This week Sam Brinkman-Fried (SBF) was arrested by Bahamian authorities, and is awaiting extradition to the U.S. at the request of the United States government based on the accusations of fraud following the collapse and bankruptcy of his FTX crypto currency exchange.
Sadly, history repeats once again and small and amateur investors have still not learned the very old lessons that others have. “Do not put all your eggs in one basket” may be an antiquated adage, but it still works wonderfully when applied to investing. It means diversify your investments, namely invest in a variety of securities because if disaster occurs with one, the rest will likely be fine.
For those investors that did not heed the diversification advice and put all their money in crypto, and moreover held that crypto in the FTX crypto exchange, they were wiped out, at least for now until U.S. regulators try to reclaim some of the money. The author of this recent article in Mother Jones interviews many investors who either lost everything, or a large percent of their assets.
There are many people that are avid crypto-currency fans, but even die-hard crypto fans are taking a dramatic risk if more than 5% of their total assets are in crypto-currencies. This advice has nothing to do with crypto, it is simple math: if that 5% of your total investments are wiped out by some unforeseen event, you still have 95% left and your life will be relatively fine.
Nearly every financial advisor will tell you to diversify, in fact if they do not, they likely are violating any number of rules, regulations and best practices that are long established in the investment industry. These days even the smallest investor can get a financial advisor and pay modest one-time, or hourly or retainer fees. It is a myth that one needs to be a millionaire to get quality financial advice. In the first meeting after hiring your advisor, diversification will be one of the topics your advisor discusses for sure.
There are other old lessons that today’s investors need to learn or relearn. For example, crypto currency investing itself is still very much in question. Some of the worlds most successful investors do not believe investing in crypto currency is sound. One basic test for a worthy investment is consumer use, and given that very few use crypto as a utility, rather crypto is only purchased for speculation means it fails the consumer demand test. As an example, no one questions that the products of McDonalds, Netflix or Tesla are used every day by consumers.
If you are still willing to take the crypto risk, and you use a custodian to hold onto that crypto and cash, make sure that custodian is sound, reputable and regulated. For example, FTX was only three years old, started by a 27-year-old, and was not regulated in the United States by the typical regulators such as the SEC, Finra, or the FDIC. On the other hand, Fidelity, one of the oldest financial institutions, is a heavily regulated firm that allows Bitcoin and other crypto currency investing. Those using FTX to buy their crypto can’t even get their cash out now, something that would nearly be impossible to happen at firms like Fidelity, and other older house-hold name firms.
Investing in new technologies, companies, and concepts can be very exciting and financially rewarding. However, make sure you remember the old, basic lessons to mitigate your risk.
MyPerfectFinancialAdvisor is the premier matchmaker between investors and advisors using personalized data, proprietary algorithms, and deep industry experience.