The biggest recent news is the spectacular collapse of the FTX cryptocurrency exchange, owned by 30-year-old Samuel Bankman-Fried. Now, FTX is bankrupt. He is under investigation by the SEC. And up to a million creditors are wondering if they’ll get back any of what they invested.
Clearly, many investors still look at the cryptocurrency market with skepticism. Others, including major institutional ones (like the Ontario Teacher’s Pension Plan) had invested tens, even hundreds of millions of dollars in FTX.
Above all, there could be no better demonstration of the importance of due diligence when making investment decisions. Seemingly bedazzled by the promised 8% returns, and Bankman-Fried’s supposed genius, FTX investors didn’t sufficiently question its financial strategy. They allowed media hype to replace the care they should’ve taken to guard their investable assets.
What caused FTX to collapse and why should you care?
FTX was an offshore, unregulated cryptocurrency exchange. They went great lengths to avoid setting up business affairs in the U.S. That is a red flag; so how could they attract billions of dollars in capital over the last few years? Clearly, not that much of a concern as FTX became the second largest cryptocurrency exchange in the world behind Binance.
Sam Bankman-Fried (SBF) founded many other companies including a company called Alameda Research. Alameda was a trading firm that traded billions of dollars from FTX accounts which they comingled with FTX’s assets. Investors’ money and FTX money became one big pile of money. Alameda used this money to make risky investment decisions including leverage against these assets.
The crypto market corrected this year, many times over. Lenders called on their loans, which triggered a margin call. FTX had to sell assets repay the borrowed balance. The funds used to pay the margins were not FTX’s money. As such, investors did not have much to recover. Sadly, this is not a representation of how the crypto markets, decentralized finance or is reflection of Bitcoin or Ethereum’s potential. Based on today’s prices, I don’t believe investors care which crypto has utility and which one doesn’t. For instance, all protocols are down currently, some more than others.
Regulation – Rules of Play
Today, we do not have regulation clarity on crypto related projects. Is crypto a security or currency and what regulatory body should be responsible for regulation? Is it the SEC or CFTC?
This indecisive approach may have incentivized many crypto related companies to leave the U.S. while setting up shop in another country. Most likely a country more crypto friendly such as the Bahamas or Antigua.
There are many crypto currency exchanges outside the U.S. and there is a lack of regulation clarity. Therefore, Coinbase (COIN) is beginning to look very attractive and here is why in my opinion.
Coinbase has already plugged into the U.S. financial system. They are a public company; and they must complete quarterly filings. Publicly traded means more transparency which can boost investor confidence. If you add on top of this transparency, eventual clarity on the rules of play and what regulator will call the shots including what is a security or what is a currency, Coinbase could be light years ahead of its competitors just on pre-existing rules-based infrastructure.
What is this week’s takeaway?
If you knew nothing about Bitcoin or Ethereum, and you heard about last week’s collapse of FTX, an unregulated, offshore cryptocurrency exchange, you might have thought to yourself the following:
“I knew it – crypto currency is a scam”
“I’m so happy that I didn’t involve myself in crypto.”
“I can’t understand why anyone would invest in crypto”
Although Bitcoin and Ethereum have nothing to do with the FTX collapse, it wouldn’t surprise me if people, especially with limited knowledge on the subject, thought everything crypto related was a scam. There is no doubt that many “coins” have no use case utility and hold a high probability of going to zero. However, to assume that blockchain technology and the entire crypto industry will disappear is unlikely at this point and holds a low probability.
Somewhere in between is a potential opportunity so stay curious and open minded.
Have a great weekend!
Michael
Disclaimer:
Nothing on the website shall be construed as an offer to buy or a solicitation of an offer to buy any services or products. Commissions, trailing commissions, management fees and expenses may be associated with investments. Products are not guaranteed, their values change frequently and past performance may not be repeated. Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice.
I do hold a beneficial long position in the shares of COIN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
FTX Pain. Coinbase Gain?
