Harvey Jones
05.12.22

Is FTX scandal the death of crypto or a buying opportunity?
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2022 was a torrid year for Bitcoin and crypto-currencies, even before digital coin exchange FTX went into meltdown.
The last thing the controversial asset class needed was yet another scandal, and this one surely won’t be the last.
One day FTX was valued at $32billion. The next, zero. More than a million investors face painful losses.
By now you’re probably read about FTX chief executive Sam Bankman-Fried, a shaggy-haired 30-year-old in shorts and untied trainers who played video game League of Legends during business calls. Once hailed as an eccentric genius, his offbeat habits don’t seem so amusing now. The latest crypto meltdown is no surprise and confirmed everything critics have been saying about crypto for years.
It’s the wild west out there.
Any investor who dabbles must accept they could lose everything, with little chance of redress. One thing is surprising, though. Bitcoin is still with us.
Some will even see this year’s collapse as a buying opportunity. Incredibly, they might even be right.

People lose real money in virtual currencies

US corporate restructuring expert John Ray has overseen some huge bankruptcies in his 40-year career, including energy trading firm Enron in 2001, but called FTX “unprecedented” amid a "complete failure of corporate controls”.
Yet FTX is just one of many crypto meltdowns this year.
The Terra (LUNA) token, hedge fund Three Arrows Capital broker Voyager Digital and lender Celsius have all collapsed, at a total cost of almost $100billion.
There will be more. Contagion is rife.
Blockfi, which FTX bailed out following the Three Arrows collapse, is the latest domino to fall, owing 100,000 customers.
Everybody is suing everybody.
Crypto market cap has crashed from $3trillion to $750billion, with Bitcoin losing three quarters of its value, plummeting from $67,000 in November 2021 to $16,500 at time of writing.
Yet this is not unprecedented. Bitcoin has been here before, crashing from $20,000 in December 2017 to $3,000 within a year.
Another dramatic comeback cannot be ruled out but anybody tempted to invest at today's price must be careful.

Crypto was a creature of its time

Bitcoin rocketed during the era of near-zero interest rates and seemingly endless quantitative easing, which saw central bankers flood markets with virtual money.
Its advocates argued that Bitcoin, with its limited supply of 21 million coins, offered protection from debased fiat currencies.
Some even called it “digital gold”, a claim destroyed by this year’s collapse. Crypto is not a store of value but pure speculation.
The cheap money era changed the investment world, says Andrew Parry, head of investments at J O Hambro Capital Management and Regnan. “It fuelled an explosion of speculative trading and financial engineering, which included hyperactive day traders on Robinhood and other apps, the special purpose acquisition company (SPAC) boom and crypto-currency mania.”
The money for nothing era is now over as central banks tighten to fight inflation, Mr Parry says. “A higher cost of debt forces capital discipline and inflation exposes companies whose products or services have limited appeal.”
Bitcoin imploded but is hanging on in there. During this summer’s bear market rally, the S&P 500 was not the only market to spring back into life.
Bitcoin bounced, too.
The recovery was short-lived but it showed interest is still there. Once interest rates peak, as they will at some point next year, and investor confidence returns, it could recover. So could Ethereum, Dogecoin and many others.
Yet anybody thinking of diving in at today’s lower price should tread carefully.

There are good reasons to shun Bitcoin

“Perhaps the greatest lesson from today's crypto winter is that while financial systems change, human nature does not,” says Chris Clothier, co-fund manager at CG Asset Management.
Bitcoin creator Satoshi Nakamoto set about creating a simple, pure financial system. “No sooner had he done so than it became overlaid with derivatives, leverage, and Ponzi schemes of all kinds. We can only speculate on what he thinks of the monster he spawned.”
Mr Clothier recognises the appeal of crypto in a world marked by “monetary debasement, inflation, and financial repression”.
Yet he would never invest in “something that has a fundamental worth of zero”, and suggests a rule of thumb that might apply to any investment. "We are reluctant to purchase any asset that has fallen, with reasonable frequency, more than 80 per cent.”
Mr Clothier points out that Bitcoin is also an ecological disaster, given the energy used to mine it. “No investor who upholds environmental, social and governance (ESG) principles should own it under any circumstances.”
There are very good reasons never to go near crypto.
But you already knew that.

New tech teaches us the value of old rules

Crypto-currencies remain a solution in search of a problem.
They do nothing that cannot be done already, in a regulated way and with much less counterparty risk.
While the underlying blockchain technology may have its uses, it could have done without all the speculative fuss.
Some early adopters will have made fortunes, but anybody who arrived late to the party is likely to have lost big money rather than made it.
Crypto also has all the hallmarks of a cult, with fanatical followers and charismatic figureheads, such as Tesla founder Elon Musk and for a while, Sam Bankman-Fried.
If tempted to invest, limit your exposure. Accept that this is pure speculation, and do not invest money you cannot afford to lose.
The old investment rules still apply, notably this one: Never hold all your eggs in one basket.
Never put more than 5 per cent or at most 10 per cent of your total portfolio into crypto. The rest should be spread across old school asset classes such as shares, bonds, property, cash and gold, as before.
Finally, beware false prophets. Especially those in shorts.

Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.

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