What the FTX just happened?
The collapse of the second-largest crypto exchange, FTX, sent shockwaves through crypto markets and stock markets as well.
In August 2022 he was touted as “the second Warren Buffett” by FORTUNE magazine, but Sam Bankman-Fried (SBF) has bankrupted his two companies, with investors losing up to $10 billion, and there are numerous allegations of outright fraud and theft*, not just accidental mismanagement.
The comparison to the world’s greatest investor may be a stretch, as Bankman-Fried made billions from a promise and a dream that lasted less than five years, whereas Buffett has been acing the markets for more than sixty years.
What lessons can investors learn?
The lessons are old-school and have been heard thousands of times, but obviously, many investors need a frequent reminder.
1. Diversification: Many investors faced losses or lockups with the collapse of Celsius earlier this year. Now over a million more investors have lost vast sums due to the bankruptcy of FTX; some claim to have lost their life savings. During the 2008 Global Financial Crisis, there were major banks that went bankrupt. Crypto exchanges are not banks and are not guaranteed. If you have your entire portfolio of cash (or stock, or crypto) stored with one company, you face a massive risk. Investors are prudent to put funds not just into several stocks or cryptocurrencies, but also to have cash savings in several banks.
2. Patience: Buffett started investing at age 10 and became a billionaire when he was 55. Over 95% of Buffett’s wealth was created after he turned 60 years old. Bankman-Fried created billions from thin air and deception, added very little value and was back to broke in less than five years. The adage “easy come, easy go” was first espoused by King Solomon in Proverbs 13:11, and holds true thousands of years later. Savvy investors can still learn a lot from ancient wisdom, whether it be the Book of Proverbs, or The Richest Man in Babylon. Anyone wishing to create true wealth that lasts a lifetime would be wise to learn from the wisdom of those who have already done so.
3. Diversification, yes, again: Sam Bankman-Fried was a schoolboy in short shorts during the terrorist attack of 9/11/2001; Buffett was a seasoned investor with decades of experience. Airline stocks and insurance companies plummeted in value after the plane crash, but Buffett was OK, as he had many different investments. Bankman-Fried had over 90% of his worth in just one coin. When that was hit, he had nothing. Investors, whether in stocks or crypto, should aim to hold a portfolio of 20-40 different investments across various non-linked industries; either managed by yourself or with the aid of a financial professional.
*For those who wish to dive deeply into the schadenfreude, there are numerous stories online about FTX, its sister company Alameda Research, and all the alleged shenanigans that went on. These include, but are not limited to, a $1 Billion “loan” given to the director, paying fake employees, customer funds intermingled with company funds, numerous property purchases made by the company using client funds, with properties being held in the names of employees, and so much more.
And what financial scandal would be complete without allegations of sexual misconduct, polyamory and amphetamine use? Netflix will apparently make a TV series out of this debacle, so stay tuned for “How to Lose A Guy and Ten Billion”.
Another good summary came out on LinkedIn, where the accused was named as “Scam Bankrun-Fraud”. You have to laugh sometimes…
Rumours that FTX was “hacked” after declaring bankruptcy initially had people feeling sorry for SBF. The next story to come out was that SBF hacked his own exchange for $600 million and apparently handed the stolen funds to purportedly corrupt authorities in the Bahamas. It seems that everything SBF touches turns to crime. Personal opinion: we hope that SBF and his cohorts go to prison for a very long time.
All quiet on the crypto front: time to get in?
Both crypto and stock markets are still quite subdued, as there are fears that other companies may have lost large sums in the FTX collapse. These may include BlockFi, Voyager, Galaxy, Apollo and Genesis, among others. Before evidence comes to light, before new companies file for Chapter 11 Bankruptcy Protection, now may be a good time to secure your crypto holdings by moving them off any online exchanges and into a secure wallet.
Whilst fears are high, prices are down, presenting some great buying opportunities. For example, wrapped Bitcoin (WBTC) is trading for a discount. Wrapped Bitcoin can be likened to gold wrapped in silver foil. Bitcoin can only be sent and received on the Bitcoin blockchain, whilst Ethereum can only be sent on the ETH blockchain.
To send BTC on the ETH network, the BTC is “wrapped” in an ETH smart contract so it can be sent via the ETH blockchain. This can be handy if someone wants to run an ETH smart contract, and when the contract is fulfilled, receive payment in Bitcoin.
