This cryptocurrency scam, and with it the bankruptcy of FTX, the third largest crypto exchange “by volume,” exposes the concept for what it is; a giant, elaborate Ponzi scheme. A year ago, I blogged about cryptocurrency and its’ nebulous concept. I couldn’t grasp how it had any value. It works as “money” only if the seller agrees to accept it as payment for his product. The seller then had crypto in his wallet he could only use if someone else agreed to accept it as payment. It was otherwise worthless! Using crypto had to be perpetual or it would all blow up. The guy who couldn’t find a buyer willing to accept crypto was stuck. He had crypto in his wallet that he couldn’t use and was virtually worthless.
The problem is unsuspecting investors traded real money (U.S. dollars) to buy cryptocurrency. The value of crypto fluctuates minute-to-minute, and as such, investors were expecting their crypto investment to increase in value. And it did, so much so that when investors tried to sell it back to FTX to take profits, FTX was insolvent. Investors’ requests for withdrawal exceeded available cash leaving them holding a currency with no value. The company also apparently had an insider “hack” of $600 million that was devastating and led to filing for bankruptcy protection. Investors lost millions.
In last year’s blog, I stated that only people who can afford to lose money should venture into the realm of crypto. That seems to have proven to be true. Millions of people have lost money. FTX is only one of many crypto exchanges, but I think it is indicative of the instability of the entire concept. The management of FTX abused their position to take advantage of investors and used company money to fund lavish lifestyles. They should face legal consequences, but will probably skate. Now I see big name athletes and celebrities may be sued by investors who tried to regain their losses. We’ll see how that goes.
Cryptocurrency falls into the category of “if it sounds too good to be true, it probably is!” And the other category “if it’s too complicated to understand, then stay away from it!” Peter Lynch, former manager of the Fidelity Magellan fund, always said “invest in a business any idiot can run, because someday, an idiot will run it.” He also said,”If you don’t understand markets, then you’re not ready and won’t do well!” And Warren Buffett said, “Risk comes from not knowing what you’re doing!” Crypto fits all of these warnings.
Cryptocurrency isn’t gone because of the bankruptcy of FTX and the threat of investors to sue Tom Brady and Shaq to recover their losses. There are still those folks with too much money who use crypto to get richer quick. They can “afford” to lose money more than regular folks. These debacles certainly alert people, however, to the risks, and really the dangers, of cryptocurrency. Buying something with a currency that exists only in cyberspace makes no sense. If it can only be used if someone else accepts it, the market for use is limited. That makes no sense, either.
It’s the “little guy” I feel sorry for, but only slightly. He went into crypto to get rich quick and got stung. He entered deep, scary waters, and as Buffett said, “When the tide went out was swimming naked.” A lot of “naked” investors got scammed. It’s harsh to say they deserved it, but they should have known better. It was too good to be true, and turned out to be driven by the greed of investors and brokers. Hopefully those at fault will be held accountable, but in today’s world it depends on who you are and who you know, not what you did.
