FTX’s spectacular collapse shows crypto will never be the ‘future of money’

Dubbed the ‘Lehman Brothers’ moment for crypto, last week the second-largest exchange, FTX, spectacularly imploded as investors realised putting their hard-earned money into an unregulated and highly speculative ‘asset’ probably wasn’t the wisest idea.

While it will be a financially ruinous lesson for some, FTX’s implosion serves as a validation of what many of us have been saying for a long time: cryptocurrency is just one large Ponzi scheme, a house of cards ready to crumble at the whim of an unverified tweet or stroke of a government pen.

And while the saga likely still has a long way to roll, the events of last week read like the script of a Netflix drama.

Sam Bankman-Fried, chief executive officer of FTX, has seen his fortune destroyed.Credit: Bloomberg

Officially headquartered in the Bahamas and led by chief executive Sam Bankman-Fried, FTX is (or was), a cryptocurrency ‘exchange’ that facilitated the buying and selling of cryptocurrencies, similar to the role that a broker performs for us Luddites who prefer to invest in real companies. FTX had also created its own currency ‘FTT’ (because that’s a normal thing these days).

The dominoes started falling last Monday when rumours spread Bankman-Fried’s hedge fund Alameda Research held billions of dollars worth of FTT which it used as collateral for loans in other risky investments. This meant any fall in the value of FTT could expose both the hedge fund and FTX to enormous losses. More news came that FTX lost over $US10 billion ($15 billion) in customer money trying to fund other risky bets, among them putting client funds towards the Democratic party ahead of the midterm elections.

The next day, Changpeng Zhao – one of the largest single holders of FTT and head of its largest competitor, Binance – sold their $US580 million holding of FTT, uncomfortable with the alleged financial smoke and mirrors Bankman-Fried was performing. This sparked a classic liquidity crunch as other investors bolted for the door, with the fear spreading across the broader crypto market. Bitcoin plummeted to its lowest level in two years, after losing 17 per cent of its value in just five days.

In less than the space of a week, the second largest exchange in the world had filed for bankruptcy, Bankman-Fried had resigned as CEO, also filing for bankruptcy, while owing $650 million to lenders. The exchange also had a reported $US515 million of customer funds stolen.

Bloomberg now values FTX at $1 from $32 billion just one day prior. The extent of the damage is yet to be realised, with even a Canadian teacher’s pension fund disclosing it had a $95 million hole due to its investment in FTX. Investors are unlikely to see their money again.

It’s not the first time something like this has happened. Earlier this year Luna, another cryptocurrency, virtually disappeared overnight wiping about $60 billion of investors’ money with it. Not even governments are immune to the crypto cult. One year ago, El Salvador, made bitcoin legal tender after the government itself bought 2381 bitcoin worth $US105 million in an “experiment” that is now worth $US41.5 million.

Despite these spectacular failures, and despite crypto markets having lost about $2 trillion in value over the past year, some people still herald cryptocurrencies as the future alternative to traditional currency.

So is this the beginning of the end for crypto? There is no doubt that the FTX downfall has shaken confidence and perhaps irreparably damaged trust and confidence in cryptocurrencies and therefore investor appetite.

JP Morgan says the contagion from the collapse of FTX could see the value of cryptocurrencies halve, while Binance’s Zhao warned of “cascading effects” yet to be felt. This will inevitably spur governments to further crackdown on crypto – the Wall Street Journal reports that the US Justice Department and Securities Exchange Commission have launched investigations into FTX.

Most experts agree that no more than five per cent of an investment portfolio should be in cryptocurrencies, but if you ask me the words “investing” and “crypto” should not be used in the same sentence.

If you’re looking to have a flutter on crypto as an alternative to a night at Crown or race at the Melbourne Cup, that is perfectly acceptable as long as you use good risk management, but don’t go telling me crypto is still the ‘future of money’.

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• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.