The $32 billion bankruptcy of crypto exchange FTX and its trading arm Alameda Research is yet another example of the risks associated with investing in unregulated and unproven markets. FTX is the latest on a growing list of failed crypto associated firms and products. The crypto universe, once worth $3 trillion, has shed over 70% of its value. By the time the pixie dust settles from crypto mania it may resemble the dot.com mania of the late 1990s in which companies with little or no revenue traded at multi-billion-dollar valuations before burning up in the fiery furnace of reality.
Purchasing crypto is not investing, it is speculating on steroids. Crypto was initially presented as an alternative currency that would allow today’s modern, tech-savvy consumers, businesses, and governments to by-pass the antiquated traditional reserve currencies issued by sovereign nations. That argument did not last long as the volatility of these instruments made them unsuitable as currencies. Imagine saving to buy a car or home only to see your money drop in value by 20% in a single day. To counter volatility concerns, firms popped up offering complex algorithmic “stablecoins” which became an oxymoron after they wound up in the trash heap of failed crypto experiments. Next came the store of value argument. Why store your money in stocks, bonds, real estate, precious metals, or art when you can buy crypto and reap its inevitable long-term rewards once the rest of the world climbs aboard the crypto train? You could even park your cash at a crypto exchange called FTX and earn 8% while you studiously contemplated which of the many cryptos might be your best bet. The only problem with that proposition is you may lose your entire investment if FTX turns out to be another Ponzi scheme.
Digital currencies may be inevitable and if so, sovereign nations will likely create their own such currencies which they will regulate and backstop to ensure stable values. In the meantime, cryptocurrencies, and other digital assets such as NFTs (Non-Fungible Tokens) are mostly unregulated which creates enormous opportunities for misrepresentation at best and fraud at worst. Not surprisingly, cryptos have become a favored “currency” for nefarious organizations, enabling them to fly under the radar of regulators more easily. The pursuit of high returns requires high risk and investors would do well to remember the old saying “If it sounds too good to be true, it probably is."
Sam Taylor, CIMA®, AIF®, CRPC®