It has been a precedent to emulate the strategies leading to creation of success stories in any business or entrepreneurship. The failures in any sector are hardly given any attention as it is normally believed that failures would breed failures. However, it’s not so. Failed ventures, businesses or entrepreneurship leave a solid guidance document for others to emulate and be insulated against the possibility of any failure.
Precisely, generally speaking, it’s not a success story alone which can be a motivating factor for others to tread the path of success in their life cycle, but a story of failure can serve as a constant reminder about the causes that can lead to failures. Once causes of failure are known, it becomes easy for others to remain alert and avoid repeating the mistakes which others did.
When we talk in the context of investment matters, investors generally show herd mentality and follow success stories to make quick bucks. Otherwise, the investors who make glaring mistakes while staying invested in the markets and lose their hard earned money serve as a tested investment strategy. The fellow investors should have an eye to pick the wrongs in their investment strategy and subsequently avoid repeating them.
A case in point is cryptocurrencies. This kind of investment is a story of failure. One needs to understand the cause of failure as it serves as an eye opener for investors who have been blindly boarding the cryptocurrency platforms.
Today, investment in cryptocurrencies is yet again a hot subject of discussion world over. But for all bad reasons. At a time when chances were emerging ripe for including cryptocurrencies in mainstream investment portfolio, at least as a portfolio diversifier, the fall of FTX crypto exchange has caused disillusionment among its investors for suffering unprecedented levels of losses.
A few weeks back, FTX until recently considered as one of the most blue-chip names in the crypto market filed for bankruptcy, leaving millions of crypto investors in a state of shock. Billions of dollars have been wiped out in the mayhem in global crypto markets.
Since millions of young investors are actively considering the investment in cryptocurrencies for magical returns, it is imperative to force their attention towards the dangers this kind of investment carries through this failure story.
So, let’s peep into the events that led to the rise and fall of the FTX platform. The rise as well as the fall has been steep, leaving some important investment lessons for all of us as far as investment in cryptocurrencies is concerned.
FTX, established in 2019, created a niche in the crypto ecosystem as one of the trusted names in the digital currency exchange, where trading of digital ‘assets’ such as bitcoin, dogecoin, ether was done seamlessly and without any hassles.
Its marketing strategy was so powerful that it successfully lured millions of investors, especially the young one, into the crypto investment for making quick bucks.
Celebrity endorsements and major sports sponsorships was the heart of its strategy to woo an army of investors into the virtual currency investment ecosystem. Precisely, the exchange shot into international prominence in a span of few years through aggressive marketing strategies and charging low trading fees as compared to its competitors.
Even as there were some crypto platforms struggling to remain afloat and the market was showing a downward trend in the beginning of this year, FTX stood firm.
It even bought some of its struggling competitors in the trade. However, FTX soon saw its spine bending owing to running on its platform as its digital token, FTT, was losing value.
Basically, it was CoinDesk, a crypto-focused digital media website which leaked the balance sheet of FTX-owned crypto investing firm Alameda Research. It revealed that Alameda held a large amount of tokens (FTTs) created by FTX. “And though FTT held a certain market value, if the price were to drop, Alameda would be at risk of insolvency,” mentioned CoinDesk in its report.
FTX-minted digital tokens were used by the exchange (now in crisis) to lure people to use their services by offering FTTs as rewards to investors. Notably, the connections between Alameda and FTX were not yet public.
After CoinDesk pushed the panic button, Binance, a rival crypto exchange of FTX, announced on Nov. 6 that the company would sell off all its FTT tokens. This added fuel to the fire and the price of FTT dropped sharply. As the price dropped, panic gripped many FTX customers and they moved to withdraw their assets from the platform. The situation triggered a run on the FTX and billions of dollars poured out of the platform. This forced the exchange to stop allowing customers to take money out of the platform. Now reports indicate that FTX is facing a huge gap between what it owed and what it could pay out.
The collapse of FTX is a perfect storm and questions on the viability of the crypto ecosystem will remain there as it would be very difficult to find appropriate answers to these questions.
At a time when crypto markets were booming in India and people were busy in selling their other assets for investing in cryptocurrencies, the Reserve Bank of India (RBI) highlighted the risks posed by these virtual currencies.
Last year, the RBI didn’t lose time to denounce cryptocurrencies not as a currency, asset or commodity; with no underlying cash flows and no intrinsic value. Even the apex bank called cryptos worse than Ponzi Schemes; undermining financial integrity; and evading government controls to bypass the regulated financial system.
Today cryptos are collapsing with major crypto currencies including Bitcoin and Ethereum losing value. A report worth quoting states that “Bitcoin, which hit over $63,000 in April 2021, is now down nearly 75% from that level. Ethereum, which hit a high of around $4,800 in November, 2021 has fallen 73% since. Binance Coin, which hit a high of $670 in May 2021, is now down by 58%.”
Here the RBI deserves kudos for picking the threats which these cryptocurrencies were posing to the stability of the financial system. It’s a laudable effort when top management of the apex bank including none other than its Governor Shaktikanta Das took pains to apprise general investors about the dangers loaded in investment in cryptocurrencies.
However, the government’s stand on cryptocurrencies is not in line with the RBI stance. Both are not on the same page. The government’s move to collect taxes on these virtual currencies is ambiguous. Investors are confused and many assume that the taxation is an admission of the legality of virtual assets in India. Now the major dent in the crypto ecosystem caused by the fall of FTX exchange and loss of billions of dollars to the investors globally, it would be interesting to watch RBI and the government on the same page. Definitely, tight regulations on cryptocurrencies on global lines are on cards.
(The views are of the author & not the Institution he works for)
DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.