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Putting Crypto’s Big Scandal in Context

Time will tell whether the FTX debacle will give way to another in a series of explosive rallies since 2010.

There’s a major scandal unwinding in crypto right now. And it brings to mind the lyrics of the 1972 Jimmy Cliff hit in which he sang: “The harder they come, the harder they fall, one and all.” The words are a good description of the current situation in cryptocurrencies.

Sam Bankman Fried, aka SBF, was the founder and CEO of FTX and Alameda research, high-profile players in the cryptocurrency world. Sam became a multi-billionaire with an agenda. He shunned business suits for T-shirts and shorts; he donated to political candidates and social and environmental causes. He enlisted a posse of celebrities, including Tom Brady, Giselle Bundchen, Larry David, Kevin O’Leary (aka Mr. Wonderful), Anthony Scaramucci (aka the Mooch), and others to promote FTX. The company’s brand was on sports and entertainment stadiums. In early 2022, SBF spent millions on one of the most memorable Super Bowl commercials featuring Larry David. Ironically, David’s comic “I don’t think so, and I’m never wrong about this stuff” was dead right regarding FTX.

Today, SBF is at his parents’ home after a federal court judge set bail at a record $250 million. SBF faces a laundry list of charges from the Department of Justice that could lead to decades behind bars. SBF rose to be one of the wealthiest people in the world before his downfall. The harder they come, the harder they fall, one and all.

Financial scandals are nothing new, but they often push markets to levels that offer compelling value. Time will tell if the latest cryptocurrency debacle gives way to another in a series of explosive rallies since 2010.

Bernie Madoff marked a low in stocks in 2008.

  • Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.”
  • The 2008 global financial crisis exposed Bernie Madoff’s notorious Ponzi scheme in late 2008.
  • In October 2008, the stock market reached a bottom.
  • Bernie Madoff died in jail, serving a 150-year sentence.
  • The Madoff scandal added to the bearish sentiment in the overall stock market.

Theranos generated bearish sentiment and caution in the biotech sector.

  • In 2015, Theranos, a biotech company, began to unravel when a whistleblower raised concerns about the company’s flagship testing device, the Edison.
  • The iShares NASDAQ Biotechnology ETF (IBB - $137.17 0.46 (0.336%)  ) fell from a record $133.60 high in July 2015 to a low of $80.01 per share in early 2016.
  • In November 2022, a federal judge sentenced Theranos’ founder and CEO Elizabeth Holmes to federal prison after a jury convicted her of defrauding investors.
  • In December 2022, Holmes’ partner Ramesh “Sunny” Balwani received a 155-month sentence after his fraud conviction.
  • Theranos impacted sentiment in the biotech sector.

Mount Gox pushed cryptos lower in 2014.

  • Mount Gox was a Tokyo-based cryptocurrency exchange that once accounted for more than 70% of Bitcoin transactions.
  • In February 2014, a hack caused Mount Gox to lose thousands of Bitcoins, and the exchange filed for bankruptcy.
  • Bitcoin fell from a high of $1,135.45 in November 2013 to a low of under $220 per token in August 2015 in the wake of the Mount Gox hack and bankruptcy.
  • Mount Gox eroded confidence and caused bearish sentiment in cryptocurrencies.

The dust has not settled from FTX.

  • FTX’s demise occurred in November 2022, after Bitcoin had dropped from over $68,900 in November 2021 to just over the $15,500 level in November 2022.
  • The cryptocurrency asset class’s market cap fell from over $3 trillion to under $1 trillion.
  • The U.S. Department of Justice has just begun its investigation, filing a laundry list of criminal charges against FTX’s founder and CEO, Sam Bankman-Fried. Two of his inner-circle members pleaded guilty and are cooperating with federal prosecutors.
  • The full systemic impact of the FTX bankruptcy remains in flux.

But … scandal can also create value.

  • The stock market recovered and rallied after the Bernie Madoff scandal.
  • The IBB Biotech ETF recovered and made a new all-time high after the Theranos fraud.
  • Bitcoin and the cryptocurrency asset class exploded to a series of new record peaks after Mount Gox.
  • Time will tell if FTX leads to similar price action in the burgeoning cryptocurrency asset class.
  • The extent of FTX’s fallout — on regulation, the political environment and market sentiment — will determine Bitcoin and cryptocurrencies’ future.