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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Crypto Crash. 11/8/22



  • Regarding my forray into crypto in recent years:

    - I'm glad my 'traditional' investing horse-sense/experience kept me safe and skeptical, meaning I did the necessary due diligence on investments, (counterparty) risks, & exchanges.

    - I'm glad I went w/an exchange that is regulated as much as possible, not the one w/the flashiest ads, bonuses, or stadium naming rights.

    - I'm glad I got all-out in mid-Spring before things turned for the worse. Used that 'fun' $$ to help pay for condo renovations that just wrapped up last week.

    IMO the 'crypto winter' has become an MF Global-reckoning for the crypto industry. Regulation is needed!
  • There is much I don't understand regarding crypto, therefor I don't invest/speculate in it. Over the last handful of years I have tried to educate myself about crypto a bit as my neighbor is a national sales manager for a company now owned by NCR which sells software for among other things, ATM machines at which individuals can purchase crypto for a fee.

    I just read an article that states FTX "invented" a token (FTT) to ease trading on its platform.

    What the heck does that mean or work?
  • edited November 2022
    @Roy, simple explanations can be dangerous. But even with that risk, let me try.

    Tokens are like prepaid store cards or chips on cruises/casinos. There are hundreds of unregulated crypto exchanges and most have their own tokens. That is what FTT was for the crypto exchange FTX (and its related market-maker Alameda). One uses some cryptos to buy exchange tokens (FTT in case of FTX). To promote their tokens, crypto exchanges offer great deals, discounts, favors.

    But at some point, one wants to get off the train and change the tokens back into cryptos or dollars. But what happens if there is a crisis of confidence and tokens become almost worthless? You cannot trade them, and the "house" won't/cannot honor them. The trigger here was (Mr) CZ of Binance who was an early investor in FTX and received lots of FTTs for his stake in FTX. He got upset by something that (Mr) SBF of FTX did or said and CZ threatened to sell $500+ million in FTTs that he had. Well, that crashed FTT, FTX, Alameda, BlockFi (that FTX was in the process of acquiring), and a few others that we haven't heard about it yet (this situation is still unfolding).

    Amazing that in something touted as DeFi (decentralized finance), 2 guys that most haven't heard of before could cause so much damage.

    At the time of Enron collapse, my wife asked why did it matter to her or general public? She worked at a national store chain. I tried to explain that imagine 100s of stores like hers just vanishing overnight - buildings, stuff, inventory. And that kind of loss can impact EVERYBODY and it did.

    Here too, whether one is in crypto or not, disappearance $125+ billions (industrywide loss est) will have an impact on EVERYBODY. For perspective, in a decent IPO year, startups raise $50+ billion in a year and that leads to good markets (a great year like 2021 has $142.4 billion IPOs, a terrible year like 2022 YTD only $7.6 billion). This crypto crash is going in reverse by draining money - industrywide, $125 billion gone!
  • edited November 2022
    Think of the FTT token as the equivalent of airline miles, Starbucks rewards or Disney dollars. Each of these has value because of the public trust in the institutions issuing the "currency" and more importantly the ability of the holders to exchange the "currency" for goods/services.

    However if there was a rumor that Starbucks was going to go bankrupt soon, the value of the Starbucks rewards would plummet pretty much to zero.
  • Thanks, yogi. I still don't get it. Maybe because I don't WANT to. Meanwhile, I'm adding to my watchlist of REAL investments...
  • See, this tulip that I'm holding is actually also a token... and one of the best tokens at that. And just look out there at my great big field, just full of tokens... and look at all the pretty colors!

    You can have some of these... just fill out this form to transfer funds from your bank. With everybody wanting more and more of these they are increasing in value every day! And they can make you rich too, just like me!
  • A great crypto-101 primer, run by the brokerage I use(d) for dabbling in this stuff...
  • Be careful when crypto is being offering in your 401(k) plan.
  • Old_Joe said:

    See, this tulip that I'm holding is actually also a token... and one of the best tokens at that. And just look out there at my great big field, just full of tokens... and look at all the pretty colors!

