Uncle Sam Bankman-Fried

America tried to kill Bitcoin and instead triggered the 2nd global banking crisis of our lifetimes, pushing BTC +80% YTD. Bank runs, glass houses, men-behind-curtains, and 2.5x

Apr 19, 2023

He took in money from depositors, invested in the wrong assets, mismanaged liquidity profiles, failed to manage risk, realized heavy losses, and was unable to meet customer withdrawals…

I am, of course, talking about Greg Becker, CEO of Silicon Valley Bank.

But he’s not alone. Every single bank in the U.S. has exactly the same business model as SVB, and it’s one that looks eerily similar to SBF’s. They took customer deposits, invested them poorly, and then struggle to meet withdrawals.

The terrifying difference is that Silicon Valley Bank, Silvergate, Signature, and other banks aren’t going bust buying shitcoins, but rather US Treasuries, the “safest investment in the world". Think about that. In 2008, it was banks’ portfolios of bad credit: subprimes. In 2023, it was banks’ portfolios of U.S. Treasuries.

SBF = SVB = USG

It’s an inherently unsustainable model that relies on two things: 1) a never-ending carousel of new capital, and 2) an unwavering faith in the man-behind-the-curtain: the disheveled tech billionaire wunderkind, the bulletproof banking CEO, the omniscient Fed Chair, the full faith and credit of the United States Government…

Overleveraged, undercollateralized, and fractional reserve institutions like SBF, SVB, & USG rely on “reputation”, “confidence”, or “faith”, respectively, and will therefore always be subject to the same type of risk: a bank run.

In Sam Bankman-Fried’s FTX empire, there simply wasn’t enough money in the proverbial bank to make users whole. With Greg Becker’s SVB empire (and in fact every bank in the U.S.), there simply isn’t enough money in the literal bank to make depositors whole. And with Uncle Sam’s American empire, there’s always enough money in the central bank to make creditors whole… it just won’t be worth the paper it’s printed on by the time you get it.

Which is why I find it so comical that the United States, with the business model of SVB and financials worse than SBF’s, has become so aggressive towards crypto specifically and Silicon Valley broadly. What’s that quote about people in glass houses?

Last month’s letter, Goofy Gary, covered the politically-motivated (and dubiously legal) attacks on crypto. Since then, we’ve seen the Operation Choke Point 2.0 Gestapo point the government gun at Silvergate, Signature, Silicon Valley Bank, Kraken, Paxos, Custodia Bank, Coinbase, Grayscale, Genesis, Gemini, and Binance.

The U.S. Department of Justice even went as far as market dumping 9,860 BTC ($216m) in a single day to try and crash crypto prices. Hilariously, they executed this sale on the very same exchange they’re trying to shut down: Coinbase! Even better, BTC ended that day up +9.4% and is +30.0% since!

M31 Capital

Goofy Gary

Forwarded this newsletter? Back in 2013, a government initiative called “Operation Choke Point” attempted to crush a couple industries the government didn’t like without dealing with that pesky little thing our Constitution calls due process. The idea was to stamp out these perfectly legal industries by choking off their bank access and ability to use fi…

2 years ago · Nathan Montone

The U.S. took a swing at crypto and instead started a run on all banks, triggering a global financial crisis resulting in the collapse of several of America’s largest banking institutions with others down (-80%). Meanwhile, BTC is +80% YTD.

They tried to get everyone to pull their dollars out of Bitcoin, and instead, everyone pulled their dollars out of U.S. banks! What was that about glass houses??

Bitcoin is Better

It’s not complicated: Bitcoin is winning because Bitcoin is better.

When SVB collapsed on March 10th, a Friday, depositors couldn’t access their funds, over 10,000 companies had their accounts frozen, and more than 1,000,000 tech employees didn’t know if they would get their paychecks on Monday.

Over that same weekend, Bitcoin settled ~$33 billion, facilitated ~600k transactions, and issued 2,037 new BTC at a predictable 1.8% annual inflation rate. Around 1 million new addresses were created, and miners earned $43m producing 326 blocks.