The biggest recent news is the spectacular collapse of the FTX cryptocurrency exchange, owned by 30-year-old Samuel Bankman-Fried. Now, FTX is bankrupt. He is under investigation by the SEC. And up to a million creditors are wondering if they’ll get back any of what they invested.
Clearly, many investors still look at the cryptocurrency market with skepticism. Others, including major institutional ones (like the Ontario Teacher’s Pension Plan) had invested tens, even hundreds of millions of dollars in FTX.
Above all, there could be no better demonstration of the importance of due diligence when making investment decisions. Seemingly bedazzled by the promised 8% returns, and Bankman-Fried’s supposed genius, FTX investors didn’t sufficiently question its financial strategy. They allowed media hype to replace the care they should’ve taken to guard their investable assets.
What caused FTX to collapse and why should you care?
FTX was an offshore, unregulated cryptocurrency exchange. They went great lengths to avoid setting up business affairs in the U.S. That is a red flag; so how could they attract billions of dollars in capital over the last few years? Clearly, not that much of a concern as FTX became the second largest cryptocurrency exchange in the world behind Binance.
Sam Bankman-Fried (SBF) founded many other companies including a company called Alameda Research. Alameda was a trading firm that traded billions of dollars from FTX accounts which they comingled with FTX’s assets. Investors’ money and FTX money became one big pile of money. Alameda used this money to make risky investment decisions including leverage against these assets.
The crypto market corrected this year, many times over. Lenders called on their loans, which triggered a margin call. FTX had to sell assets repay the borrowed balance. The funds used to pay the margins were not FTX’s money. As such, investors did not have much to recover. Sadly, this is not a representation of how the crypto markets, decentralized finance or is reflection of Bitcoin or Ethereum’s potential. Based on today’s prices, I don’t believe investors care which crypto has utility and which one doesn’t. For instance, all protocols are down currently, some more than others.
Regulation – Rules of Play
Today, we do not have regulation clarity on crypto related projects. Is crypto a security or currency and what regulatory body should be responsible for regulation? Is it the SEC or CFTC?
This indecisive approach may have incentivized many crypto related companies to leave the U.S. while setting up shop in another country. Most likely a country more crypto friendly such as the Bahamas or Antigua.
There are many crypto currency exchanges outside the U.S. and there is a lack of regulation clarity. Therefore, Coinbase (COIN) is beginning to look very attractive and here is why in my opinion.
Coinbase has already plugged into the U.S. financial system. They are a public company; and they must complete quarterly filings. Publicly traded means more transparency which can boost investor confidence. If you add on top of this transparency, eventual clarity on the rules of play and what regulator will call the shots including what is a security or what is a currency, Coinbase could be light years ahead of its competitors just on pre-existing rules-based infrastructure.
What is this week’s takeaway?
If you knew nothing about Bitcoin or Ethereum, and you heard about last week’s collapse of FTX, an unregulated, offshore cryptocurrency exchange, you might have thought to yourself the following:
“I knew it – crypto currency is a scam”
“I’m so happy that I didn’t involve myself in crypto.”
“I can’t understand why anyone would invest in crypto”
Although Bitcoin and Ethereum have nothing to do with the FTX collapse, it wouldn’t surprise me if people, especially with limited knowledge on the subject, thought everything crypto related was a scam. There is no doubt that many “coins” have no use case utility and hold a high probability of going to zero. However, to assume that blockchain technology and the entire crypto industry will disappear is unlikely at this point and holds a low probability.
Somewhere in between is a potential opportunity so stay curious and open minded.
Have a great weekend!
Michael
Disclaimer:
Nothing on the website shall be construed as an offer to buy or a solicitation of an offer to buy any services or products. Commissions, trailing commissions, management fees and expenses may be associated with investments. Products are not guaranteed, their values change frequently and past performance may not be repeated. Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice.
I do hold a beneficial long position in the shares of COIN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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