Fears around the collapse of FTX and Three Arrows Capital have made people sell down their wrapped BTC for less than it is worth. This is similar to fools forgetting that the silver outer layer still contains a full gold bar. Regardless of which company wrapped the Bitcoin, it still contains a full Bitcoin. This fact can be verified on the blockchain, just as any decent jeweller can verify whether your ring is valuable gold or cheap brass.
Never be fooled into paying top dollar for cheap junk; similarly, always buy great value for cheap prices. Brass at gold prices is the playground of scammers. Gold at brass prices is only available when the markets are in panic and fear.
The FTX story will soon blow over (go to jail, SBF, go directly to jail) just as past fiascos have blown over. Nobody cares about Enron, World Com, Lehman Brothers or Theranos anymore. As investors, we still do our homework, do our best to invest into good projects and try to avoid the bad ones. It would be foolish to damn the entire stockmarket because of the 1% of bad operators, and it is foolish to damn all of crypto because of a handful of bad eggs. We should never discard an infant because they have a dirty diaper.
Blockchain was created to create full openness, transparency and build trust. Anyone can look at the code and anyone can see who is holding which cards.
Far from being a failure of blockchain or crypto per se, the FTX story is a tale of human greed, lack of discipline, zero transparency and a complete disregard for how a business is supposed to operate. For those who are yet to understand: a business is expected to pay staff and expenses from its profits; a business is not supposed to use client funds as its own personal play money.
Investors have learned many lessons. It is now time for regulators to call for more stringent controls over who can be trusted to hold client funds, whether they be in crypto, stocks, real estate, funds management or any other business.
Meanwhile: some good news
Meanwhile, in good news, Changpeng Zhao (CZ), CEO of the world’s largest crypto exchange, Binance seems to be the good guy. Initially seeking to buy into FTX, CZ did a little digging (due diligence or DD) and did not like what he found. Aside from FTX mixing company funds with its investors’ funds, CZ saw that the FTX-created FTT token was not subject to “fair launch”. Billions of FTT tokens were held by the company and its directors, meaning that if they sold their FTT, the market would crash.
In a responsible tweet, CZ advised that Binance would be selling all their FTT tokens, with the tacit advice that everyone else should also sell. CZ gave 48 hours’ notice before he started dumping, in a move unheard of in the crypto world, where short sharp surprises and rug-pulls have become commonplace.
FTT tokens predictably went to zero as investors rushed to sell out of the worthless “asset” that was created out of thin air by SBF, a 30-year-old guy who apparently failed Finance 101. As the (allegedly) corrupt felon SBF went from $30 billion to $0, CZ offered up to $2 billion in bailout funds for companies that were affected by the criminal negligence of FTX.
CZ later stated that he wished he could have done more or warned people earlier about FTX. It seems like CZ wants to be more like Buffett: a hero who is in the game for the long-haul. As for SBF, lawyers suggest he could be sentenced to prison “for decades” for massive fraud as well as many other charges. We live in hope that justice will be served, and that regulators will do background checks (or IQ tests) on company directors who think they are smarter than the market.
(For an example of a sensible crypto project who did a fair launch and aims to be around in decades to come, see the press release from Fantom.)
After the collapse of Celsius, Three Arrows Capital, FTX and others, we may be getting closer to the advent of crypto regulation. Hopefully, the regulatory red tape is light enough to still encourage creativity and heavy enough to bind those who deliberately damage the industry for their own gain.
Crikey: crypto DownUnder
Around the sunburnt country: some Aussie men are getting out of crypto, with around 1/3 of men backing down during times of peak fear. It is highly likely that serious HODL-men will stay, whilst silly boys will foolishly rush back in during the next bull market…
Meanwhile, figures on women investing into crypto are up 5%, showing that women can be more logical and less emotional during a flash crash sale than their male counterparts. Stock up ladies! Just like buying Christmas ornaments in February, you will be very glad to have picked up extra Bitcoin by the time the calendar rolls around again.
A lack of regulation and consumer protection was cited by 36.1% of Australians as the reason they have not invested into crypto yet; this may change with a rush of regulations expected after the FTX scandal. The good news in Australia is that the number of people investing $500 or more per month in crypto (dollar-cost-averaging or DCA) has risen from 10.3% to 17.3%.
More institutions are now bullish
In August, BlackRock, the world’s largest asset manager with $8.5 trillion in funds under management, announced a partnership with Coinbase to allow its institutional clients access to crypto markets.
In October, America’s oldest bank, BNY Mellon, announced its digital asset custody platform. The platform will allow clients to hold and transfer Bitcoin and Ether.
BNY decided to embrace cryptocurrency after a recent survey of nearly 300 institutional investors worldwide found over 91% of institutional investors are interested in tokenized products.
Also in October, Google selected Coinbase to assist it in taking cloud payments of cryptocurrency.
On November 3, Fortune reported that the retail fund manager Fidelity will offer crypto trading to its 35 million customers.
It seems that the older “grey-beards” from Wall Street may be smarter than the young “whipper-snapper” Millennials. Let’s see what happens in the next five years.
It may take a few months, or even a full year for the news cycle to roll around to the next big scandal, but sooner or later, people will forget about SBF, FTX and WTF happened. The blockchain is secure, immutable and transparent. Bitcoin is scarcer than gold. The Bitcoin blockchain has been up for 15 years and has never been hacked. Passing gossip and irresponsible humans will not alter the facts. Hang in there.
What are we up to?
When Bostoncoin launched the world’s first diversified crypto fund in 2016, we felt like we had arrived early to the party, and our friends would show up soon. In truth, we had to wait a few years and a whole bull run before some major players showed up with their own funds and offerings.
When the competitors showed up, we celebrated. Competition is great for refining your business skills, and is always advantageous for the market. Those of us old enough to have a few grey hairs may recall when the number one car rental company Hertz was torpedoed by Avis’ “we try harder”, or when Telecom Australia (“Telstra”) was blindsided by SingTel (“Optus”). Having a few telcos, a handful of banks, several large insurance companies and a plethora of political parties means that you have a choice. Capitalism and democracy may not be perfect, but it certainly feels better than monopolies or dictatorships.
After being “first dog on the moon” for a while, we finally were able to dance around with a few newcomers and had a good time. When the music stopped, we suddenly felt lonely again. It seems that some of the new arrivals did not bring chairs, or food, or business experience.
Although some of the CEO’s may have been inexperienced or greedy ratbags, that did not necessarily mean that the company or project was bad. Like CZ of Binance, we hope that some of the usable parts may be allowed to flourish again. If you, or any of your friends would like to launch a crypto project, coin, token, exchange or fund, please do get in touch. Responsible founders may be mentored, but for those whose greed is only exceeded by their ignorance, you may as well take the SBF shortcut and incarcerate yourself, saving us all from the trouble.
Charts, stats and stacking satts
The flagship Bostoncoin fund continues its journey of outperforming Bitcoin, even if sometimes it is a close run.
This month we made gains on sporting token Chiliz, no doubt helped along by the World Cup, as well as on the blockchain-agnostic Quant, up 122% and 177% respectively.
Some good gains also on BAND, up 278% and Polygon up 155%.
If you missed the reporting on emerging projects from our sister site, Cryllionaire.com, now is the time to see how they fared over the last 2-3 years. Tell your friends to join the mailing list now, whilst it is still free. Many competitors are charging $100-500/month for similar data; all we ask is the price of a coffee if you like it, and nothing if you don’t find value.
We continue to buy discounted coins as the projects are still evolving even as prices drop. The Bitcoin Lightning upgrade makes the asset faster, cheaper and arguably more valuable than when the price was over $60 000. Avoid the hype and stick to the facts. Blockchain is here to stay and crypto is the future. There will be scandals, shenanigans and schadenfreude along the way, just as there was in the mid- to late-1990s Tech Wreck, but those who emerge from the ashes will be stronger than what tried to stop them.
At Nov 30 2022
DART NAV 104.6593366
DART Price 115.12527
DART has a marginally higher price over last month (an increase of 1%), which, considering that most of the crypto competitor funds went down 50-99% last month, is a big win for us. DART is up a touch over 15% for the year.
As at Nov 30 2022
BOS NAV 51.5557989
BOS Price 56.7113788
BOS is down for the month and the year, due to the fallout in BTC and ETH prices from Celsius, Luna, FTX and a massive amount of media FUD* (Fear, Uncertainty, Doubt). Bostoncoin is still up 221% from pre-pandemic levels and 154% above 2018. We have been investing more into good projects at discount prices and will hold on for future gains.
See you next month
Stay safe in the markets and on the roads