Crypto Crisis: The FTX Collapse and Its Fallout
Regular readers of my column know that I’m deeply skeptical of investing in cryptocurrencies. That said, I recognize that crypto represents a lasting revolution in finance and consumer behavior.
To make money in crypto, you need to be highly discerning. Below, I’ll steer you in the right direction. But first, let’s take a closer look at the FTX Group crash, as well as the wider crypto debacle.
As of this writing, 130 companies under the FTX Group umbrella owning the crypto exchange FTX have officially filed for bankruptcy stemming from a cash flow crunch.
Major factors behind FTX’s liquidity crisis are a wave of deposits starting November 6, as well as news reports that Alameda Research, a company within the FTX Group, had a significant portion of its holdings in FTX’s own FTT coin. After this revelation about Alameda, rival company Binance divested its FTT holdings, which caused the coin’s value to plunge.
The FTX fiasco has weighed on the entire industry. Dozens of companies in the crypto industry have laid off employees, including crypto exchanges BitMEX and Coinbase, and crypto service providers Crypto.com and Blockchain.com. Year to date, the granddaddy of all crypto, Bitcoin (BTC), has fallen in value by about 65%.
Former FTX Chief Executive Sam Bankman-Fried says the company would have needed $9.4 billion to prevent collapse. Once viewed as an entrepreneurial wunderkind, Bankman-Fried resigned from FTX in disgrace.
The 30-year-old Bankman-Fried, famous for his unkempt appearance and wearing shorts everywhere, was lauded by the media as a banking visionary. Bankman-Fried epitomized the breed of tech hipster that gets fawning coverage on CNBC.
Bankman-Fried’s fall from grace is stunning, if not predictable. The media once compared him to J.P. Morgan; now he’s being compared to Charles Ponzi.
Bankman-Fried’s net worth has plummeted to about $990 million, a more than 94% decline from the estimated $15.2 billion before the FTX crisis hit.
The following chart depicts how the default of FTX could wreak havoc on an already volatile crypto industry:
In the context of the year-to-date trading volume on the biggest crypto exchanges, FTX ranks fourth. First-place Binance initially offered to bail out FTX, but the deal rapidly collapsed.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance announced on Twitter on November 9.
In addition to incompetence, FTX insiders are being accused by regulators of securities fraud and manipulation. The whole mess has garnered the notice of lawmakers.
“It is crucial that our financial watchdogs look into what led to FTX’s collapse so we can fully understand the misconduct and abuses that took place,” said Senate Banking Committee Chair Sherrod Brown (D-OH).
U.S. Senate Agriculture Committee Chair Debbie Stabenow (D-MI) underscored that sentiment: “It is time for Congress to act. The Committee remains committed to advancing the Digital Commodities Consumer Protection Act to bring necessary safeguards to the digital commodities market.”
The Democratic party, which is more amenable to financial regulation than the Republicans, retained Senate control in the midterm elections. The political pressure on FTX and the crypto industry won’t ease anytime soon.
Charlie Munger, billionaire investor and vice chairman of Berkshire Hathaway (NYSE: BRK.A, BRK.B), said Tuesday morning on CNBC that the FTX collapse resulted from “partly fraud and partly delusion.”
That said, crypto’s recent woes have not dimmed the renewed appetite on Wall Street for risk-on assets. The broader stock market enjoyed a sharp rally last week and continues to show strength. The tech-heavy NASDAQ is coming off its best week since March.
On Tuesday, the main U.S. equity indices closed higher as follows:
- DJIA: +0.17%
- S&P 500: +0.87%
- NASDAQ: +1.45%
- Russell 2000: +1.50%
Lifting stocks was an encouraging inflation report, released before the opening bell. The benchmark 10-year Treasury yield dipped below 3.8%.
The U.S. Bureau of Labor Statistics reported Tuesday that U.S. October Producer Price Index (PPI) inflation rose 0.2% month-over-month, versus estimates of 0.4% and the previous number of 0.2%. U.S. core PPI year-over-year rose 6.7%, versus the forecast of 7.2% and previous figure of 7.2%. U.S. core PPI month-over-month came in at 0.0% (vs 0.3% forecast and 0.3% previous).
Coming on the heels of good news last week on the Consumer Price Index (CPI), the latest PPI print helped cement the bullish sentiment that inflation is cooling.
Crypto investing, within your comfort zone…
Crypto coins and platforms are speculative investments; they’re not for the risk averse. However, decentralized digital banking is changing global finance and human society in a permanent way. I’m a crypto skeptic, but I’m not a Luddite. The key is separating the solid opportunities from the hype-driven fads.
That’s where my colleague Jimmy Butts comes in. Jimmy has done the homework for you.
As chief investment strategist of Capital Wealth Letter, Jimmy has pinpointed the best ways for investors to make money on crypto.
When investing in crypto, you can make a fortune…but as recent events have shown, you can also lose your shirt. You need expert, honest guidance.
A seasoned financial advisor, Jimmy can you show you little-known ways to get into cryptocurrencies, within your comfort zone. Click here to learn more.
John Persinos is the editorial director of Investing Daily. You can reach John at: firstname.lastname@example.org