Category Archives: Bitcoin

The Impact of FTX’s Collapse

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“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” ~ John Ray, new FTX CEO

Crypto exchange FTX filed for bankruptcy after a stunning five-day collapse of the once-$32 billion dollar crypto company as concerns over its financial health led to a surge in withdrawals and a plunge in the value of its native FTT token. FTX’s founder, Sam Bankman-Fried (SBF), resigned as CEO.

As a result of the collapse, the company and its leadership are facing investigations and potential criminal charges in both the Bahamas and the U.S. for its misappropriation of users’ assets and allegations of fraud. 

Before its collapse, FTX offered retail and professional traders spot crypto investing as well as more complex derivatives trades. At its peak, the platform was valued by investors at $32 billion and had more than 1 million users.

FTX’s books revealed the exchange had more than $9 billion in liabilities, but less than $1 billion in liquid assets the day before its bankruptcy filing. And, after an apparent hack (or “unauthorized access” via a backdoor by SBF) drained $477 million of the company’s remaining assets, customers are facing long odds of ever recovering much of their deposits.

After FTX collapse, at least $1 billion in customer funds are unaccounted for, and FTX may owe as many as one million creditors. Additionally, FTX’s collapse has resulted in:

  • Crypto’s total market cap has dropped below the $1 trillion mark since FTX’s trouble started early last week, and sits near $826 billion as of Wednesday morning, November 9. 2022.
  • After the firm’s bankruptcy filing, BTC price sank nearly 25%, dropping below $16,000, before slightly recovering; ETH fell by more than 30% in the same span.
  • Market contagion and liquidity issues have spread to a growing number of crypto businesses that have suspended redemptions, citing “extreme market dislocation … caused by the FTX implosion.”
  • Several major players have halted customer withdrawals and cited “significant exposure to FTX.” Others are planning to file for bankruptcy.

CNBC reported that Alameda Research, FTX’s sister company, had borrowed billions in customer funds from the exchange to make risky leveraged trades, leaving FTX caught short when users wanted to withdraw their money.

In general, mixing customer funds with counterparties and trading them without explicit consent is illegal, according to U.S. securities law. It also violates FTX’s terms of service. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said newly appointed FTX CEO John Jay Ray III – a bankruptcy expert with more than 40 years of restructuring experience who liquidated Enron.

Former CEO Bankman-Fried declined to comment on allegations but said the company’s recent bankruptcy filing was the result of fraud, misappropriation and issues with a leveraged trading position placed by Alameda Research.

“In the Bahamas, I understand that corporate funds of the FTX group were used to purchase homes and other personal items for employees and advisors,” Ray wrote. “I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”

Moreover, larger investors and traditional firms been impacted

  • Since its founding in 2019, FTX raised nearly $2 billion in capital from sources like venture capital firms and pension funds, and its bankruptcy means that many of its investors will likely need to write their investments off as losses. 
  • SoftBank, Tiger Global, and Sequoia Capital are among the many well-known firms who made now-worthless bets on FTX. Sequoia was marking its $213 million stake down to $0. 
  • The impact isn’t limited to venture capital firms either — the Ontario Teachers Pension Fund lost $95 million investing in FTX’s funding rounds and professional athletes celebrities like TV producer Larry David and NFL quarterback Tom Brady are among the individuals who had equity stakes in and promoted the company. 
  • In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

In the wake of the FTX exchange’s collapse, there has been calls from financial business leaders and lawmakers regarding the need for greater oversight and regulation of the crypto industry.

U.S. Congressman Patrick McHenry, the top Republican on the House Financial Services Committee, said: “It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”

Source: Coinbase Bytes

References:

  1. https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html
  2. https://www.businessinsider.com/ftx-managers-used-online-chat-emojis-approve-official-expenses-ceo-2022-11
  3. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

Don’t get financial advice from NFL stars

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When it comes to financial investing, investors should not rely on advice from professional athletes who promote crypto-currencies or currency trading platforms.

In November 2021, cryptocurrency market prices were skyrocketing to new heights and Bitcoin was one of the red-hot. Concurrently, two well-known NFL football players, Green Bay Packers quarterback Aaron Rodgers and Los Angeles Rams wideout Odell Beckham Jr., stated that they would accept a portion of their 2021 salaries in the cryptocurrency during a month when Bitcoin hit an all-time high of $68,906 per coin. 

