Demise of Crypto Exchange FTX Leaves the Community Shell Shocked

What happened, and what does it mean long-term for crypto?

Ric Edelman: Well, I don't know if you've heard the news. I don't know how you could not have heard the news. But the biggest event in the history of crypto, since Bitcoin was invented in 2009, we're talking 13 years ago - the biggest event in crypto happened this week and it has sent shell shock throughout the crypto community.

FTX, the world's second largest crypto exchange, has announced that the company is broke, that they aren't able to handle withdrawal requests from their crypto exchange platform. Now you've probably heard of FTX. FTX has slapped their logo on the uniforms of umpires in the World Series. They bought the naming rights to the stadium where the Miami Heat plays. They paid $212 million for that. The founder and CEO of FTX is Sam Bankman-Fried, 32 years old and worth $32 billion, at least until this week. And he not only was on the cover of Time magazine, he just recently contributed $39 million to Democratic political action committees, making himself one of the largest political contributors in the country.

And now to help us unwind all of this, to talk about what it means for crypto, the impact on Bitcoin and other digital assets, I'm very happy to bring onto the program Matt Hougan. He's the chief investment officer of Bitwise Asset Management and one of the world's leading experts on crypto. Matt, thanks for joining us on the program today.

Matt Hougan: Thanks for having me, Ric. This was an event that developed very quickly. Even a week ago, FTX was thought as sort of a kingmaker in the crypto industry, one of the largest and fastest growing exchanges. And today it's effectively out of business. It's a remarkable turn of events and executives putting their own personal interests ahead of the interests of their customers. In this case, you know, the way exchanges should work is customers deposit assets and the exchange holds those assets for them in custody. But what happened here was, rather than just holding customer assets, it appears like FTX was lending them out to an affiliated entity who was making risky and illiquid bets. And so when customers wanted their money back, FTX couldn't make good. This is a bad event for the crypto industry. We will get past it. We can talk about what it means short-term and long-term. But make no mistake, this is a negative event for crypto. It's set back the market probably by 6 to 12 months.

Ric: Bitcoin is down over 20 percent. All digital assets are down by similar amounts and everybody's wondering, what does this mean?

Matt: Well, first, from a short-term perspective, there's a loss of confidence in the ecosystem, right? This was one of the blue chip names and it turned out not to be acting in customers’ best interest. Now, it is important to note there's nothing about this event that changes the long-term trajectory of crypto. This doesn't interfere with crypto's ability to move money faster than traditional banks, to program money like software, to create digital property rights. So the long-term journey is still intact, but we're in a volatile period now and will likely be for a number of weeks.

Ric: Those who invested in FTX are going to lose most probably all of their investment, aren't they?

Matt: That's right. As an equity, FTX has to be marked to zero, that's what's going to happen. And this was a firm that was valued at $32 billion. It had recently raised about $1.7 billion in venture capital from some of the largest institutions in the world. All of that money is, of course, gone. And what people are focused on is whether the customers, the retail investors, will those investors be made whole or will they have to enter some sort of bankruptcy process? And that would, of course, be messy. We've had these blowups in crypto's past. We had Mt. Gox in 2014, which lost 7 percent of all Bitcoin. More recently, we've had Celsius Voyager, etc. These are not good. The crypto industry needs to do better. Managers and executives in the industry need to do better. There are some companies that are showing how that can work - companies like Coinbase, companies like Circle. Companies, we hope, like Bitwise, who have been in the market for multiple years, doing the right things for customers. But this is the wrong thing for customers. And as a result, we are seeing these losses.

Ric: We do have to point out a very important piece of fine print here. There are a couple of versions of FTXs and a couple of versions of Binance. Binance and FTX are global companies, and they serve customers who live outside the United States. They created both of those companies, separate businesses, standalone companies that operate here in the United States to serve United States investors. FTX US and Binance US. Neither of those two companies are involved in all of this debacle, are they?

Matt: I think that's exactly right. An important note. FTX US continues to process customer redemptions. The regulated US entity is working as designed. Customer assets appear to be safe. The less regulated international entity has suffered this catastrophic failure. So I'm glad that you brought it up.

Ric: And so what do you think the reaction on Capitol Hill is going to be?

Matt: Well, obviously, it's going to get their attention. They're going to focus on the industry. They're going to accelerate efforts to bring exchanges and brokers into the regulatory perimeter. We need the right level of regulation that provides customer protection. I actually think that will be a net positive for the industry.

Ric: Yeah, I share your view. I think there has been far too slow a pace by regulators and by Congress to provide the consumer protections that have long been in place in the stock market, the bond market, the real estate market, the oil market, the commodities market, etc. Everybody recognizes that's been a weakness. I think, quite frankly, we need a cop on the beat and they aren't there the way that we need them. 

Matt: That's absolutely true. And I hope and think that we will get it in the coming months.

Ric: What, Matt, is the advice you give to investors today? How should people be reacting to the news of this situation?

Matt : Yeah, I think there really are two things to keep in mind. One is that long-term, as mentioned, we haven't changed the trajectory of crypto. We haven't changed at least its destination. It's still going to dramatically change how finance works in America. It's still going to unlock the creative class in new ways, improve our payment system. All of that is intact, but over the short-term, you should expect additional volatility. That means investors need to decide their time horizon. If they're in it for the short-term, they should be wary that this could be a very volatile period. If they're in it for the long-term, they should remember that and not panic and sell at this particular moment. Quality matters in crypto and there are a number of quality service providers in this space and investors should look to work with them and exclusively with them.

Ric Edelman: And of course, Bitwise Asset Management is one of those firms. I'm an investor in Bitwise and also holder of many of the investment funds that it offers. So I have to reemphasize that this is not a systemic issue on crypto. This is something that has affected a specific company in crypto as prominent as FTX has been. This situation happens in every industry. As Matt has pointed out, this is an extraordinarily risky asset class. It is new, it is emerging, it is still uncertain. They're still finding their way. There are huge profit potential opportunities available, which is why you need to make sure you're working with a talented advisor and organization that can help guide you to help reduce or manage those risks as best you can. This development is so momentous that Matt Hougan and I just recorded on Friday a 1-hour webinar for financial advisors. We did it in conjunction with my sister company, the Digital Assets Council of Financial Professionals. The webinar is available for financial advisors for free at DACFP.com, and you can watch the free replay of the webinar as well. It's available at TheTruthAYF.com. It's a 1-hour webinar. Matt and I were speaking to and taking questions from financial advisors all around the country, and you can watch as well what's going on with FTX and Binance. What does it mean for crypto and what does it mean for your investments, that special 1-hour webinar which we just produced Friday, is available at DACFP.com and TheTruthAYF.com. Matt, I want to say thank you for joining us on this urgent conversation. It wasn't something we expected we'd be talking about this weekend, but given the news, I'm really glad that you were here to share with us what's going on and how investors ought to be reacting. 

Matt: Thanks for having me and thanks for continuing to educate the investors out there, Ric.

Ric: That's Matt Hougan. He's the chief investment officer of Bitwise Asset Management. If you would like to learn more about how Bitwise operates, I encourage you to go to BitwiseInvestments.com. And coming up later on today's program, a conversation with SEC Commissioner Hester Peirce and her observations of the FTX debacle. I'm Ric Edelman and we'll be back with more here on The Truth About Your future.