Oh how the mighty have fallen!
If you’ve invested money in crypto, your balance is probably looking pretty sad right now.
Since the beginning of 2022, the stock market has fallen 15%. However, Bitcoin, one of the most common crypto currencies, has fallen over 70%! To put that into perspective, if you’d invested $1000, you’d only have $300 now… noooooot ideal.
To backtrack a little, earlier this month, Sam Bankman-Fried was the poster-child and face of crypto. Sam is 30 years old and founded one of the biggest cryptocurrency exchanges in the world. The company is called FTX, and at its peak, it was worth about $32 billion.
Today, Sam is the face of an epic downfall and is now the poster child of fraud + misconduct.
What is FTX?
FTX is one of the world’s largest cryptocurrency exchanges. Just like the New York Stock Exchange (NYSE) or the New Zealand Stock Exchange (NZX), it enables customers to trade digital currencies for other digital currencies or traditional money, and vice versa. It was founded by Sam in 2019, when he was just 27 years old.
Another thing to note, Sam is also the founder of Alameda Research, a hedge fund that trades and invests in cryptocurrencies and crypto companies (I’ll get to why this is important in a second…)
In a normal finance world, there would be suuuuper strict rules around the dealings between these two companies, especially due to the conflict of interest that comes with Sam being tied to both. However, crypto is a fairly new phenomenon and was founded on the idea of being decentralised, so there’s much less regulation in place. So, this kind of f*** up would be MUCH less likely to happen in the traditional finance world.
Binance is another crypto exchange platform, the world's largest actually, and has nearly 29 million users. When FTX got into a bit of trouble, Binance was like ‘hey, we will be your liferaft and bail you out’ by acquiring the company. However, within 24 hours, they did a u-turn because apparently the FTX accounts were so bad that they refused to go through with the deal. This spooked FTX users all over the world and caused a ‘run on funds’ (which is a term in the industry for when everyone decides to withdraw their money at the same time).
Things started to get real housewives of the finance industry, when customers couldn’t get their money out. Essentially the mass exodus led to the discovery that the company couldn’t actually pay everyone back and that there were millions of dollars ‘missing’. The company was forced to file for bankruptcy (the legal process where a company is unable to pay its debts). The collapse of FTX has kicked off investigations by the US Government, and the Securities and Exchange Commission (the US financial regulator) on whether FTX used customer funds to prop up Alameda Research (the hedge fund company Sam is involved with), which is highly illegal and fraudulent. Also - as a side note, apparently one of the other founders of Alameda Research is Sam’s ex GF (lol is this an actual TV show?).
And just like an earthquake, the ripple effects of the FTX downfall are impacting other crypto exchanges. As people get scared, they are withdrawing their funds from other platforms. Genesis and BlockFi are two of the latest casualties who are now also filing for bankruptcy due to investors running for the hills.
How will this affect the crypto industry?
The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy. The FTX collapse definitely hasn’t helped the situation... It has created an increased amount of uncertainty around the stableness and viability of crypto as an asset class. How can investors and customers get comfortable that their crypto exchange isn’t carrying out fraudulent activities too, just like FTX?
We have seen similar scenarios play out before in the traditional finance world. When things are going well, we see financial institutions make increasingly risky bets in the belief that good times would just keep on rolling. We saw this in the Global Financial Crisis with banks making risky loans, which inevitably led to the collapse of a major investment bank, Lehman Brothers. This had catastrophic effects on the wider finance world, and overall global economy. Is this the ‘Lehman’ moment of the cryptoworld? Will there be major flow on effects? Only time will tell.
This fiasco should be a really good reminder to ‘invest in what you know’. Don’t ‘fomo’ invest. Don’t invest in something just because someone else is.
Crypto is a very high risk investment and should make up part of a diversified portfolio. Don’t put all your eggs in the high-risk-crypto basket.