    You can have some of these... just fill out this form to transfer funds from your bank. With everybody wanting more and more of these they are increasing in value every day! And they can make you rich too, just like me!

    Holy jaypers.
  • I am less sure this is just about crypto, but more about simple fraud.

    it seems SBF used customers assets in the non-US subsidiary as margin for shaky investments in FTT etc, and then CZ pulled the plug on FTT but dumping his entire position. CZ may not have known that FTX and Alameda was so heavily margined against customer's assets, but found out when SBF came begging for rescue.

    US security laws and regulations prevent brokerages from using customer's assets for their own purposes, so it is unlikely without a non-US subsidiary, this would have blown up so spectacularly.

    I had a friend whose son had "a couple of million dollars worth " in Bitcoin on a thumb drive locked in a safe deposit box when Bitcoin was $15000 in 2018. He said the kid was sure it would soon hit $200,000 a "coin" and they could buy a nice yacht.

    I never heard if the kid sold it.
  • Sam Bankman Fraud is sure acting/tweeting rather squirrelly these days, which doesn't exactly inspire confidence to anyone -- especially the investigators.

  • The gobbledygook in the CNBC article is embarrassing. If an external auditor only relies on client flags to review a transaction, the auditor has already failed and their license should be yanked.

    If the money cannot verifiably exist in a bank account as attested to by the bank, it does not exist, period.

  • More dominos falling. This one is BIG BIG BIG .... they're the prime lender for most crypto-lending platforms that generate huge yields to various 'sophisticated' investors[1]. I used them with Gemin Earn to get 8% on 'deposits' lent out as crypto but got out completely in the Spring b/c I was getting queasy not knowing their full counterparty risk exposure -- just before the crypto-winter started.

    [1] I took 'sophisticated' institutional investors to mean banks, brokerages, and other crypto speculators, which the more I dug, the less comfortable I became. Glad I was so prescient!
  • Not to worry - SBF was generous with his political contributions:

    "Sam Bankman-Fried and his fellow FTX executives followed the well-established lobbying playbook of spreading money around Washington — at least $70 million on 2022 campaigns, with three sources saying there was much more in “dark money” — to make friends with whoever ended up in power, regardless of the outcome of the elections.

    Sam Bankman-Fried is a Democrat, and he spent at least $40 million supporting the party."
  • Just wondering if anyone here either invests in or has considered investing in GBTC - Graystone Bitcoin Trust (an ETF)?
  • @Mark, not an owner but I know that GBTC is a trust, NOT an ETF/OEF/CEF. It has high ER, 6-mo holding requirement, min $50K, and may require accredited-investor status. It has high discount now (it was at premium when Bitcoin was hot). Cathie Wood has been buying it for ARK funds (ARKW).

    Grayscale's application to convert GBTC to ETF has been rejected by the SEC several times and a revision is pending.
  • edited November 2022
    Digital Currency Group owns Genesis and Grayscale Investments (ie, GBTC). Per Reuters, they just tried to get a $1 billion loan to help them deal with a "liquidity crunch due to certain illiquid assets on its balance sheet" at Genesis (ie, FTX). I wouldn't touch it with a bargepole anytime soon...given the crypto winter this past few months, you can bet everything is connected to everything else in these big crypto firms.

    Edit: late Friday night...

    "Cryptocurrency investment product provider Grayscale Investments has refused to provide on-chain proof of reserves or wallet addresses to show the underlying assets of its digital currency products citing “security concerns.”

    Something smells fishy here, but I had steak for dinner...
  • @rforno- Since you had steak for dinner it would seem to suggest that you didn't have a lot of money "invested" in this silliness.
  • Old_Joe said:

    @rforno- Since you had steak for dinner it would seem to suggest that you didn't have a lot of money "invested" in this silliness.

