As news about the financial collapse and bankruptcy proceedings of the crypto company FTX and its affiliated entities rolls in we find ourselves asking the question why were so many people doing business with FTX? It is easy to understand (but not condone) businesses that worked on the principle that Bitcoin and the rest would keep going up forever and ever. These folks were overleveraged, crypto hedge funds that were not hedged against risk, and folks addicted to the thrill of crypto profits who did not know when the party was over. Now as more and more information comes to light, we need to be forgiven for wondering just how much of the high end of the crypto world has been propped up by multiple levels of incestuous financial interrelationships. Was this just all about greed or is there more to the story? Why were so many people doing business with FTX?
Who Has Lost Money in the FTX Mess?
Forbes put together a list of who we know so far to be the biggest losers in the FTX debacle. The biggest loser from the collapse of FTX will be its founder, Sam Bankman-Fried who Forbes estimates has lost about $26 billion and who has stated publicly that he has virtually nothing left. Venture capital investors who coughed up $1 billion in June of 2021 are Paradigm, SoftBank and Sequoia Capital. Shortly thereafter Tiger Global Management, the Ontario Teachers’ Pension Plan and the investment firm Temasek owned by the Singapore government added $421 million. This was when FTX and the crypto world were still going up. By January of 2022 crypto was heading down and FTX attracted another $400 million. The $1.8 billion in losses by these companies is based on the dollar amounts that they invested in FTX. At the crypto peak in November of 2021 these investments could have been valued much higher and now several of the investors have written off their investments as having $0 value. In addition, FTX US got another $400 million in January in its “series C” round. These investors include billionaires Daniel Loeb, Paul Tudor Jones, and Israel Englander, as well as SoftBank and Tiger Global Management.
Celebrities and Employee-Investors in FTX Lost Money
About three percent of the FTX valuation pool belongs to FTX employees, 20,858,124 shares. Back at the peak of FTX value this was worth almost a billion dollars. Tom Brady and his “ex” Gisele Bundchen had about 0.15% and 0.09% of FTX in 2021 which comes to a loss of $45 million and $25 million respectively. Their losses could actually help them in their celebrity lawsuits in that they probably believed the good things they were saying about FTX. FTX employees who received tokens as reimbursement or bonuses can be forgiven for believing in the company as its valuation grew but, as investors, they are as much at fault as the rest for believing in the invincibility of the crypto world.
Reasons for Investing in FTX
For a lot of serious investors the crypto world has always been a puzzle. Folks have compared Bitcoin and the rest to the Dutch tulip bulb frenzy centuries ago where individual bulbs with intrinsic value of pennies sold for the equivalent of hundreds of dollars. As people got rich during this time others sought to imitate their success and the value of the tulip bulb market rose and rose until one day it crashed. Crypto true believers have always countered by saying that crypto is the safe haven when inflation wipes out the value of the dollar and other currencies, a refuge in times of war and social unrest, and a way to do business out of the prying eyes of governments and regulators. Unfortunately for the crypto world in the last year the dollar has gone up as the Federal Reserve has raised interest rates, inflation has raged, and crypto has taken a nosedive. Calls for crypto regulation are the norm today as those who have lost money point fingers, claim fraud, and look everywhere except back at themselves for whom to blame. Big venture capital companies have written off their losses and the experience and are moving on as they are used to experiencing occasional losses in return for occasional huge gains. Teachers pension funds are another matter and need to be called to task for exposing their retirement capital to unnecessary risk. The ultrarich who lost money in the FTX mess probably had too much money and too little sense anyway.
The Enemies of Investors
One might wish to say that the crypto world is rigged and that is why people lost money but all investments are risky. This is because the eternal enemies of investors are fear and greed. As Warren Buffett famously advised, investors need to be greedy when the market is fearful and fearful when the market is greedy. The way that investors like Buffett profit when the market bottoms out is by understanding how an investment makes money and will do so for the long-term future. Then they use forward looking earnings as a guide to whether or not the investment is favorably priced compared to its current market price. The problem for investors today with FTX and the rest of the crypto world is guessing where the bottom will be on one hand and then where in the worlds of DeFi, the Metaverse, and NFTs various tokens will have predictable long-term value.
Why Were So Many People Doing Business with FTX? – SlideShare Version