Is it just me or does “crypto” anything remind you of a funeral? Cryptocurrency derives its name because it uses encryption to verify transactions. Per Wikipedia: “A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.” So what and, more importantly, how does this impact you?
Currency of any form only has value based on what a person is willing to accept in trade for either a good, service or another asset. It is a belief system, in my opinion, and is based on the principle of scarcity. Only so much gold exists; thus, it has value. There is a limited amount of Bitcoin, started in 2009 as the first cryptocurrency, and as a result, people are willing to buy “coins.” Others are willing to accept those “coins” for goods and services, thus creating a currency.
FTX was the second largest provider of liquidity for leveraged assets and especially cryptocurrency. You are likely tempted to believe that if you owned no cryptocurrency that the bankruptcy of FTX filed on November 11 didn’t impact you. My 35 years of industry experience in the financial world thinks otherwise.
Smart people – or people who believe they are in the “know” – don’t like surprises. I assure you of two facts: I know more about cryptocurrency than many of those who owned cryptocurrency, and I also know nowhere near what I would want to know to be an owner.
Humans operate with a herd mentality in many areas, and cryptocurrency was no different. Large numbers of intelligent people bought into and made tremendous fortunes buying coins and tokens. The crowd simply couldn’t miss the opportunity and jumped on board.
I asked our Chief Investment Officer, Adam Harter, CFA, at the Financial Enhancement Group to explain FTX for us. His answer may require translation, but here it is: “Imagine if TD Ameritrade (our primary custodian) were also the NYSE and then they also acted as a bank lending out deposits and such. That was FTX in a nutshell. FTT is the token they came up as a scheme to build value by being used to lower trading costs. Simple, elegant, and holy cow, doomed to fail.”
Books and movie deals are already in the works regarding the collapse of FTX. The aftermath kind of reminds me of the Bernie Madoff situation where things were rather obvious after the fact, but missed as long as it appeared to be working.
The impact for hedge funds, institutions and investors will never be fully revealed. Few people are willing to publicly admit to major mistakes. FTX going under means that the institutions that had assets held by FTX have less on their balance sheet than they did the day before. Regulation will likely improve after the bankruptcy, but don’t think some of the big boys went unscathed.
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