    In 2021 I setup an account w/Gemini in NYC due to how heavily regulated it was and low-key. They didn't sponsor NBA teams, run TV ads, or get stadium naming rights. I dabbled in some active-trading of BTC for a bit to see how it compared to futures trading back in the day, and then I parked $50K in their Earn product to get 8.05% interest. In early May of this year, when its interest rate dropped to 6.5% as rumors started swirling about 3AC, I started getting weird vibes in my Spidey-Sense and withdrew everything into (insured) cash in the account. Finally, I pulled 99% of it out to help pay for 2 bathroom renovations that just wrapped up -- but I am keeping the account open for possible future use....I think Gemini will be one of the few folks that survive this stuff given their fairly conservative approach to crypto investing, regulation, and stability. But for now, apart from a tiny slice of BTC that wsa part of my sign-up bonus with them, I hold no crypto assets.

    Bottom line, I took away a modest amount in profits/intrerest for that initial forray into crypto, but the money was far better spent on home improvements -- plus that 'fun' fund (money i could 'afford' to lose speculating, not my life's savings) and some extra $$ coming in from work meant I didn't need to dip into other investments to pay for it, so double-win. It's the same approach I used years ago when I closed my active futures trading account and used the proceeds to pay cash for a new German car. :)

    As to getting in/out of crypto lending: the lessons of the GFC about doing deep due diligence about counterparty risk controls, transparency, and listening to my risk-aware gut feelings paid off for me in several ways. I knew it was risky[1] going in ..... but a lot of people drank the kool-aid, bought into the hype, threw caution to the wind, had TONS of money in these types of products across many often less-risk-oriented ompanies (3AC, Voyager, Celsius, and now FTX), only saw profits but never considered the risks, both obvious and quite possible --- and in the end either lost it all, only retrieved some of it, or are waiting for the outcome of investigations/litigation to be made semi-whole again if even possible.

    [1] I viewed crypto-lending's risk profile akin to junk bonds -- it was an either/or outcome about getting my money back on that speculatative position in my portfolio.

  • Roy
    edited November 2022
    From @rforno, "I think Gemini will be one of the few folks that survive this stuff"

    My neighbor whom I mentioned earlier in this thread who works in the crypto universe stated last night that he believes could be the next to fall.

    He thinks Gemini and Kraken are legit and that Coinbase should be okay.

    He also whole-heartedly states that people should keep their crypto holdings in a cold wallet.
  • Joshua Brown's commentary regarding the FTX fiasco.

  • Uncle Josh speaks truth.
  • edited November 2022
    Uncle Josh speaks truth.
    Not really here:
    No amount of due diligence in the financial services industry can prevent a person or organization from going rogue. You can vet the leadership, you can analyze the balance sheet, you can background-check, you can ask for references, you can obtain signed pieces of paper, you can demand third-party custody, you can vigilantly check in on the website and analyze activity logs, you can do all of these things – but if someone decides to commit a crime, the end result is going to be the same until that crime is revealed. No matter what regulations are in place, we are always – all of us – subject to this risk.
    This part strikes me as utter nonsense with the usual line about regulation and laws being meaningless. And I think due diligence absolutely matters. There were people who did the work on Madoff and Theranos and avoided them like the plague. Greed, laziness because of greed, inadequate regulation and a lack of due diligence seem evident all around.
  • edited November 2022
    Adam M. Grossman with an insightful post regarding FTX and "The Next Buffet."
  • edited November 2022
    BBG reporting that Genesis may seek Chapter 11. This will be HUGE in crypto-land since among other things, their lending operation underwrote many of the popular income-generating products offered at crypto brokerages -- even the more adult and reputable ones.

    Can't say I'm surprised --- Genesis always struck me as the Countrywide of Crypto despite saying the crypto on their yield products were only lent out to 'sophisticated' or institutional investors. (Like 3AC and FTX.)
  • There is lot of opaqueness in the affairs and operations of DCG, the holding company that owns Genesis, GBTC/Grayscale, Coindesk (mews mouthpiece), Luno, Foundry. The founder/CEO Barry Silbert has been totally quiet. DCG was trying to raise up to $1 billion that was assumed to be for Genesis, but it is unclear how its other units, or even the parent DCG, are doing. Even GBTC (Bitcoin trust now trading at 50% discount) has been impacted. News was also that Binance evaluated Genesis but decided not to invest - that is becoming CZ' modus operandi (look at the books, then reject) and people predicted just that knowing what he did for FTX.

    Next domino may be Genesis, may be even DCG.
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