“FTX terminated its operations after it was revealed that the company was engaging in fraudulent activities,” said Aviad Faruz, CEO of FARUZO in New York. “This caused panic among investors and led to a sharp decline in the price of cryptocurrencies.”
This issue was only related to an exchange and not directly to cryptocurrencies. Cryptocurrency infrastructure logistics, however, echoes the FTX debacle across the industry.
“While there’s a lot to figure out, it’s pretty clear that FTX Group’s operations were unsustainable and had critical flaws,” says Chris Kline, CRO
While the technology may be more sophisticated, the actual result has been an old-fashioned meltdown that may sound familiar to other failed investments.
“FTX declared bankruptcy due to the mixing of customer funds, essentially funding its sister company Alameda Research with deposits from FTX customers,” said Don Cody, CEO of Global Macro Asset Management in Las Vegas. “FTX used customer deposits to create an FTT token, which was then used as collateral. When Coindesk reported that a large portion of Alameda’s balance sheet was FTT, Binance, a major crypto trading firm , liquidated its FTT allocation, leading to a “race to the bank”. Since then, all FTX assets have been frozen by the SEC. The concern for the rest of the markets is that this could be another Lehman Brothers, or as Larry Summers (former US Treasury Secretary) described it, an “Enron moment”.
The reason the FTX situation is disturbing the crypto markets is that it is not an isolated case.
“The collapse of FTX International is the latest in a series of bad news for the crypto world,” says Holly Verdeyen, partner and head of defined contributions at Mercer in Chicago. “Each isolated incident (3AC, Celsius
However, despite all this bad news, the enthusiasm of investors, especially among young investors, does not seem to have dissipated. Major pension plan service providers, such as Fidelity, have begun offering cryptocurrency investments to 401(k) plans. Does FTX offer a cautionary tale for participants in these plans?
“I would advise any investor to hold their money until the situation calms down,” says Rhett Stubbendeck, CEO of LeverageRx, Inc. in Omaha. “It is important for investors to understand that their favorite exchanges could be in trouble and could potentially cause them to suffer losses. It is also important to keep a close eye on currency prices and follow the charts.
Some finance professionals aren’t afraid to be direct.
“Stay away,” says John M. Nowicki, president of LCM Capital Management in Chicago. “Your retirement funds should be managed in stable and diversified real estate investments. My 35 years of experience have taught me never to get involved in anything that’s unregulated, has no barrier to entry, and my 20 year olds think it’s cool and the fact that I don’t know what I’m talking about.”
The US Department of Labor issued this warning regarding cryptocurrencies on March 10, 2022:[P]Local trustees charged with overseeing these investment options or authorizing these investments through brokerage windows should expect to be questioned on how they can reconcile their actions with their duties of care and loyalty to the light of the risks described.
This warning applies primarily to plan sponsors, but plan participants often seek to make their own decisions.
“For the average retirement saver, especially those in the fifty-plus group, I would suggest following the advice of the Department of Labor, which is to not expose yourself,” Cody says. “For young investors, I generally recommend no more than 10% of assets in alternative investments and, within that allocation, no more than 20% in an alternative, in other words, a maximum of 2% in crypto- currencies. Besides the volatility and lack of transparency of information on many exchanges and platforms, there is a portability issue. With few exceptions, cryptocurrencies are not held like traditional plan assets in most trust or custodial accounts, so you may not be able to transfer the assets if you decide to move your IRA or roll over your 401(k).
The allure of cryptocurrencies may blow your mind. The marketing of these instruments is certainly designed for this. Even without the fall of FTX, these mysterious assets contain both known and unknown risks. If you’re interested in investing in it, it’s best to keep your eyes peeled.
“When it comes to crypto investing, I would advise the typical retirement saver to proceed with caution,” says Oberon Copeland, owner and CEO of Very Informed in Sandy, Utah. “While there are certainly potential benefits to investing in cryptocurrencies, there are also risks to consider. On the one hand, the value of cryptocurrencies can be very volatile, which means that investors could potentially lose a lot of money in a short time, and the lack of regulation in the cryptocurrency market means that investors can fall victim to fraud or other unethical practices. Accordingly, I believe retirement savers should only invest in cryptocurrencies if they are willing and able to lose their entire investment.
A sudden and extreme loss is a risk you may already know about. But other types of risk exist, and this is where the FTX exchange story hits home. Unlike other types of investments, cryptocurrencies are usually tied to a singular exchange on a level similar to locking your phone in a way that prevents others from using it.
“Remember where you put your coin keys,” says Paul Tyler, chief marketing officer at Nassau Financial Group in Hartford. “Really! An acquaintance of mine has put significant retirement assets into bitcoin for the past five years. Unfortunately, he passed away and the family does not know where the wallet is. Some of these currencies will definitely recover in value and will turn out to be valuable assets. We just don’t know which ones. Make sure you don’t throw away your lottery ticket just yet.
Eyes wide open. Easily visible key.