The so-called ‘King of Crypto’, Sam Bankman-Fried, has lost his crown in a breath-taking blow. His company filed for bankruptcy, and the estimated 1.2 million users who use the exchange to buy crypto have been left in the lurch with their digital wallets frozen.[i]

The Lure of Buying Cryptocurrency

Good, balanced investing should be like watching paint dry – it takes a while, can be a bit boring, and once you decide what you want, you can basically leave it to do its thing under the guidance of the experts (financial advisers).

Cryptocurrency is the opposite of that… and has been notoriously volatile since its very inception. I’ve written many an article about various platform failures – the last one as recent as August this year, when another well-known platform called Celsius declared bankruptcy, and froze user assets (except for CEO/founder Alex Mashinsky, who was able to cash out his tokens).[ii]

History is repeating itself, quite rapidly at that.

The appeal of crypto is understandable. It feels accessible, exciting, and those who have made money out of it are held up in the media as the everyman made mystical. Sam Bankman-Fried (or ‘SBF’ as he is commonly known) was compared to Warren Buffet before this latest development, a comparison hinging on his apparent skill, or luck, in trading.

However, volatility of crypto as actual currency aside – there are major issues with regulation, platform management, and cybersecurity in the world of NFTs.

Crypto is not backed by an issuing authority and exists only as computer code, generally kept in a so-called “digital wallet,” accessible through a password chosen by the user. Many of us have forgotten or misplaced computer passwords from time to time and have had to contact the sponsor to restore access. No such avenue is typically available to holders of cryptocurrency. After a limited number of password attempts, a user can permanently lose access.[iii]

Imagine permanently losing thousands of dollars (or more) because you couldn’t remember your password…

The Case of FTX

What’s concerning about FTX in particular is the alleged use of billions of user dollars from FTX accounts. The Economist has compared it with all 3 notorious failures over recent decades, Enron, Lehman Brothers and Bernie Madoff all in one – quite a toxic trifecta!  To Antipodeans, cases closer to home would be Feltex, Bridgecorp and David Ross to name but a few.  Alameda Research (founded by the very same SBF) was, according to sources, quietly ‘borrowing’ customer funds to trade, using the platform’s own cryptocurrency FTT as collateral. They failed to inform investors, employees, and auditors of this process – and they didn’t leave enough on hand in the event their customers wanted to cash out. When the FTT took a nosedive of 75% in a day, it became insufficient to cover the trades… leading to the situation we see now.[iv]

The lack of transparency is alarming enough. The financial loss these customers are facing – some of them large traders with significant money on the line – is a devastating blow on top of that.

As typically happens when we see a big crypto platform falter or fail, there’s renewed calls for regulation in the cryptocurrency sector. Crypto trading platforms position themselves as an alternative to ‘traditional’ investment routes, but they’re held to little (if any) of the same regulatory scrutiny. This is what makes it all too easy for what are essentially unregulated financial institutions, operating outside the laws that are designed to keep investors protected, to do what FTX has done.[v]

We’re also seeing the impact of this across the crypto world as people lose confidence in the wake of FTX’s failure. Another high-profile crypto lender, Gemini Earn, was forced to halt withdrawals on their programme just this week as a result of the crisis. BlockFi is allegedly considering filing for bankruptcy. And one crypto hedge fund called Galois Capital has roughly half its capital stuck in FTX – not a good look. People are rushing to withdraw their money as the panic from FTX spreads, which is causing a cascade of similar closures from other firms as they are unable to supply everyone at once.[vi]

So far, there’s little sign of it impacting actual economic activity.

If you’re looking to grow or protect your wealth, you are much better off following philosophies which subscribe to scientific, evidence-based practices. If you’re questioning your current approach or want to get into investing for but you’re stuck on where to start, get in touch with a trusted fiduciary to discuss your options.

Note: Cryptocurrency is a prohibited investment at Stewart Group… one amongst many alternative/fringe assets which are not supported by our evidence-based approach to investing.

• Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

• The information provided, or any opinions expressed in this show, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

[i] https://www.bbc.com/news/technology-63612489

[ii] https://www.stewartgroup.co.nz/we-love-to-write/horrific-burns-from-celsius

[iii] https://www.stewartgroup.co.nz/we-love-to-write/2022/4/16/chocolate-coins-and-other-dubious-currency

[iv] https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html

[v] https://www.washingtonpost.com/business/2022/11/16/ftx-collapse-crypto-exchanges-regulation/

[vi] https://www.axios.com/2022/11/17/crypto-dominoes-ftx-collapse-winklevoss-gemini-blockfi