We all understand that trust is the foundation of any lasting relationship, whether in our personal life or business. But trust is the bedrock for so much more than that. The entire world depends on trust to function. Without it, there is only anarchy. Trust is required for financial markets to function, for governments to govern and for nations to conduct trade. Conversely, when trust breaks down, everything falls apart. During the GFC when institutions were no longer able to trust each other, credit markets froze, and banks collapsed. It brings me to the current crisis in crypto markets.
Billions of dollars have been lost in the latest crypto debacle. The exchange company FTX has been found to have an $8b hole of missing funds after a run-on the platform by investors withdrawing funds exposed the lack of reserves backing the business. The flow-on effects have been swift with more to come in a sector that was already under siege. We hold no crypto in our portfolios as it is impossible to value and justify purchasing. We are unlikely to invest directly in crypto currencies anytime soon. Yet many of the world’s wealthiest and most well-respected investors did and many invested directly into FTX itself, including Sequoia Venture Capital, Tiger Global and SoftBank, all of them losing more than $100m each. It raises questions about the due diligence processes that these funds have in place.
But trust in financial markets matters a lot and the current situation and subsequent contagion with other companies linked to FTX and Alameda Research is a massive setback for the industry. It will be a critical turning point for the industry and the adoption of the technology as new regulations and compliance will now be forced upon it to protect investors and participants in the future. Those that embrace this side of the equation will be best positioned to prosper long term. Where you’ve got companies acting as custodians for an asset on behalf of investors, even crypto currencies, there needs to be trust that those assets are in fact being held. If everyone was doing the right thing, most of these issues would never eventuate. But they don’t, which is exactly why robust governance and regulatory processes matter so much.
That said, it doesn’t mean that this technology is not set for incredible growth that changes the world. I believe that it will. It’s just too difficult to invest in at this early stage. I remember the early phase of the internet and tech stocks back in the 2001 tech bubble. We didn’t go anywhere near it back then simply because not only was there no profit but also no revenue for many of those companies. Fast forward a decade or two and many of the tech companies from that era have grown to become some of the best companies in the world. But many didn’t. This will likely be the case with crypto style companies and assets. In my opinion, it is generally far too difficult to invest in today and most will fail but that doesn’t mean that in 10 years some won’t be great companies, making a profit and operating in the mainstream. In these situations, regulation does not equal bureaucracy but instead is the bedrock of trust on which the industry will grow.
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