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Why an Exchange Seller Sell More Than 70,000 Bitcoin IOUs

Why would an exchange sell customers Bitcoin but then not take cash to market to buy BTC ?

They were attempting to trade against their own customers as well as arbitrage them...

FTX & Alemeda, their size may be size but their smart is not smart

Let's go through an example👇

1/n User Deposits 20K USDC in FTX and proceeds to BUY 1 BTC at 20K

FTX should first accept USDC into user assigned hot wallet. From there to cold storage.

This is where something as simple as custody has been made complex.

How? The idea: Assets = Liabilities balance sheet

2/n This accounting trick allowed FTX to take on short term liabilities against inflated bull market asset valuations

It is now evident that one of the many liabilities they assumed was arbitraging their own customers

Instead of taking users 20K & putting BTC in cold storage

3/n 20K became cost basis for FTX

All they needed to do is take 10% of that deposit 2K and using derivatives long 10x

If Bitcoin went up they "hedge against USD" so they maintain the purchasing power to aquire 1 BTC

BUT price moving to downside beyond implied...

4/n

...volatility (predetermined liquidation level) means that FTX could actually use the remaining principle 20K - 2K hedge = 18K to buy back the liability for less than remaining principle.

So if Bitcoin price went to 17K then FTX "USD hedge" is liquidated at 18K

BUT

5/ FTX assets are 18K & liability is 1 Bitcoin or 17K

Alemeda just made 1K from its customers BTC purchase by "hedging against USD" and issuing an IOU so they could try to "arbitrage" except in this case arbitrage was really

just trying to time markets better than clients

6/ This is just my opinion based on the data we now have available

FTX sold more than 70,000 Bitcoin IOUs in an attempt to make money off clients

These were literally paper BTC that came about as a balance sheet liability "properly hedged" with the "borrowed" customer assets

7/7 This is just one form of liability that FTX was taking on balance sheet

Not sure of the others as of right now but no doubt this has nothing to with Bitcoin & everything to do with trusting human regulations more than code

Be Your Own Bank Not your keys, not your coins

This post is based on this twitter thread.

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