Crypto comeuppance: Who’s next in the firing line?

Day by day the wider damage caused by collapsed US crypto exchange FTX is mounting across financial markets.

Most smart investors have always questioned the cryptocurrency market, yet they still placed speculative funds into the game primarily because they had a fear of missing out.

The crypto crisis is going from bad to worse as investors at every level get hit with losses.

The danger now is the wider reputation risk it poses to key players including the ASX, Commonwealth Bank and a string of fund managers.

Starting with the collapse of the FTX exchange in the US, that drama is now triggering collateral damage in every market and Australia is not being spared.

As the crypto shake-out accelerates investors wonder if we have a crypto “Enron” at hand. Enron was the company that in 2007 became the biggest bankruptcy in history.

Curiously, John J Ray, the bankruptcy expert who has been put in to try and manage FTX first came to prominence in the Enron workout: On Friday he said FTX is the worst thing he has seen in forty years.

As John J cast his beady eye over the former crypto empire of Sam Bankman-Fried, the Bank of International Settlements in Basel, Switzerland, also entered the fray with a timely note on retail activity in cryptocurrencies.

The so-called “bank of banks” report shows a stark reality that “most people most of the time lose money in crypto and this was the case long before the FTX drama.“

More than three-quarters of users are likely to have lost money on their investments in cryptocurrencies, according to the agency which charted retail use of crypto across 95 countries between 2015–22. The study assumed that if each new user bought $100 of bitcoin in the month of their first exchange app download and in each subsequent month, then 81 per cent of users would have lost money.

Australia was fully included in the survey, ranking near the midpoint in terms of retail activity.

In our market the retail money is currently being lost by younger investors who speculated directly on coins through crypto exchanges and “mum and dad” investors who invested through locally listed crypto-linked Exchange Traded Funds – some of these products are down by 70 per cent.

The BIS survey shows the majority of crypto investors follow the same pattern: They jump into the market when the price goes up blindly aiming to ride the next upswing. Most investors are male and most of them are under 40.

At the other end of the spectrum sophisticated investors have been hit inside specialist funds, while leading names such as Mark Carnegie openly admit to losing hundreds of thousands of dollars in the sell-off.

The damage is most clearly revealed in the public markets, where we can track that trajectory of funds such as the Betashares Crypto Innovators fund. Remember, that’s the one which set records for first-day trading when it listed at the top of the cycle. So far this year the fund is down by 73 per cent. It is flanked by a string of similar crypto-linked funds which are all taking a bath. At the end of the line are a string of smaller funds listed locally which are simply shutting their doors – the Cosmos funds and the 3iQ crypto have recently now closed down.

There are important questions to be answered here: Did investors in EFTs know how much risk they were taking? Did financial advisers use ETFs as a “no risk” way of sending their own clients into the maelstrom of crypto? Did regulators move fast enough on crypto exchanges? Certainly the exchanges have been calling for regulation for years.

You might say investors are getting only what they deserve – this has been a super speculative play from the start. The notion of an independent global currency based on blockchain technology has always been hypothetical as long as the world’s central banks exist in their current form.

Most smart investors have always questioned the crypto currency market yet they still placed speculative funds into the game primarily because they had a fear of missing out.

Talk to of any of the best financial advisers – and this includes several in the upper reaches of our annual Top 100 Financial Advisers list – they say the same thing; they don’t recommend it, but if the client wants to speculate they can go ahead assuming they know the risk they are taking.

Yet at some point there has to be responsibility.

Earlier this week in another episode of crypto’s systemic difficulties, the extended crypto empire of the Winklevoss twins hit serious trouble. (Yes, the twins that fought with Zuckerberg in the early days of Facebook.)

The Winklevoss empire had to freeze funds in the so-called Genesis product range. The group has to issue a statement saying nothing else in the product suite would be affected: Genesis is a key partner for Gemini in the US.

Senior executives at Commonwealth Bank will certainly hope so. Only a year ago the nation’s biggest bank announced a partnership with Gemini which enabled it to offer customers an ability to trade a range of crypto currencies.

CBA put up very little money to get this venture off the ground, in reality the bank only lent its brand name to the exercise. Now the bank’s reputation is in the spotlight.

And as the questions continue to mount over crypto, questions inevitably arise over the underlying blockchain technology which triggered the whole speculative mania around coins in the first place

Seven years ago the ASX announced it would leapfrog the wider world and move from the CHESS system to a blockchain technology. It was an audacious exercise: Too audacious, it turns out, and this week in a troubling reversal the ASX had to close down the entire project at a minimum cost of $200m.

It’s just one project in one company but unfortunately that company happens to be the stock exchange at the very heart of our sharemarket.

As investors we should be as sceptical about this sell-off as we were about the mania that ran though the market at the peak “bubble” phase.

As it turns out blockchain will keep evolving – just like the internet kept evolving long after the dot.com bust, Enron or any other drama.

In fact if the BIS is right and the majority of people lose money on crypto speculation at any given time then who is to say they won’t keep betting as they do on the horses or in casinos.

This latest crypto reversal is a major sell-off. The price of bitcoin remains at $US16,000, which is a 65 per cent drop from the start of the year. But it is still a lot more than zero: And that tells us the game is by no means over yet.