And Then There Were None

When we wrote the article about FTX a couple weeks ago, we all had hopes that the contagion would be contained and sorted out in a couple weeks.  Unfortunately, that was not to be.  In the last couple of weeks, the contagion and losses have multiplied.  This morning my twitter feed lit up with information about BlockFi (crypto exchange) filing for bankruptcy.  There are up to $10 billion in liabilities, and only $256 million in known cash reserves.  As with FTX, no one is certain about who/how many have/will lose assets during the bankruptcy, or how long it may take to sort it all out.  It is curious to note that BlockFi was “bailed out” by FTX a few months ago, with assets that were largely nonexistent, apparently.  Meanwhile, precious metals investors continue to sleep soundly while holding tangible assets in reserve.

I have long had a suspicion that crypto could be used nefariously by the powers that be, to limit inflation by enticing capital into the sector and then destroying it.  In the same way that mechanics spread kitty litter (or other similar substance) to soak up excess oil on the floor before throwing it away, crypto could mysteriously vanish somehow after being purchased, removing dollars from the economy.  To some this might seem an unfounded conspiracy theory; perhaps it is.  There are enduring tales, however, that Bitcoin was the offshoot of technology developed by US Intelligence agencies.  Many make the case that “Satoshi Nakamoto” (supposed inventor of Bitcoin) is not a real person, but a name created by the agency that invented cryptocurrency.  Even if the conspiracies are true, it might be 50 years before we would know.  What we do know, is that $billions in investor capital have vanished.

Granted, $millions can be traced to political campaign donations, and graft such as the purchase of luxury real estate properties of FTX directors and family members.  But that still leaves $billions unaccounted for.  Did somebody spend those $billions in a traceable way, or have they vanished into the ether?  At least with the Bernie Madoff ponzi scandal, there were $billions in recoverable assets that were returned to the victims of the scam, and 80% of losses have been recovered.  In the case of FTX and BlockFi, it is not clear that even the company founders know where the bulk of the money is/went.  Minus a few hundred $million for illicit campaign contributions and island mansions, there doesn’t seem to be an electronic or paper trail leading to the remaining $billions gone missing.  Ironically, the bankruptcy of BlockFi was said by Mark Renzi (BlockFi financial advisor) to be an important step towards protecting investor assets. 

Much of the challenge for BlockFi corporate leadership is tied to recovering assets supposedly held by FTX, which is in the midst of it’s own bankruptcy.  It will likely be an extended time before FTX issues are known or resolved, which makes the estimated timing and likelihood for the solvency of BlockFi difficult to project.  For many invested in the crypto space, it is hard to imagine this news coming at a worse time.  Massive crypto exchange “Coinbase” is also facing financial difficulties amidst the carnage in crypto, and has warned investors that they could lose their cryptocurrencies if Coinbase files for bankruptcy also.  They have already lost over $75 billion in market valuation as a company, simply from the loss of value in their crypto holdings.  Those invested in Coinbase stock (symbol COIN) have lost 84% in less than a year, depending on when they purchased it.

The CEO of FTX, Sam Bankman-Fried (SBF) was referred to as the “JP Morgan of crypto”, when bailing out BlockFi.  Few assertions could be further from the truth.  With both (and several more related entities) entangled in bankruptcy, a reconsideration of this assertion is in order.  JP Morgan built his empire on trust, and tangible assets.  The investment bank that bears his name, owns and manages one of the largest gold vaults in London, and serves as custodian for the gold held there.  JP Morgan testified before Congress in 1912 that “Money is gold - and nothing else.”   He considered all other financial instruments as a form of credit - fraught with counter-party risk.  That is, the value of paper financial assets was dependent upon the other party to produce or pay back what the paper represented.  Physical gold, however, has no counter-party risk.  Physical gold in a vault exists, and has value.  Period. 

To suggest that the purveyor of what may be the largest investment fraud in history, is somehow likened to the 20th century business tycoon that bailed out the financial system, is far-fetched.  SBF has weakened confidence in the financial system in a short amount of time, whereas JP Morgan strengthened confidence in the financial system in a similar amount of time.  Interim FTX CEO John Ray recently said, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”  SBF promoted the idea of investments that were intangible and ethereal, while removing cash from investors to purchase tangible items for himself.  JP Morgan owned and promoted the idea of investments that were tangible, and stabilized the financial system by pledging his reputation and assets for the betterment of all. 

If you are someone that has lost money in Crypto, or has a personal stake in FTX, BlockFi, or related entities, I’m sorry to hear that.  Perhaps there will be some recovery of assets lost to fraud, or some recovery in the price of some cryptocurrencies.  Sometimes it seems like the government opposes private crypto, and prefers to promote their own CBDC.  In any event, it might be a long slog from here to recover lost value.  But we don’t have to make the same mistake twice.  While it may be fun or exciting to get involved with the newest and latest investment opportunities, it is better to commit only small amounts of capital until a good track record is established.  You, (or someone before you), has worked hard for the resources you have accumulated.  It is much safer to entrust a greater portion of your savings to an asset that has been preserving value for thousands of years - such as physical precious metals.