Mark Lister, 24 November 2022

The FTX saga makes for uncomfortable reading, especially for anyone with funds caught up in this high-profile crypto collapse.

It’s unlikely to mean the entire crypto landscape is doomed, although things could certainly get worse from here.

More importantly, it’s a major warning bell for unsophisticated investors, and something they will hopefully learn from.

The FTX story is a sordid tale, punctuated by poor governance, management incompetence and investor naivety.

Comparisons with the 2008 bankruptcy of Lehman Brothers are understandable.

However, I tend to side with former Treasury Secretary Larry Summers, who likened it more to the infamous Enron scandal of 2001.

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Summers noted that like Enron, in additional to the financial errors there were also "whiffs of fraud.”

Anything crypto-related has been hit by this, with a crisis of confidence emerging in other crypto exchanges. There could well be others that run into trouble before the dust settles.

Prices in cryptocurrencies themselves have also tumbled, with Bitcoin falling more than 20 per cent in the past three weeks. That sees it down more than 75 per cent from its November 2021 highs.

That sort of volatility makes this year’s moves in other investments look tame. World shares are down a mere 17.7 per cent from their peak, which came in January.

While Bitcoin has tumbled over the past 12 months, it’s still some three-and-a-half times higher than where it was at the end of 2018.

Many long-time holders will still be in the black, although it might also suggest there’s further heat to come out of the price.

Bitcoin hasn't been particularly useful as a currency either, despite ongoing calls from crypto quarters that it was a great hedge against the frailties of traditional fiat currencies, which are at the mercy of central banks.

The US dollar is up 12 per cent this year, and two months ago it hit its highest levels since 2002.

It’s also yielding about three per cent per annum now, which means the opportunity cost of holding assets like crypto is a little higher than it was before.

Maybe the greenback has a bit of life left in it after all.

The lessons are clear. Don’t invest in what you don’t understand, and avoid jumping on bandwagons.

The celebrities endorsing some of these things on social media can afford to lose more than you and I, while other promoters have vested interests.

It’s also a reminder that the regulatory framework surrounding an asset class matters.

Some of these issues are occurring because of the way crypto markets are structured. Exchanges like FTX often carry out a range of functions.

In traditional financial markets these would be spread across multiple entities, most of which are regulated, as well as publicly traded in many cases. This adds important layers of scrutiny, and therefore safety.

Until some level of regulation oversight catches up with it, the crypto landscape will lend itself to more conflicts of interest, less transparency, and higher risk around client holdings than conventional markets.

For most people thinking about their retirement plan or how to grow their wealth, a diversified portfolio of high-quality, income-generating investments still makes the most sense.

With shares, property, bonds and managed funds – you (for the most part) know what you’re getting and what you own.

Fort those who feel the need to have a punt, don’t bet the farm.

There’s nothing wrong with ring-fencing a portion of your money to invest in riskier, more interesting opportunities – smaller companies, venture capital, start-ups, or crypto – just don’t go overboard.