If you have money in crypto, you may be getting messages like this from friends and family.
That’s been my experience since Sam Bankman-Fried’s cryptocurrency exchange, FTX, went belly-up earlier this month.
I bought my first bitcoins in September 2011, about a year after it first started trading on online exchanges.
The transformative potential of crypto has been a regular topic of conversation with my friends and family members ever since.
And when FTX went bust earlier this month, the “I told you so’s” started to roll in.
I received a flurry of links for podcasts, media articles, and Twitter takedowns all with the same message…
The entire crypto industry is an elaborate scam. Anyone who invested in it has been duped.
Was I wrong to believe in crypto’s potential? Are the naysayers right to label the whole industry a fraud?
The answer I’ve arrived at is no. And today, I’ll show you why.
First, I want to address the elephant in the room…
As we looked at in these pages earlier this month, FTX’s business was to serve crypto investors.
But its business model was the same one Wall Street banks follow – make profits and serve the insiders.
There are plenty of decentralized crypto exchanges. They run entirely on code, across decentralized blockchain networks, and require no middlemen.
But FTX wasn’t a decentralized exchange.
It was an off-shore company based in the Bahamas that gave absolute power to its 30-year-old founder, Bankman-Fried.
And its customers paid the price.
As we now know, he was exactly the kind of corrupt middleman decentralized networks were supposed to protect us from.
Fraud and asset bubbles go hand in hand.
Take the Enron scandal…
In 2001, executives at the Houston-based energy company got caught hiding billions of dollars in debt from failed deals and projects.
Enron was originally a gas pipeline company. But in the 1990s, it became more like an investment fund or hedge fund. And in 1999, it launched trading website EnronOnline.
The company even announced plans to create a market for trading data capacity on the high-speed fiber-optic networks.
(I remember it well. I was working or Bloomberg competitor Reuters at the time. And my first assignment was to dig into Enron’s trading business.)
This made Enron a darling of the dot-com boom, which peaked during the late 1990s.
And while stocks were soaring… and investors were raking in the cash… nobody cared about its complicated accounting. Enron could get by largely on marketing, promoting power, and having a high stock price.
But when the dot-com boom went bust in 2000… and the stock market collapsed… it was only a matter of time before it was revealed to be a massive fraud.
It was the biggest Ponzi scheme in history. Madoff’s firm was worth $64 billion when it blew up in December 2008.
And again, the timing wasn’t coincidental.
It came just three months after Lehman Brothers went under… in the darkest days of the financial crisis.
Nobody cared that Madoff made weirdly consistent returns in the preceding boom. But when stocks tanked… and investors grew wary… he was unable to bring new investors his Ponzi scheme.
And it collapsed…
Enron and Madoff incinerated billions of dollars of investor wealth.
But we don’t say the entire energy business… or the entire fund management business… is fraud.
Instead, we laid the blame where it belonged – on the bad actors.
It’s a message colleague and world-renowned crypto investor Teeka Tiwari has been shouting from the rooftops.
In April 2016, became the first guy in our industry to recommended cryptocurrencies to his readers.
Since then, cryptos he holds in the model portfolios at our Palm Beach Confidential advisory are up 1,525%… 4,281%… 5,248%… 13,429%… and even 15,623%.
And he’s been clear on the true nature of the FTX collapse. Over to Teeka…
This isn’t a crypto problem. It’s a fraud problem. It would be like looking at Jeffrey Skilling, who was behind the accounting fraud at Enron, and saying, “Oh, the energy business is terrible. It’s nothing but a fraud.”
Or take what the credit ratings agencies were doing in the run-up to the 2008 crash. They were giving “A” ratings to toxic bonds left, right, and center. This helped bring about the biggest financial crisis since the Great Depression. But an equally absurd observation would have been that the bond market was fundamentally flawed because of what the ratings agencies were doing.
If you’re invested in crypto, you’re going to have people telling you this is proof crypto isn’t a real asset. Crypto has no value. And you should have nothing to do with it.
But I hope can see how absurd that is.
The real problem isn’t this new technology. Its problem is as old as history… human greed.
Teeka believes the crypto market is going to get worse before it gets better.
That’s because the reverberations from the FTX collapse could trigger further bankruptcies at other centralized crypto players. (Paid-up Palm Beach Confidential subscribers can tune into Teeka’s latest video update on this here.)
So, over the short term, we’ll have more crazy volatility. But longer term, Teeka says this will flush the toilet on the bad actors…
What’s happening with FTX reminds me of what happened after the 2008 financial crisis. We’re cleaning out the garbage. But in crypto there’s no central bank to bail you out. If you mess up, you get wiped out. Bad businesses… bad business models… and bad management aren’t supported here.
In the future, anyone who wants to be in the exchange business will have to show a level of transparency that’s never existed before. This is the beauty of crypto’s design.
Yes, it has attracted a lot of charlatans. But they burn out quickly. As ugly as things look right now, this will ultimately strengthen the case for crypto.
That’s the important message Teeka has been spreading since he first recommended bitcoin more than six years ago.
If you use a centralized exchange such as Binance, Coinbase, or Kraken, you don’t own the coins you store there. You own IOUs from these exchanges.
That leaves you vulnerable to fraud at the exchange… or an exchange going bankrupt.
It’s more secure to hold your bitcoin in a cryptocurrency wallet, where you control the private keys.
As bitcoiners like to say, “Not your keys, not your bitcoin.”
You can find out more about how to do that from the one-page guide Teeka and his team put together for you.
And if you find the idea of self-custodying your crypto daunting, Teeka says stick with Coinbase.
It’s publicly listed. And it’s based in the U.S. So, it has oversight from regulators.
As Teeka has been showing his readers, crypto will rise again.
But to profit over the long run, you need to make it through the turbulent weeks and months ahead.
Regards,
Chris Lowe
Editor, The Daily Cut