Over a trillion dollars.
That’s how much value has evaporated because of the collapse of the FTX crypto exchange.
I first put that story on your radar last week.
Since then, there has been all sorts of FTX-related craziness in the headlines – including a multibillion-dollar hack. And just this morning, another major crypto player, Genesis Global Trading, halted withdrawals.
But there’s one development above all that might have you feeling fearful about crypto…
Reports came out that, indirectly, FTX used customers’ money to fund risky bets. It did this through its affiliated trading firm, Alameda Research.
FTX reportedly lent more than half of its clients’ funds to Alameda. Alameda then used those funds to trade cryptocurrencies.
It’s a classic case of “too big to fail” firms getting greedy with other people’s money. We’ve seen it before in traditional finance. And unfortunately, it’s not the last time we’ll see it.
That said, this revelation has many people worried about what it means for the crypto industry.
So today, I’m going to look beyond the headlines. And I’ll show you what the FTX story means for your money.
FTX Broke More Than Just Trust
Last week, questions started swirling about FTX’s solvency. On November 7, FTX founder and CEO Sam Bankman-Fried (aka SBF) said in a tweet:
FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).
In its own terms of service, FTX said transfers to its crypto trading arm were explicitly forbidden. But as it turns out, Alameda had used FTX customer funds for trading.
SBF later reportedly described the decision as a poor judgment call (after deleting the tweet above). But reports also suggest that SBF had built a back door to siphon customer funds to Alameda.
The trading firm owed $10 billion to FTX before both filed for bankruptcy last Friday. And while there’s already a civil bankruptcy case, all the above raises the probability that there will be a criminal fraud case, too.
As I write, authorities of the Bahamas, where the company is based, are seizing whatever FTX assets they can get their hands on.
U.S. enforcement agencies are also investigating FTX.
FTX was once seen as a leader in a struggling market. But its fall has sent shockwaves through the cryptocurrency industry.
This is why Bitcoin and other cryptos have crashed over the past week.
No, FTX Has Not Doomed Crypto
At this point, you might be thinking that the entire crypto space is one big Ponzi scheme.
FTX certainly is the most shocking insolvency of a custodian since Mt. Gox.
But the FTX incident isn’t a reason to lose confidence in Bitcoin and the New Money paradigm.
One thing I learned on Wall Street is that it’s important to separate the bad apples from the orchard.
In this case, FTX is an example of a bad apple that was dishonest and gambled with other people’s money.
But this isn’t unique to crypto. And it also doesn’t mean that the entire crypto industry is doomed.
This is what happened with many firms in the traditional finance space during the 2008 crisis. Lehman Brothers and Bear Stearns, my former employers, went under because of it.
But the strongest players survived. That includes JPMorgan Chase and Goldman Sachs, where I also worked during my 15 years on Wall Street.
So, when all is said and done, Bitcoin will survive the FTX “black swan,” just like it survived Mt. Gox. Even in the crypto space, most exchanges and lending platforms today don’t play the FTX game.
Some have to undergo rigorous SEC evaluations of their books. So in this case, I’d say that the SEC was also asleep at the wheel.
That said, there’s one big difference. The moment people lose faith in a crypto player, there’s no one coming to bail them out.
But that’s not a bad thing in the long run, as my colleague Teeka Tiwari also pointed out in Monday’s guest edition.
It allows the crypto industry to weed out the bad apples. And it forces other companies or projects to learn from their mistakes.
What This Means for Your Money
Will the FTX fiasco set back trust and confidence in crypto for some people? It may.
But the crypto industry’s most transparent players and prevalent currencies (such as Bitcoin) will eventually bounce back.
Plus, it could force U.S. regulators to create better regulation that protects customers. And that would be a good thing.
As I saw during my years on Wall Street, many sectors and industries came back even stronger after the initial fallout from some of the mistakes made by specific actors.
And we’re already seeing that happen in crypto.
Since the FTX collapse, at least nine prominent crypto exchanges have already pledged to provide proof of their reserves. It’s a good step in the right direction.
That said, there is still so much uncertainty in the market. It will continue to be choppy for some time.
So if you hold Bitcoin, my advice to you is to stay patient and ride out this volatility. And if you’re considering buying Bitcoin, I’d wait out this turmoil.
In the meantime, steer clear of private companies like FTX when it comes to storing your crypto. Whenever possible, choose companies that are transparent about their reserves. As well as public companies with a longer track record of success.
At the top of that list for me is Block (formerly Square), one of our model portfolio holdings at Distortion Report.
It launched its first trading platform in 2010, and added Bitcoin trading in 2018. And, compared to other companies with ties to crypto, it has been relatively unscathed by FTX.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. Block (SQ) is already up 18.9% since I added it to the Distortion Report model portfolio in July. And I expect more upside for it ahead as the New Money paradigm takes hold, in the U.S. and around the world. Earlier this year, I put together a video presentation with more details. You can watch it right here.