It seems surreal, like something out of a made-for-tv movie. How could $ billions just vanish overnight, in what appears to be a massive money-laundering operation with geopolitical implications? For those who claim that cryptocurrencies are “digital gold”, the implosion of crypto trading platform FTX highlights the fact that crypto and gold sometimes have little in common. Ironically, gold and silver are moving higher out of a trading range while many holding cryptocurrencies have watched their assets evaporate in ways that are difficult to track. What we know for sure is those at the helm of FTX and related entities have fled to other countries, leaving individuals, corporations, and pension funds holding the bag. In some ways, even the bag seems to be missing as well.
Fraud. Multiple layers of fraud. That’s what happened. American politicians (from both parties) voted to send money to support Ukraine. Ukraine then invested money sent by US taxpayers into cryptocurrencies using the FTX platform, who in turn funneled money back into the campaign coffers of some of the same American politicians who voted to send the money to Ukraine. Makes you wonder what the real motivations were in sending the money to Ukraine to begin with. Granted, this may turn out to be the smallest part of the fraud. And it certainly did not involve every politician, or every dollar sent to Ukraine. But the fact that it happened at all is disheartening to Americans who pay their taxes and try to play by the rules.
Then there is the suspicion about how/why FTX bought so many other entities, if they themselves were in such dire straits financially. One theory being explored is that in many cases, FTX would purchase other firms to which they owed money, to keep from being foreclosed on. They would do this using equity in their firm (FTX), as collateral to make the purchase. An example of this is when they purchased the crypto-lending firm Voyager, while owing Voyager $ hundreds of millions in loans. The purchase price of $1.42 billion was made using inflated equity on FTX balance sheets, some of which were crypto tokens purchased with borrowed funds from Voyager (which FTX never paid back). The purchase of BlockFi is another example of “rescuing” a troubled lender (to which FTX owed money).
Rescuing the bankrupt crypto lenders also kept the devalued crypto tokens from being sold to settle the bankruptcy proceedings, which kept the assets of FTX from falling further in value. But this served only to prolong the inevitable, as word began to leak out about FTX and related entities double-counting assets on their books, and borrowing money multiple times against the same “assets”. But the fraud didn’t begin as the FTX empire was crumbling. It began even as it was being built. A common practice at FTX affiliate Alameda was to front run customer orders for crypto, normally considered both illegal and unethical in most industries. FTX also paid bills in FTT tokens that it created, to all who would accept them. They were thought to connect to the underlying value of FTX, which itself turned out to be a fleeting mirage.
Parallels to Other Scams
Perhaps the most egregious fraud committed in the FTX scandal involved counting client funds as corporate property, and leveraging client assets to purchase additional cryptocurrency reserves owned by FTX. The intermingling of client and company funds caused some to compare the founder of FTX, Sam Bankman-Fried (SBF), to John Corzine of MF Global fame. Others have drawn parallels to the Ponzi scheme carried out by Bernie Madoff, who defrauded investors out of more than $4 billion principal, besides nonexistent earnings. But Mr Madoff carried out his deception for 17 years, before turning himself in. FTX lost upwards of $10 billion in a matter of days. FTX bank accounts also appeared drained, though it is uncertain at this point who withdrew the funds, or where in the world they were withdrawn to. But the money, crypto, and founders appear gone - 130 companies filed for bankruptcy protection on Friday, Nov 11, 2022.
The Gold & Silver Solution
Inflation has begun to come down, while interest rates have begun to rise. But real interest rates are still negative. That is, inflation is higher than interest rates, which means that purchasing power is still eroded over time. Many people understand the fallacies of storing savings in a fiat currency that loses value. Millions have sought protection in the arms of crypto-currency, which claims to be de-centralized and out of the reach of government regulators, and not subject to the vagaries of devaluation. Those same millions of people are now reconsidering the protections offered by crypto, including those who no longer have assets to protect. I sincerely hope many investors duped by FTX will somehow recover at least a portion of what they lost.
A safer way to protect assets outside the corrupt and inflation-prone financial system, is by owning physical precious metals. For thousands of years, gold and silver have quietly protected purchasing power. In the book The 7.0% Solution, this truth is proven by observing that an ounce of silver will purchase a similar amount of grain today, as it would in 200 BC. It holds it’s value in terms of purchasing power, while simply sitting in a vault or other location of your choosing. Gold also accomplishes the same thing, in terms of preserving and protecting wealth and purchasing power over time. Physical metal stored outside the banking system, is not subject to the types of fraud and hacking that routinely plagues crypto currency and crypto exchanges like FTX.
Even sophisticated investors, such as Kevin O’Leary from Shark Tank, were duped by SBF and the business model for FTX. O’Leary was not only an investor, but also a paid spokesperson for FTX. If sophisticated investors and institutions managing $billions were deceived, what hope does that give the average investor to avoid the dangers associated with crypto investing? Increasingly, investors are exploring the 5,000+ year track record associated with physical gold and silver. It can’t be hacked, doesn’t lose it’s luster, isn’t subject to electronic confiscation, and provides financial stability and peace of mind in uncertain times. Precious metals are also among the best performing assets of 2022. My friends at the United States Gold Bureau can help you get started today. Tell them Bill sent you…