Post by michaelbuckbee »

mertd wrote: post #10

> In all, the spreadsheet says FTX Trading’s assets were $900mn of “liquid” assets, $5.5bn of “less liquid” assets consisting of crypto tokens Aren't tokens supposed to be "liquid" or is this a different way of saying the tokens are worthless?

My understanding is that a lot of their assets were in their own cryptocoin that they borrowed against like:

1. Make million new coins called $mikecoin

2. Sell 1 $mikecoin to a friend for 1 USD

3. Claim that the "Total Market Cap" for $mikecoin is 1 million USD

4. Borrow Bitcoin or dollars against your $mikecoin reserve.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#18

Post by rbultje »

mertd wrote: post #10

> In all, the spreadsheet says FTX Trading’s assets were $900mn of “liquid” assets, $5.5bn of “less liquid” assets consisting of crypto tokens Aren't tokens supposed to be "liquid" or is this a different way of saying the tokens are worthless?

Liquid doesn't just mean "can trade out of it at any time", but also "would typically be willing to trade out of it at any time". If a market is in a downswing, you're typically told to hold on to your stocks: buy low, sell high. The same rule would apply here. But that does mean they're not guaranteed to be liquid ("willing to trade") at all times, given that there's a risk of loss if you are forced to trade out of it at times of a market-low.

Re: FTX held less than $1B in liquid assets against $9B in liabilities

#19

Post by partloyaldemon »

mertd wrote: post #10

> In all, the spreadsheet says FTX Trading’s assets were $900mn of “liquid” assets, $5.5bn of “less liquid” assets consisting of crypto tokens Aren't tokens supposed to be "liquid" or is this a different way of saying the tokens are worthless?

Not worthless! Just, you know, worthless right now.
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