Five Lessons From FTX

Jan 13, 2023

The collapse of FTX is just one of the big financial debacles in recent history. Yet, it is a fresh reminder of some very critical lessons for investing. 

It’s painful when people lose money in scams like that. That doesn’t mean we should fear the markets or investing. Rather learn the lessons quickly, be reminded to invest smarter, and move forward. 

Here are five lessons from FTX: 

  1. Size Doesn’t Matter

Like Lehman brothers, FTX once again proved that size does not matter when it comes to performance and strength. 

Anyone can whip up some glossy marketing materials and a website in a couple hours these days. That does not directly transfer to financial strength. 

Nor does size. There are plenty of big corporations losing billions of dollars each year. Or like FTX, have gone from being valued at tens of billions, to going bankrupt in a very short period of time. 

It is unlikely that this will be the last big failure in this cycle either. Binance, which is heralded as the world’s largest crypto exchange, also just lost the backing of the accounting firm which had posted on its proof of reserves. Binance suffered a run of $6B in withdrawals in just 36 hours before that. 

  1. It Will Always Catch Up With You

There are phases of markets in which many get caught up in questionable practices. It is contagious. People say, “well everyone else is doing it.” “No one else is getting caught or punished.”

That’s until they do. Sooner or later illegal and even gray area practices backfire. Then it is too late. 

You can bet FTX’s founder would do and pay anything to get out of jail. 

  1. Be Smart About Who You Invest With 

Who you invest with is most important. More important than the sector or individual assets. Poor or criminal managers will ruin the best opportunities. Whereas a great manager can outperform with modest opportunities. 

Look at the individuals you are investing with. What are their lifestyles, ethics, and values? Are they headed for a disaster, or getting healthier? 

  1. Be Sure Your Interests Are Aligned

If those managing your money and investments are getting paid first, or make all their money regardless of performance and how much you get, that should be a red flag. They have no motivation to put you in the best investments or manage them well. It’s just about where they get the most fees and commissions. 

You also want to know what lock up or redemption period there is. What is your access to money in an emergency compared to the benefits of going longer? It’s always a balance. 

Yet, a run on withdrawals is what crushed FTX, and now potentially Binance. This has even become an issue for Blackstone and Starwood, who have some under the scrutiny of the SEC for their limits on withdrawals. 

You may look for a balance in returns, and perhaps a 90 day call period. 

  1. Common Sense & Fundamentals Trump Trends Every Time

It can be fun and exciting to jump on new trends. Most of which we know will be fads. If you put $100 into bitcoin there was a lot of upside potential, and not much to lose. If you put 30% of your net worth, or $1M in, then you are in trouble. 

By all means have a play fund. A little bit of change you can just have fun making bets with. Just don’t confuse those things with real investing. 

Stick to the timeless principles of investing when you want to be able to rely on your financial future. 

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund.

Image by Xandra Iryna Rodríguez from Pixabay