The FTX Dumpster Fire: A Harsh Investment Reminder

Written by the William Allan team · Published 2022-12-16T12:00:00.000Z

For most of us, the motivation to invest is the same… grow our money. Unfortunately, when seeking to expedite that growth, many are destined to play a supporting role in FTX-like stories. Typically, we attribute success to picking the right investment; however, avoiding potentially flawed opportunities is just as important. The FTX debacle serves as a reminder or even an education to invest appropriately.

For the past few weeks, the information has been coming fast and furious on what led to the bankruptcy filing of the cryptocurrency exchange darling, FTX. Whether it’s the founder, SBF (Sam Bankman-Fried), tweeting, appearing on camera at a conference(s), or the astute new CEO charged with dissecting this dumpster fire of a company, the explanation(s) are plenty. Let me see if I can simplify what transpired so we can move on to the real lesson here.

By this article’s December 16, 2022 publication date, the SEC had alleged that Bankman-Fried diverted FTX customer funds to Alameda Research and concealed the resulting risks. Its complaint also described Alameda’s reliance on FTT and other illiquid assets as collateral. After Binance announced plans to liquidate its FTT holdings, customer withdrawals accelerated. FTX paused withdrawals on November 8, 2022. These were allegations in the SEC’s December 13 complaint, rather than a completed adjudication at the time of writing.

In simple terms, FTX could not meet its customers’ withdrawal demands. The problem went beyond a token’s falling price: customers’ assets had not been safeguarded as represented.

Historical update added September 10, 2026: In March 2024, Bankman-Fried was sentenced to 25 years in prison following convictions arising from fraud involving FTX customers and other parties. The Justice Department’s sentencing announcement provides the later outcome. The investing discussion below retains the original December 2022 perspective.

The existence of an exchange, token, or an enthusiastic following does not establish that an opportunity is sound. Digital assets differ substantially, and neither popularity nor novelty substitutes for understanding their structure and risks.

I have been approached by many folks seeking my opinion on crypto. And while my tone varies depending on with whom I am conversing (I don’t like to hurt people’s feelings), the main points are always the same:

A Thesis Is Not a Guarantee: An investment thesis should identify the source of expected value and the conditions that would disprove it. Public-company prices can diverge from underlying business results for long periods, and operating companies can fail. Digital assets use a different analytical framework and carry distinct technology, custody, liquidity, regulatory, and valuation risks. Neither category offers a certain outcome.

Fear Of Missing Out (FOMO) Is Not A Rational Thought: With the FTX implosion, the question most asked on TV is, “How could this happen.” Most likely, this is directed toward the major players (i.e., SBF), but individuals should answer it. And for many people, FOMO is the answer. Maybe a neighbor or a work colleague made a small fortune as a bitcoin early adopter. You get wind of this, and FOMO can push you to buy without assessing the price or the risks. A reasoned investment thesis still can be wrong, but buying simply to keep up with someone else gives you little basis for deciding whether to sell, buy more, or hold. FOMO is driven by greed, and anything done for greed generally does not end well.

Invest In What You Know (Or At Least Can Understand): We are dealing with real hard-earned money. An investment decision needs a clear thesis and an understanding of what could go wrong. A conventional operating company can be analyzed through products, customers, financial statements, cash flows, and competitive risks. Digital assets require a different framework. Familiarity alone does not make any investment safe or suitable, and a clear thesis does not assure success.

Crypto is not the first new shiny object that has garnered the public’s interest resulting in early adopters realizing sizable gains. And it’s not the first to burn many speculators. Over time, it may very well become something and enrich many folks. And that’s great for them.

Last time I checked, there isn’t any law that says we ALL need to get in on the “next best thing” every time it comes around. It’s okay if others make some money and you don’t. We can control the diligence, position size, diversification, and risk limits applied to an investment decision, but none of those steps guarantees a favorable result. Unfortunately (or fortunately), FTX is a harsh reminder of what could happen when straying from this path.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.