Crypto crash latest in a long line

Australian investors in the collapsed Bahamas-based crypto currency exchange FTX face an anxious wait to know whether they will recover any money. Like investors everywhere, most will be shell-shocked at the speed with which their investments have vanished and wondering exactly what has happened. For seasoned investors, it is a familiar story. An enigmatic and charismatic chief executive was able to beguile investors, regulators and a fascinated media with claims of a new investment paradigm. Behind the scheme lurked what FTX’s new management told the Delaware bankruptcy court was a worldwide, international organisation being run as a personal fiefdom by its creator, Sam Bankman-Fried. Funds that investors may have thought were held on deposit as crypto currency had in fact been used by another related company to make unsuccessful investments.

As with all Ponzi schemes, when deposits were overtaken by withdrawals – like a run on a bank – the music stopped and there was a frantic scramble for the exits. Unlike with a bank, there is no deposit insurance or set of regulations to protect investor deposits. To make matters worse, the corporate carcass of FTX has reportedly been the target of a co-ordinated attack by cyber criminals that has left the cupboard empty. Some assets have been seized by authorities in the Bahamas, which had set itself up as a global home of crypto currencies because of its favourable tax and trading laws, and a complex process has begun to unwind a financial mess that is being compared by liquidators to the great collapses of recent times, including energy trader Enron in 2007 and investment bank Bear Stearns the following year. The history of financial markets is littered with similar episodes, from Tulipmania in the 1600s to the South Sea Bubble of 1720, or, closer to home, the Poseiden nickel boom and bust of 1970. All share a common theme of speculative bubbles fuelled by greed and fear of missing out. The FTX collapse is distinguished by being connected to the new world of crypto currencies that few understand but millions of unseasoned investors have been convinced represent a store of wealth rather than a roulette wheel of chance. Many who put money into FTX, thinking they were investing in crypto coins, were no doubt unaware exactly what the company did or the risk they were taking.

When we editorialised on the push for greater regulation in the crypto currency market, we encouraged unseasoned investors to heed the words of Berkshire Hathaway chief executive Warren Buffett: if you don’t understand something, don’t invest in it; and for riskier investments, do not wager more than you can afford to lose.

FTX is unlikely to be the end of crypto currencies, but in time it will no doubt become a marker on the long road to greater market oversight and regulation of crypto markets, something that is long overdue.