Chris’ note: The collapse of crypto exchange FTX continues to reverberate through the markets. There are many false narratives about what this means for the industry circulating in the mainstream media.
And if you’re invested in crypto, it’s crucial you don’t get sucked in.
That’s why, today, you’ll hear from former Wall Street insider Nomi Prins. She’s a big-picture investor, not a crypto analyst like Teeka Tiwari or Jeff Brown. But she’s bullish on crypto at her Distortion Report advisory. That’s because it disrupts the chokehold Wall Street banks have on the financial services sector.
And as she’s been showing her readers, the FTX collapse hasn’t doomed crypto, like many would have you believe. Quite the opposite, in fact. It’s a necessary clearing out of bad apples from the industry. And that will help crypto thrive over the long run…
More than a trillion dollars…
That’s how much wealth has evaporated because of the FTX crypto exchange collapse.
I first wrote about it a week ago.
Since then, there’s been all sorts of FTX-related craziness in the headlines – including a multibillion-dollar hack.
And yesterday morning, another major crypto player, Genesis Global Trading, halted withdrawals.
But there’s one development above all that may have you feeling fearful about crypto…
Reports came out that, indirectly, FTX used customers’ money to fund risky bets. It did this through its affiliated trading firm, Alameda Research.
FTX reportedly lent more than half of its clients’ funds to Alameda. It then used those funds to trade cryptocurrencies.
It’s a classic case of “too big to fail” firms getting greedy with other people’s money. We’ve seen it before in traditional finance. And unfortunately, it’s probably not the last time we’ll see it.
That said, this revelation has many people worried about what it means for the crypto industry.
So today, I’m looking beyond the headlines. And I’ll show you what the FTX story means for your money.
Last week, questions started swirling about FTX’s solvency.
On November 7, FTX founder Sam Bankman-Fried (aka SBF) said in a tweet:
FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).
In its own terms of service, FTX said transfers to its crypto trading arm were explicitly forbidden. But as it turns out, Alameda had used FTX customer funds for trading.
SBF later reportedly described the decision as a poor judgment call (after deleting the tweet above). But reports also suggest that SBF had built a back door to siphon customer funds to Alameda.
The trading firm owed $10 billion to FTX before both filed for bankruptcy last Friday. And while there’s already a civil bankruptcy case, all the above means there will likely be a criminal fraud case, too.
As I write, authorities of the Bahamas, where the company is based, are seizing whatever FTX assets they can get their hands on.
U.S. enforcement agencies are also investigating FTX.
FTX was once seen as a leader in a struggling market. But its fall has sent shockwaves through the cryptocurrency industry.
This is why bitcoin and other cryptos have crashed over the past week.
At this point, you might be thinking the entire crypto space is one big Ponzi scheme.
FTX is the most shocking insolvency of a custodian since the collapse of the Mt. Gox crypto exchange in 2014.
But the FTX debacle isn’t a reason to lose confidence in bitcoin and the “New Money” investment theme I’ve been writing you about.
It covers companies and technologies that break the big banks’ chokehold on payment transfers, loans, and deposits.
That includes the cryptocurrency world and its underlying blockchain technology.
In fact, I believe crypto is an evolving disrupter to Wall Street, central banks, and fiat currencies such as the U.S. dollar, the euro, and the Japanese yen.
One thing I learned on Wall Street is that it’s important to separate the bad apples from the orchard.
And FTX is an example of a bad apple that was dishonest and gambled with other people’s money.
But this isn’t unique to crypto. And it doesn’t mean the entire crypto industry is doomed.
This is what happened with many firms in the traditional finance sector during the 2008 crisis. Lehman Brothers and Bear Stearns, my former employers, went under because of it.
But the strongest players survived. That includes JPMorgan Chase and Goldman Sachs, where I also worked during my 15 years on Wall Street.
Bitcoin will survive FTX just like it survived Mt. Gox. Even in the crypto sector, most exchanges and lending platforms today don’t play the FTX game.
For instance, Coinbase, because it’s publicly traded, must undergo rigorous evaluations of its books by the Securities and Exchange Commission.
And as Chris Lowe has been writing about, others like Uniswap and Curve are completely decentralized. This makes the kind of thing that happened at FTX impossible.
This crisis allows the crypto industry to weed out the bad apples. And it forces other companies or projects to learn from their mistakes.
Will the FTX fiasco set back trust and confidence in crypto for some people?
It may.
But the crypto industry’s most transparent players can and will bounce back.
Plus, the FTX collapse will force U.S. regulators to create better laws to protect customers. And that’s a good thing for the industry.
As I saw during my years on Wall Street, many sectors and industries came back even stronger after the initial fallout from the mistakes made by specific actors.
And we’re already seeing that happen in crypto.
Since the fall of FTX, at least nine major crypto exchanges have pledged to provide proof of their reserves. And although there are some issues around whether we can trust those pledges, that’s a step in the right direction.
But right now, folks are panicked. So the crypto market will be extra choppy for some time.
If you hold bitcoin, my advice to you is to stay patient and ride out this volatility.
And if you’re considering buying bitcoin, I’d wait out this turmoil.
In the meantime, steer clear of centralized exchanges that are registered offshore, like FTX, when it comes to storing your crypto.
Whenever possible, choose companies that are transparent about their reserves. As well as public companies with longer track records of success.
At the top of that list for me is Block (SQ). It’s the company behind the Cash App mobile payment service. And it’s one of the model portfolio holdings at my Distortion Report advisory. It’s been relatively unscathed by the FTX collapse.
Regards,
Nomi Prins
Editor, The Distortion Report
P.S. I added Block to the Distortion Report model portfolio in July. And I expect more upside for it ahead as the New Money paradigm takes hold.
I’ve put together a video presentation with more details about the New Money megatrend. You can watch it right here.