As often happens with volatile currencies and investments, Bitcoin market price has crashed from that November peak to a nearly 52 percent dive, reaching a January bottom of $33,076.

If ever there were a case of buyer beware with the products athletes endorse, this would be it. Most especially when that “product” is actually a volatile form of currency that can cost investors massive sums of money.

The sad fact is that the vast majority of people don’t truly understand how cryptocurrency works. And that group also includes most professional athletes who have advisers paid to guide their investments, as well as agents who find commercial opportunities to endorse products like Bitcoin.

It’s been assumed that athlete such as Odell Beckham Jr. has take a substantial financial hit in pay with Bitcoin.

It was reported by Darren Rovell that Beckham’s entire salary is now worth only $413,000 USD equivalent in Bitcoin as opposed to the $750,000 USD guaranteed by the LA Rams football team, excluding taxes. Once federal and state taxes are factored in, Beckham is projected to make around $35,000.

References:

  1. https://www.yahoo.com/lifestyle/odell-beckham-jr-suffers-major-085440249.html
  2. https://www.msn.com/en-us/sports/nfl/bitcoin-s-recent-crash-is-a-reminder-don-t-get-your-financial-advice-from-nfl-stars/ar-AAT8kiG

Bitcoin’s Bursting Bubble

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“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

  1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
  2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
  3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
  4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
  5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/

Bitcoin and Risky Investing

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Volatility isn’t always bad, and it’s important to be cautious about applying leverage

Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games.

Bitcoin has become an asset class of great interest to many investors and speculators across the world. But recently a few leading asset managers have recommended that investors direct a small allocation of their capital to cryptocurrency as part of their investments and retirement savings.

Where does Bitcoin fit in?

“Bitcoin is neither intrinsically valuable, nor is it a reliable store of wealth,” said Stuart Trow, a credit strategist at the European Bank for Reconstruction & Development, in a Bloomberg Opinion article. “It certainly does not produce an income. It does, however, possess two characteristics that could make it a good fit for even the most conservative portfolio”…volatility and it is not leveraged.

Volatility

Many investors and financial advisors view Bitcoin’s volatility with horror. Between Dec. 2017 and Dec. 2018 the price of Bitcoin fell by almost 85%. But since that meltdown it has risen more than tenfold, demonstrating that volatility can cut both ways. The greater an investment’s volatility, the larger the losses but the larger the potential returns.

Bitcoin’s volatility offers a greater possibility of meaningful gains, while committing a relatively small, manageable sum. Since over the past year, its price has more than quadrupled. Had you invested one percent of your capital to Bitcoin, it would have contributed much to your portfolio. Thanks to Bitcoin’s volatility, as long as you don’t bet the ranch, there remains the possibility of making a real gain without too much loss.

Leverage

Bitcoins other key characteristic is that it is not a leveraged investment. Unlike leveraged trading strategies, which traders apply leverage (or debt) to trading financial instruments such as option and future contracts, your losses with Bitcoin are limited to your initial stake. Most other get-rich-quick schemes, including contracts for derivatives, rely on debt to some degree.

Fear of Missing Out (FOMO)

“Fear of missing out” and viewing cryptocurrencies as an alternative safe have to gold were just a few of the reasons that were heard when new Bitcoin investors were asked to explain their purchases in a month when the cryptocurrency had reached historical record highs.  Especially when conventional investing wisdom would advise against buying the elevated prices, and these investors knew that the cryptocurrency might lose value.

Yet, Bitcoin is not for everyone, as underlined by its recent short term $10,000 fall in early January 2021.  But, if you have a couple of dollars that you can afford to lose, there are probably worse things to buy right now than the world’s most popular cryptocurrency.

Reference:

  1. https://www.bloomberg.com/opinion/articles/2021-01-30/personal-finance-what-bitcoin-teaches-us-about-risky-investing
  2. https://www.bloomberg.com/news/newsletters/2021-01-21/bitcoin-investing-why-people-are-buying-the-cryptocurrency-now