The collapse of FTX, the second-largest crypto exchange, has sent a stark warning to all about the risks in the cryptocurrency space. The collapse also brings to light how far this asset has to go in terms of shedding the label that cryptocurrencies are akin to the Wild West.
Based on early reports, the unravelling of the company began after a news story revealed that FTX founder Sam Bankman-Fried was effectively running a digitised Ponzi scheme. As one of the company's skeptics explained, half of Bankman-Fried's crypto empire (the trading side of his business) was funded by printed-out-of-thin-air tokens.
The collapse of the crypto exchange FTX may prove to be a canary in the coal mine of the easy-money-fueled crypto bubbles. FTX’s collapse has exposed just how little due diligence is actually taking place among investors, who are apparently willing to put large amounts of cash in whatever looks like the hottest new thing and promises — without convincing evidence — big-time returns.
Many investors forget that when the easy money is flowing, financial mediocrities — and even outright frauds — can be made to look like legitimate geniuses. Unfortunately, it often requires only the smallest amount of monetary tightening to expose the grift, and then the party is over.
The lesson to be learnt are those that have been carved in stone for centuries: If you chase big wins, you will eventually have big losses, as history repeats itself.
This postscript is for Des in the "Uneited Stets of Amerca": The words Ponzi scheme is an eponym. What is an eponym? It's a word that comes from the proper name of a person or place. Charles Ponzi became known in the early 1920s as a swindler in North America for his money-making scheme. He promised clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S. as a form of arbitrage. In reality, Ponzi was paying earlier investors using the investments of later investors. While this type of fraudulent investment scheme was not invented by Ponzi, it became so identified with him that it now is referred to as a "Ponzi scheme". His scheme cost his "investors" $20 million before it collapsed. You owe me a Coke, Des!
