Crypto Fallout

November 17, 2022

Something tells me you are already familiar with the sudden collapse of crypto exchange FTX and the related fallout. It has certainly received its fair share of media attention. How could it not, when a $32 billion company seemingly vaporizes overnight? I’ll leave the summary of what happened, how it happened, and what is likely to happen to the skilled journalists covering this in detail (I’ve enjoyed the New York Times, Dealbook, Semafor, Michael Levine at Bloomberg, and I’ll definitely be waiting for the Michael Lewis book and associated movie on this collapse).

I thought it would be more useful to share a few things this event has made me remember. These are four simple lessons I’ve accumulated over my years of investing but at times, they fade ever so slightly from memory. And then, when an event as jarring as this occurs, they come right back to the forefront and reinforce what type of investor I strive to be. Hopefully they will do the same for you.

1. ) Know what you own – in my view, investing is not an exercise to be taken lightly. It’s a lifelong process that requires rigor and discipline. A key part of the discipline for me (a non negotiable in fact) – know what you own. What do I mean by that? Invest in securities and companies you can understand – those with observable inputs, underlying cash flows, trustworthy managements, surrounding regulation, audited financials, valuable services, products and innovation, and many other items you can dig into, research, and come to understand.

This lesson/discipline is the reason I have never gotten into crypto currencies or the related exchanges. I didn’t (and still don’t) know how to value the coins. There are no observable inputs to value (such as cash flows, underlying business operations, etc – see list above). Rather, they are worth what the next person will pay you for it (trading like a collectible, like art or baseball cards). For me personally, I felt it was sentiment driven and not something I could “come to know.” Many will disagree with me and that is completely fine. We all get to choose our own path. And for me, knowing what I own (and why I own it) is non negotiable.

2.) No investor knows anything for sure – it’s easy in investing, just as it is in sports or entertainment, to idolize certain individuals. Most “celebrity” investors who appear in the media do so with endless confidence and conviction. They speak in absolute terms and their hero persona can lead you to believe they may actually have a crystal ball, that they can see around corners, and will use that to generate outsized returns indefinitely. In reality, no one knows anything with 100% certainty.

As Scott Galloway, one of my favorite thought leaders says, no one is a smart as you think or as dumb as you hope. Most of us, even the famed investors on TV, are somewhere on that continuum at all times. Timing, luck, or momentum can make it seem otherwise. And yet, no one knows anything with 100% certainty – but some may know just enough to be dangerous. Be appropriately skeptical of what you hear – and do the work.

3.) You are your best regulator – Much will be written about the inadequate regulation of crypto currencies and the related exchanges like FTX. Regulation is essential to our economy and investing on many levels and it undoubtedly can protect individuals from tail risk events (such as the FDIC covering losses for depositors of failing banks in the Great Financial Crisis). However, an event like the one at FTX makes me remember that I shouldn’t (and sometimes can’t) rely on a government agency or any other party to be my first line of defense.

The great news is you can be your first line of defense. If it doesn’t sit right with you, if it doesn’t make sense, if it seems too good to be true, if it is filled with marketing blitzes and urgent directives, if it is all your friends, family, and neighbors can talk about, stop. Slow yourself down. Think it thru. Ask (and get answers) to every last question – even the dumb ones. Come up with a few more questions and ask again. Slow down again – way down. And then, only then, if it sits right with you, proceed.

4.) Find your definition of enough – Investments that go parabolic (like various crypto currencies did last year) can be very tempting. We are all human and we can all suffer from some level of “fear of missing out” and greed when we see and hear about successful investments. We can’t resist jumping in – at any price!

A way to successfully combat these feelings is realizing that your current investment plan (and perhaps even your current invested asset level) is “enough.” It’s not easy and it’s unfortunately not our default setting as humans. So again, when you feel that temptation, just pause. Take inventory of what you have and determine if you can live a happy life without reacting to the latest investing trend (at least until you’ve done your homework). Odds are you can. Give it a shot and find out

Without a doubt, the events at FTX are very meaningful and there will be considerable fallout effects for years to come. I don’t like that it happened, I don’t wish this unwinding on anyone, and I empathize with those that have been wrongfully harmed. However, I am grateful for the prompt to remember these lessons that have always served me well. I anticipate they will continue to do so for years to come.

There’s always a lesson to be learned,

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio

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