NEWSLETTER - 17.11.2022
I hope you are doing well.
Major fraud happened in crypto (again, unfortunately), ending in the bankruptcy of one of the largest crypto exchanges. FTX mishandled clients’ assets by lending them to its affiliated hedge fund (Alameda) that, in turn, lost almost all of it (or invested it in illiquid assets), taking down both companies and a large number of FTX subsidiaries (combined, more than 130 companies were put in bankruptcy protection). The whole story is in the last link below.
It seems that crypto markets are repeating the same mistakes that participants in traditional capital markets made, just with an accelerated timeline. If it took (modern) capital markets 120 years to get to their current less-than-perfect state, crypto markets are currently on the path to almost repeat the whole history in just 12 years. From pump and dump schemes, euphorias, market bubbles, and subsequent collapses to more sophisticated fraud - human psychology (mostly fear and greed) create such cycles no matter what the underlying asset is. There is a reason regulations require that exchanges, brokers, custodians, central securities depositories, etc., are separate entities with their own risk control measures… A lesson that most participants in crypto have not yet learned.
On the other hand, one would expect that the prices of cryptocurrencies would drop significantly more given the scale of the FTX downfall - major cryptocurrencies lost about 20% of their value since the news broke and have stabilised. Bitcoin, for example, is now about 75% lower than a year ago, as seen in the chart below. It is impossible to know if the market bottom has been reached, but the sentiment has changed in the last year from euphoria to pessimism.
Interesting content I’ve read/listened to in the past weeks:
[Podcast] A Macro Tour with Bob Elliot (Invest Like the Best)
[Video] Taking the Punch Bowl Away by David Rosenberg
[Article] FTX’s Balance Sheet Was Bad by Matt Levine
A picture is worth a thousand words: