Review: Number Go Up

 After being disappointed by Michael Lewis's Going Infinite, I read on Molly White's blog that Number Go Up was potentially far better. I checked it out from the library and finished it in two days, simply because it was such compelling reading.

There's a very rudimentary explanation of how blockchain works, and Zeke Faux doesn't shy away from explaining how blockchain is far from anonymous:

the way the blockchain database works, transaction records are never erased. And while it doesn’t record names, it does assign a unique address to each wallet. If any wallet can be tied to a specific individual, then an investigator can easily see every transaction that person has ever made. Investigators could tie a person to an address by making a purchase from them, just as they might buy drugs from a dealer before arresting them; or they could watch for transfers to exchanges, like Bankman-Fried’s FTX, then send subpoenas to the exchange for user records. Once the FBI busted Silk Road, the dark-web drug market, it was able to track down many of the dealers on the site. As the writer Andy Greenberg explained, “Bitcoin had turned out to be practically the opposite of untraceable: a kind of honeypot for crypto criminals that had, for years, dutifully and unerasably recorded evidence of their dirty deals.” (kindle loc 1736)

 The profiles of the various characters is probably the most boring part of the book --- to me, all the scammers kinda look alike, with very iffy backgrounds and not very interesting bios. None of them can explain why their coin or NFT token or whatever should be worth anything more than zero. I guess many of the crypto investors are betting on the bigger fool theory to be able to unload their stash at non-zero values. There's an aside where Faux watches Michael Lewis interview Sam Bankman-Fried:

the author’s questions were so fawning, they seemed inappropriate for a journalist. Listening from the packed auditorium, I started to question whether Lewis was really writing a book, or if FTX had paid him to appear. (Lewis later told me that he had in fact come to report for his book and that he was not compensated.) Lewis said he knew next to nothing about cryptocurrency. But he seemed quite confident that it was great. The writer said that, contrary to popular opinion, crypto was not well suited for crime. He posited that U.S. regulators were hostile to the industry because they’d been brainwashed or bought off by established Wall Street banks. I wondered if he simply hadn’t heard about the countless crypto scams, but the thought seemed preposterous. “You look at the existing financial system, then you look at what’s been built outside the existing financial system by crypto, and the crypto version is better,” Lewis said. (kindle loc 2292)

Then he gets into the crypto scheme in the Philipines during the pandemic called Axle Infinitie. The ending of that bubble is both comic and tragic:

Crypto bros and Silicon Valley venture capitalists gave Filipinos false hope by promoting an unsustainable bubble based on a Pokémon knockoff as the future of work. And making matters worse, in March 2022, North Korean hackers broke into a sort-of crypto exchange affiliated with the game and made off with $600 million worth of stablecoins and Ether. The heist helped Kim Jong Un pay for test launches of ballistic missiles, according to U.S. officials. Instead of providing a new way for poor people to earn cash, Axie Infinity funneled their savings to a dictator’s weapons program (kindle loc 2251)

There's a section in there where he replays an interview between  Matt Levine and Bankman-Fried, where Bankman-Fried essentially describes a Ponzi scheme:

Levine asked a simple question about “yield farming,” the investment technique Jason Stone had used at Celsius. As Bankman-Fried attempted to explain how it worked, he had more or less laid out the how-to of running a crypto pyramid scheme. “You start with a company that builds a box,” Bankman-Fried said. “They probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in thirty-eight days or whatever. Maybe for now actually ignore what it does, or pretend it does literally nothing.” Bankman-Fried explained that it would take very little effort for this box to issue a token that would share in the profits from the box. “Of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box, but I don’t know, you know, maybe there will be,” Bankman-Fried said. Levine said that the box and its “box token” should be worth nothing. Bankman-Fried didn’t disagree. But he said, “In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool.’ ” Curious people would start buying box token. And the box could start giving out free box token to anyone who put money inside, just as Axie had rewarded players with Smooth Love Potions. Crypto investors would see they could earn a higher yield by putting their money in the box than in a bank. Before long, Bankman-Fried said, the box would be stuffed with hundreds of millions of dollars, and the price of box token would be rising. “This is a pretty cool box, right? Like this is a valuable box, as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that?” Sophisticated players would put more and more money in the box, Bankman-Fried said, “and then it goes to infinity. And then everyone makes money.” “I think of myself as like a fairly cynical person,” Levine said. “And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.” (kindle loc 2359)

The big reveal in the book actually isn't about SBF. In the last third of the book, Faux discovers that the various internet crypto scammers (these are people who would tease you that they have a sure-fire way of making money on crypto using their special app, get you to download the app, and then use that app to siphon money away from you) are part of a global human-trafficking ring that essentially used human slaves to scale up these crypto scams. (In this day and age of AI, you might imagine that they'd use chatbots, but obviously machine learning models are still much more expensive than human slaves)

And the problem was large enough that it could account for a serious amount of Tether transactions. If Chinatown held six thousand people scamming like Vicky Ho, and each had to meet a quota of $300 a day—the number I’d heard from some victims—that one compound alone would generate more than $600 million a year in illicit proceeds. From what I had learned, it seemed that this scam slave complex would not be able to operate without crypto. And the benefits of crypto to the rest of the world seemed to be limited to enabling a zero-sum gambling mania. (kindle loc 3281)

 The conclusion the book comes down to is that Tether and Bitcoin have sufficient real world applications (not legal ones, given the extremely high transaction fees associated with conversion from crypto to legal tender) that countinue to fund its existence despite the crypto crash . What's more, with high interest rates being paid out by T-bills and Treasury Bonds, Tether can now make money legitimately:

In May 2023, Tether announced that it had converted most of its holdings into U.S. government bonds. It said that due to the high interest rates, it had generated $1.5 billion in profits in the first quarter alone—an insane amount for an unregulated offshore company. That number would be a good quarter for corporate giants like Raytheon, Nike, or Disney. Tether had, if its numbers were trustworthy, become one of the 150 most profitable companies in the world. (kindle loc 4208)

The author likes to give the government regulatory agencies a hard time  about ignoring the problem of crypto scams. But given the international scale of this problem, and how lightly funded the various agencies are, I can only imagine that it would be very hard to fund an investigation. But now that crypto is dead maybe at least the scammers are finding it harder to operate.

Anyway, I enjoyed the book, learned a lot from it, and it actually had insights I hadn't found anywhere else. Recommended.