WOO X, The Next FTX?
I just read Chris Brunet’s Karlstack earlier today, “A Warning about WOO X: Withdraw! This smells like FTX all over again.” WOO X does have a distinct aroma of FTX, but without the illegality, sloppiness, and charisma, and maybe even without the immorality (see my two older Substacks on FTX’s sloppiness and immorality). WOO X looks more like someone saying to people, “Give me your money and let’s see what happens” and foolish people saying, “Sure”. Taking candy from a baby is immoral, but is it immoral to take money from greedy fools? That’s actually a good question— but I’ll try not to get distracted here. Karlstack gives a link to WOO X’s balance sheet:
Assets do exceed liabilities, but when the biggest component of your assets are your own WOO tokens, assets could quickly drop below liabilities. I don’t understand crypto well enough to understand this very well, but I’d be worried if I was depending on WOO X to pay me any funds of mine they had in their possession or that they owed me.
But there’s another problem. It seems that Woo X customers are told that their funds may be loaned out to other companies. One other company is Kronos, owned by the same people as WOO X. Kronos is an investment company. What is remarkable here is that it seems customers are told up front that Woo can lend their money to Kronos. They are told their funds will not be used for speculation, but if you think about it, that doesn’t reduce the risk. Here are Karlstack excerpts from the WOO X terms:
Money is fungible, so it’s easy to lend it to a speculation company without it being used for speculation. Before I explain the implications, think about another recent example of fungibility: the Kinsey Institute at Indiana University. The Kinsey Institute is an institute for the study of human sexuality, originated by the notorious pervert and fraud, activist Alfred Kinsey. It is well known for its gigantic collection of erotica. In 2023, the Indiana legislature voted to ban Indiana University from using state money to fund the Kinsey Institute. This will have no effect whatsoever. As the student newspaper said,
Whitten disagreed with the decision to ban funding but said the university will conduct a legal review to ensure that IU is consistent with current state laws, according to the letter. The Kinsey Institute and its faculty still has the support of IU’s administration, and the university will continue to support the Institute financially through grants and philanthropy, where most of its funding already comes from.
Money is fungible. You need to be careful when you try to control it. The Indiana legislature should have said that the state appropriation to Indiana University would be reduced by the amount of the funding of the Kinsey Institute, regardless of where that funding came from. That would have hurt. What the legislature did was just virtue-signalling.1
Now back to WOO X and a hypothetical example. Suppose the owners of Kronos wants to spend $7 billion on speculation and $6 billion on hedging (which is a safe use of the funds), and they have $1 billion of capital. Thus, assets are $13 billion and equity is $1 billion. The speculation has a 50-50 chance of them ending up with $0 or $10 billion. That’s an investment of $7 billion to get an “expected value” of just $5 billion (.5($0) + .5($12)), but they know that.2
Kronos borrow $6 billion from WOO X customers and $7 billion from Rasmusen, so liabilities are $13 billion, the same as assets, with that $1 billion of capital for safety The WOO X customers require that their $6 billion only be used for hedging. Rasmusen requires that his debt be “senior”, meaning he is first in line to be paid what he is owed.
Kronos is happy with this. They take the WOO X $6 billion and spend it on hedging, and the Rasmusen $7 billion and spend it on speculation. If the speculation is successful, they pay back the WOO X customers and Rasmusen and have $3 billion left over as profit, a nice 300% return on their capital of $1 billion. If the speculation is unsuccessful, they have $7 billion to pay back the loans— the $6 billion used for hedging and the $1 billion in capital. Rasmusen gets all $7 billion he is owed, since he is senior. The WOO X customers get zero; there is nothing left for them. The Kronos owners have gotten a return of -100% too, so they are unhappy, but that’s life. Looking at the entire speculation, the Kronos owners have a .5 chance of ending up with $4 billion ($1 billion capital plus $3 billion profit) and a .5 chance of ending up with $0 billion ($0 capital and $0 profit). That’s an expected value of $2 billion, which is an expected profit of 100%.
All that is just to give specific numbers to illustrate the point that if you lend someone money and they speculate and can’t repay, it doesn’t matter what they’ve used your particular dollar bills for — they can’t repay you. And that might be the case with WOO X. Economists like myself are very much aware of this kind of problem. Any kind of lending should take this “moral hazard” into account, and almost every lender does, whether in mortgages, corporate bonds, bank loans, or loans from the International Monetary Fund. But not, perhaps, people who put their money into offshore crypto accounts.
The Florida legislature has just made the same futile gesture, with respect to state university funding of DEI activism. HB 999 says:
(2) A Florida College System institution, state university, Florida College System institution direct-support organization, or state university direct-support organization may not expend any state or federal funds to promote, support, or maintain any programs or campus activities that:
(a) Constitute violations of s. 1000.05; or
(b) Advocate for diversity, equity, and inclusion, or promote or engage in political or social activism, as defined by rules of the State Board of Education and regulations of the Board of Governors.
The University of Florida cannot use the state’s approrpriations for political activism. It looks like it can use tuition money, unless those count as “state funds”. It can’t get federal grants for it, but it might be able to use the overhead paid to the University from federal grants, which is a big part of a university’s income. It certainly can use contributions from donors of all sorts.
Of course, roulette offers much better odds when you bet $7 billion on red for double or nothing, but this is just a hypothetical. As roulette suggests, it’s easy to find investments with this kind of return. If you want to bet $7 billion, that’s over the normal table limit, but I’m sure you could find a syndicate willing to make such a bet, with everyone examining the wheel very closely to make sure it was fair.