Early in the morning on November 10th, 2022, Jihye Lee from CNBC published an article with the headline “Sequoia Capital marks down its FTX investment to $0.” In the article, Sequoia is quoted as saying that “a liquidity crunch has created solvency risk for FTX” and “the full nature and extent of this risk is not known at this time.” Sequoia’s position in the cryptocurrency exchange was valued at $210 million prior to the markdown. Just one year prior, FTX was valued by investors at $25 billion. Lee (2022) later notes that the Justice Department and the SEC on Wednesday opened investigations into the sudden implosion of the crypto trading platform.
Obviously, the sudden loss of tens of billions of dollars of value is massive – this is about one-third the valuation of Lehman Brothers during the 2008 financial crisis after adjusting for inflation. We have no idea at this point what the contagion or fallout will be from this, whether that comes from derivatives, leveraged positions, or just a race to get what little one can out of the system. FTX has already shut down deposits, withdrawals, and account creation – everything contained within is frozen – if there is anything contained there at all at this point.
We cannot forget that other, much larger investment firms, are also on the hook here. As late as a week ago, Fidelity Investments announced opening “commission-free” crypto trading to retail investors – while maintaining a 1% spread in asking price when executing trades (this is a baked-in fee) according to Tanaya Macheel of CNBC (2022). They also deployed bitcoin assets into their 401(k) options for the 23,000 employers that use their retirement benefits platform according to Webber (2022), in spite of the Department of Labor ruling that bitcoin does not meet the test of being a prudent investment.
The news will highlight how Sam Bankman-Fried will have had his net worth reduced by tens of billions of dollars. Cool story, but what about the main street investor, the retail investor, the person who was told by a friend that this was a great idea? Those people are getting crushed right now. Those people likely lose everything, and there is no recourse, there is no golden parachute – they just get to plummet.
Now you may be asking yourself, “Were there warning signs? Could the SEC or the Justice Department have stepped in sooner?” Bluntly, yes there were, and yes they could have. FTX has had liquidity issues as recently as a few months ago, and in this space there continues to be no codified regulation, no organized or systematic approach to handling crypto institutions. This means that these companies have been allowed to establish, grow, and take people’s money for years without being subject to either banking nor investment regulations, which require far more scrutiny, disclosure, auditing, and compliance actions. Even the collapse of the Luna token and Tether earlier this year, nor the theft of billions of dollars in crypto assets, caused any significant regulatory action to occur. The lawmakers and regulators sat on their hands for years and years, with the allure of crypto riches being the tail wagging the proverbial dog once more. The end result is a predictable one – ruin for millions of ordinary investors.
On a different front, we have now witnessed the first days of Elon Musk as CEO of Twitter. He has pushed false information, laid off half of the workforce while likely running afoul of labor laws, and sold billions of dollars of Tesla stock. If you’re a Twitter employee, you are likely shaken. If you’re a Tesla employee, you are likely shaken, because this could come to your business as well. And how should one feel as a Tesla shareholder when the CEO of your company seems entirely disinterested in your business or product to such an extent that they choose to sell out of it and pour their energies into an entirely different business instead? If that makes you nervous or anxious, I can confirm that that’s sanity kicking in. And where is the SEC in all of this? Once again, nowhere to be found. Gary Gensler, the head of the SEC, is sleeping at the wheel.
So, what do we take away from all of this? What lessons can be learned from these experiences?
There is an adage “when someone shows you who they are, believe them.”
Believe that this construct of cryptocurrency is a farce, a joke, a meme, and act accordingly with your money. Believe that the major stakeholders in crypto want to steal billions of dollars from average people, because they have and continue to do so unabashedly.
Believe the Sequoia’s and Fidelity’s of the world that are happy to take your money, that you earned with your work, and abandon their fiduciary duty, abandon due diligence, abandon basic levels of common sense and responsibility, to increase their AUM and make as many dollars in fees and commissions as possible.
Believe that Elon Musk will not serve the best interests of Tesla shareholders and is happy to sell the company out now that he has made his riches so he can play with his new toys while you hold the bag on a company that will not be able to compete against both long-time automakers and the new wave of Chinese EV automakers. Believe he will try to get every last puff out of Tesla first though before he pulls out the proverbial rug.
Believe that our lawmakers have zero interest in protecting the interests of the American people.
Believe that Gary Gensler at the SEC is either grossly incompetent, grossly negligent, or both in his ability to enforce regulations and protect the American people.
Believe that both the SEC and DOJ will act reactively, not proactively to situations involving potential fraud and abuse, and that people really have no protection from any agency when it comes to the saving and investment of their money.
Believe your friends and family who tried to get you into crypto and meme stocks. Those people at best were foolish; at worst, they were frauds, trying to deceive you and everyone else they know for their benefit. Think very carefully about the relationship you have with them in the future, if any.
Believe all of them, and remember that whenever someone shows you who they really are, to believe them as well.
Lee, J. (2022, November 10). Sequoia Capital marks down its FTX investment to $0. CNBC. https://www.cnbc.com/2022/11/10/sequoia-capital-marks-down-its-ftx-investment-to-0.html
Macheel, T. (2022, November 3). Fidelity to open commission-free crypto trading to retail investors. CNBC. https://www.cnbc.com/2022/11/03/fidelity-to-open-commission-free-crypto-trading-to-retail-investors.html How Does the Fidelity 401(k) That Allows Crypto Work? (2022, August 21). Investopedia. https://www.investopedia.com/how-fidelity-crypto-401k-works-5324019
Webber, M. (2022, August 21). How Does the Fidelity 401(k) That Allows Crypto Work? Investopedia. https://www.investopedia.com/how-fidelity-crypto-401k-works-5324019