The collapse of FTX this week, which is 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.
A lot has been written about the collapse of FTX and the highly speculative investments they made with client’s money that ultimately led to its downfall. Interestingly, a lot of high profile athletes and other well-known people were caught up in the debacle.
There were also companies that got caught in the collapse including Telstra Ventures and Sequoia Capital. Despite recognising the high risk nature of such investments, venture capital companies are often caught in a ‘dammed if you do and dammed if you don’t’ situation, as they appreciate the need to invest in growth areas without leaving their run too late.
While Bitcoin is down around 78 percent in the last 12 months, investors are continuing to hold on to the hope of a return to better days of rampant speculation. Unfortunately, the collapse of FTX had created a huge hole and further increased the uncertainty in this area. It has also raised the question again of whether cryptocurrencies are just one big Ponzi scheme that will leave investors very disappointed.
The lessons 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. It is important for all investors to remember that you should only invest money in highly speculative markets that you can afford to lose.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au