Banks were closed. The Fed was not needed.

That’s what a strong financial system looks like. Bitcoin is a fully backed, zero-leverage, zero-liability, zero-counterparty, fully-auditable, 100% sovereign bearer asset available at the speed of light via the click of a button on your phone. It’s simply better money.

And it’s why some are betting we’ll see 1 BTC = $1M USD very soon:

The transparency offered by a decentralized money running on decentralized financial rails would also prevent bank runs forever. Runs only exist because opacity creates fear that can only be resolved by mass withdrawals. You don’t really know if the bank has your funds unless you’re able to withdraw it back to self-custody.

Decentralized Finance - DeFi - on the other hand, makes all information available to everyone in realtime: solvency, counterparties, flow of funds, everything but your name. If financial institutions had their entire balance sheets transparently available on DeFi rails, bank runs would cease to exist.

This is important, because prior to 2023, Bitcoin was “only” useful to the +4bn people living in authoritarian regimes, plus the +300m people living in countries where inflation is over >50% a year, as well as the ~200m in Africa forced to use the CFA Franc. But now that depositing money in America’s largest banks is a high risk investment activity, Bitcoin is useful to everyone.

Protectooors

A stable, predictable, and transparent financial system matters. Consider the alternative: all throughout 2020 & 2021 - as recently as October 2021 - the Federal Reserve vehemently promised not to raise rates. Then in 2022, they ripped interest rates higher & faster than ever, from 0.08% to 4.57%.

In absolute terms it was the fastest hiking pace in decades (a 4.5% move in one year). In percentage terms it was a 57x increase. The fastest hiking cycle *of all time*.

And because banks believed the man-behind-the-curtain, they bought long-duration bonds which they were forced to sell for massive loss when rates jumped, ultimately making banks insolvent and unable to process withdrawals. GFC II.

So for those keeping score since COVID: The Fed printed way too much money, kept rates way too low for way too long, dismissed inflation as a conspiracy theory, then hiked rates way too late and way too much, breaking the global banking sector and are now right back to printing money (more on that below).

At the same time, the SEC failed to protect consumers from the scams of CeFi and then waged war against DeFi… the only financial products that didn’t harm consumers. They gave special regulatory exemptions to bad actors like FTX while throwing lawsuits and enforcement actions at Coinbase & Kraken… the good guys earnestly trying to follow the rules.

The “experts” have been wrong at every turn and have spent the last few years simply running from one side of the boat to the other, “fixing” the problems that they created. Maybe… just maybe… the global economy is too complex to be centrally planned by 12 people.

2.5x

2022 was the latest attempt at monetary responsibility. It failed. The Fed has already pivoted, adding $300bn to their balance sheet, undoing more than half of last year's entire reduction. In just *one week*.

These half-hearted attempts at monetary responsibility are historically followed immediately by expansions of 2.5x:

$0.8 billion > $2.0 Trillion
$1.8 Trillion > $4.5 Trillion
$3.7 Trillion > $9.0 Trillion
$8.4 Trillion > ???

Now back to our regularly scheduled printing programming. Strap in for another 2.5x... which, by remarkable coincidence, takes us to exactly $21 Trillion. Or, more accurately: $1,000,000 per BTC

Conclusion

The 2023 banking crisis has exposed the inherent weakness of our global financial system. We are living through the second global banking meltdown in our lifetimes as a result of the fiat money experiment. Only 50 years old, it has been a regrettable failure.

Like the ancient alchemist’s attempt to turn copper to Gold, fiat economies aim to get something for nothing. SBF tried to turn liabilities into assets, and the Fed tries to turn printed paper into wealth. So it’s no surprise more people are turning towards Bitcoin as the parallels between the Fed and FTX become clearer every day.

Uncle Sam, meet Sam Bankman-Fried.

I leave you with this:

Buying BTC during the Greek bank bail-in was smart. Buying BTC during the Mt. Gox collapse was smart. Buying BTC during the COVID pandemic was smart. Buying BTC during the FTX collapse was smart. Buying BTC during the SVB collapse is smart.