Lessons from the Crypto Craze

The Collapse of FTX

The Collapse of FTX

With Robert J. Beck, CPA

Published December 1, 2022

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Sam Bankman-Fried: The Next Warren Buffett?

In August 2022, Fortune Magazine published a glowing cover story, spotlighting cryptocurrency’s new prodigy, Sam Bankman-Fried.[1]

The magazine’s cover featured a close-up of Bankman-Fried, the title in large font: “The Next Warren Buffett?” and the subtitle: “The 30-year-old billionaire Sam Bankman-Fried is betting big on crypto…”

Bankman-Fried founded a burgeoning crypto exchange platform, FTX, in 2019. It grew to become the second largest crypto exchange earlier this year. At its height, FTX was touted as a more secure, reputable sector of crypto trading.[2]

Bankman-Fried, who was young, smart and supposedly altruistic, was hailed as an example of the growing stability of the crypto markets. [3]

Over the past few months, the crypto exchange was flooded with ads and endorsements. Celebrities from Tom Brady to Kevin O’Leary were cosigning FTX. Investors were piling their money in, hoping for quick and excessive growth.[4]

It wasn’t long before FTX’s facade crumbled even faster than it was built—exposing Bankman-Fried as one of the biggest fraudsters of his generation.[5]

It was in November 2022 that FTX unraveled. After it was discovered that FTX had quietly lent a large sum of investor funds to a hedge fund that Bankman-Fried founded himself, leaving very little liquid cash to back up their currency for investors. As of now, the money is still nowhere to be found, which indicates that FTX is not only effectively worthless, but a downright scam.[6]

Endorsements were pulled, articles were redacted, and the investors-turned-victims were given no where to turn. Just like that, FTX had collapsed, and participants were left with an estimated total loss of $1-2 billion.[7]

Bankman-Fried’s net worth, which was estimated to be $36 billion in March, dropped a record-breaking ~94% in a single day.[8] He is currently awaiting potential criminal prosecution.

It’s safe to say that Bankman-Fried is no Warren Buffett. In fact, his story more accurately resembles the disgraced Bernie Madoff. 

The Promise of Cryptocurrency

Over the past decade, we’ve seen a sweeping rise in crypto trading’s popularity. The promise of an independent, less-regulated market has made crypto into a wild west of trading[9]—subject to endless speculation and online discussion.

While I understand the inherent appeal behind decentralized trading, I discourage my clients from putting their nest egg into highly speculative investments. And although there are certainly some crytocurrencies that are more credible than others, 2022 has revealed much of the crypto market to be not only speculative, but outright fraudulent. 

The Federal Trade Commission offers some useful advice for determining the legitamacy of cryptocurrencies on their website.

Lessons Learned

I have several clients who have fun playing in the crypto markets, investing only a small, inconsequential amount of their money. However, when it comes to your real-life savings, I wouldn’t encourage playing games. I urge my clients to stick with reputable and longstanding financial vehicles, especially when it comes to their building and protecting their nest egg. Investments in the stock or bond market are regulated to disbar the likes of Sam Bankman-Fried from running off with your money.[10]

The Future of Cyptocurrency

Maybe cryptocurrency could one day evolve to meet the needs of serious investors.

At Wealth Management CPAs, we’ve made it our mission to help our clients build and protect their wealth through comprehensive finanical, tax, and estate planning—not through get-rich-quick schemes.

Robert J. Beck, CPA

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