A Spectacular Crypto Failure

By Karen R. Keatley, MBA, CFA®, CFP®

Emeritus Advisor, Principal


George T. Padula, CFA, CFP®

Co-Chief Investment Officer, Wealth Manager & Principal

November 22, 2022

Last week, two of the former leading companies in the cryptocurrency space, FTX, a crypto broker, and its affiliate Alameda Research, a crypto trading firm, filed for bankruptcy. Both were founded and directed by Sam Bankman-Fried who was once compared to JP Morgan and Warren Buffett. FTX had a market value of $32 billion in January, which is now completely wiped out.1

What happened? 

Besides the lack of faith, lack of trust, lack of controls, and possible fraud, everything was in great shape. Hmmm. It was discovered that most of the “assets” in Alameda were illiquid coins and tokens, including those issued by FTX, creating a disastrous feedback loop. When this came to light, a virtual run on the FTX crypto bank led to a downward spiral from which not even George Bailey would have been able to escape. In addition, it has been reported that FTX used leverage without disclosure, lending billions of dollars of its customer assets to support Alameda Research’s risky trading. At this point, it’s unclear exactly where all the money went. This will take time to unravel.

It has been a rapid reversal for FTX. In nationally televised commercials, FTX’s celebrity spokespeople have included Tom Brady, his former wife super-model Giselle Bundchen, Kevin O’Leary, Steph Curry, Major League Baseball, Naomi Osaka, and comedian Larry David. In a now even more famous Superbowl commercial, Larry David, when asked to invest in crypto, said “Ehhhh, I don’t think so. And I’m never wrong about this stuff — never.”

Truer words were never spoken.

Sam Bankman-Fried is brilliant. A billionaire before age 30, he now appears to have come full circle, having lost it all and vaporized billions of customers’ dollars as well. In a series of crude tweets, he seemed to ask for forgiveness. “I f—ed up and should have done better,” Bankman-Fried, who has personally lost at least $13 billion in the debacle, tweeted last Thursday. “The full story here is one I’m still fleshing out every detail of, but at a very high level, I f—ed up twice.”2

Ya think? That’s what you might say if you hit your golf ball into the sand trap and then hit it into the water. FTX’S new CEO, John J. Ray, who was appointed as part of the bankruptcy process said, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”  And Ray has seen a lot in his 40 years in the business of restructuring companies, including overseeing the bankruptcy of ENRON. Somehow Bankman-Fried’s words don’t quite measure up to the magnitude of what he did.3

One of the appeals of cryptocurrency for some people is that it’s viewed as counter cultural because it’s unregulated and therefore cannot be manipulated by the Federal Reserve or any other government authority. Yet, the lesson of the FTX debacle is that in the absence of regulatory oversight, imperfect as it may be, hubris, greed, and terrible judgement rule the day. It’s hard not to feel empathy for those who put their trust and faith in FTX amid the allure of cryptocurrencies. Many now may have lost so much. The number of creditors in the FTX bankruptcy is reported to be in the millions.

To be clear, blockchain and the technologies associated with frictionless settlement, next generation financial tracking and security are here to stay and have true value. However, Modera’s position on cryptocurrency as an investment is that it isn’t one – it isn’t an investment. There just isn’t anything there. Period.

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