The FTX Arena, where the Miami Heat basketball team plays. Photo / AP
The FTX Arena, where the Miami Heat basketball team plays. Photo / AP
The collapse of the FTX crypto exchange has shocked investors. Behind the public facade of a so-called “safe” trading platform for digital currencies, it appears there was fraud.
The financial and psychological wounds may burn some people so badly they never “invest” again, just as the 1987 stock market crashdid three decades ago.
It’s early days for the FTX post-mortem. James Cochrane, a crypto investor and lawyer at Lane Neave, says the collapse appears to have been based on wrongful use of customer funds.
Cochrane says it would be easy for FTX to be labelled the problem with crypto. “Its collapse was not the fault of the tech. Its collapse was the fault of certain bad actors.” Scams happen in traditional markets, and he cites Enron, Bernie Madoff, Ross Asset Management and others. Scams happen when money is involved.
FTX is a reminder to always be vigilant, says Cochrane. “This was the second biggest exchange in the world. They were sponsoring sports stadiums, Cricket World Cups, had endorsements from celebrities like Tom Brady and Giselle Bundchen, and top investors like Kevin O’Leary.
“The frontman, Sam Bankman-Fried, or SBF, was a Wall St whizz kid who largely fooled everyone, including numerous retail customers, sophisticated investors and probably regulators and politicians.”
One of the issues with FTX is that it held customers’ crypto as a custodian, which makes it hard to get back when the exchange collapses. With other exchanges, such as New Zealand-based EasyCrypto, you keep a hold of your own crypto.
The custodial aspect of FTX takes me right back to the demise of Goldcorp in the 1980s. This darling of the chardonnay set sold certificates to investors for gold that it allegedly held in a vault. When the proverbial hit the fan, and investors wanted their gold, it wasn’t there. That doesn’t mean people can’t make money from holding gold just because one company was a fraud.
Likewise, the Blue Chip Financial Services property scams of the 2000s robbed many naive investors of their life savings. Blue Chip doesn’t mean that all property investment is bad.
Another lesson from FTX, says Cochrane. is that it’s a great reminder not to have all your crypto in one place. “Especially not on a centralised exchange. The old crypto adage ‘not your keys, not your coins’ has never rung truer.”
Anyone who wants to make money from crypto needs to understand their investments. As Janine Grainger, founder of New Zealand-based crypto exchange EasyCrypto, says: “If you don’t know where the yield is coming from, you are the yield.”
That adage reminds me of a dotcom-investing conference I reported on in London in the late 1990s. The audience was made up of financial advisers of paunch-bearing age who, from the questions they asked, appeared largely bamboozled by this “internet thing”, but wanted to believe the dotcom wave was a licence to print money. The market crashed not long after.
Crypto trading, in my humble opinion, is more difficult to master than dotcom stocks, which operated as traditional investments, albeit selling products that many investors didn’t understand.
As we’ve seen this year, there can be very big losers. Newbies or people with blinkers piled in at the top of the market last year and lost half their money when their holdings crashed with the onset of what’s called “crypto winter” [bear market]. Although one should “never say never” in the financial world, it’s likely the markets will pick up again.
Interestingly, and what caught many by surprise, was that the FTX exchange was highly regulated,says Grainger. Sadly those behind it, however, had nefarious intentions, it would appear.
Further regulation will need to evolve to protect investors here and overseas, however. Cochrane hopes the regulators don’t go overboard. “We don’t want over-regulation, because that stamps out innovation.
“In NZ we have some wildly successful web3 [decentralised] crypto businesses making eye-watering amounts of tax revenue and returns for their investors. We don’t want, particularly, smaller web3 businesses drowning in compliance and cost so they fail.
“But we do need regulators to be watchful and proactive. Particularly as crypto businesses get larger and more prevalent.”
