This has been a tough year in the market. Thankfully, the rally we predicted in our October 3 Insight has occurred. We have seen negative results year-to-date even still, but it could be worse: you could have put your money with FTX.
For those who do not follow the financial news, FTX is (or, was?) a cryptocurrency exchange, which has collapsed. Client assets are frozen and possibly wiped out. I say possibly because no one really knows where the money is located. FTX’s new CEO is John J. Ray, who specializes in cleaning up bankrupt companies; most famously he was brought in to clean up Enron. He is on the record saying that FTX financial information isn’t trustworthy; in fact, he stated he has never seen anything as bad as this in 40 years of restructuring companies.
FTX’s former CEO, Sam Bankman-Fried, evidently did not see the need to keep records at all. Why would he? He is a 28-year-old wunderkind who had a crypto empire and was living a hedonistic life in the Bahamas in a polyamorous relationship with anywhere from seven to ten people, depending on which tabloid one reads. Who has time for bookkeeping? That is old-world stuff…he was enabling crypto, “the people’s currency.” It was a bold new world, until it wasn’t.
Needless to say, none of our clients had exposure to FTX (unless they did it separately without our knowledge). The last time I wrote about crypto in 2017, cryptocurrency enthusiasts were explaining that what they were really excited about was not a new form of currency, but the blockchain technology that makes crypto possible. That made no sense, since putting money in crypto wasn’t actually investing in blockchain technology, but at least they understood that a currency backed by absolutely nothing doesn’t make sense.
I wrote that article at the first height of crypto craziness, and crypto did in fact crash from there. Then the narrative changed at some point during the pandemic when people started talking about, and in some cases using, crypto as an actual currency. This is one of those “the emperor has no clothes” moments we seem to be having all the time now.
In the grand scheme of history, it has not been that long since the population of the world decided that we are comfortable with currency simply being backed by our faith in government. It wasn’t until 1971 that the U.S. dollar went off the gold standard for good. We did try to unlock the dollar from gold a few other times but were forced back to the gold standard for the dollar to be worth something. Since 1971, the dollar is simply backed by the faith and credit of the U.S. government (no wonder we have inflation).
Cryptocurrencies, on the other hand, are backed by absolutely nothing and nobody. Still people ask me if we invest in crypto, and my answer is that crypto isn’t an investment. We believe that an investment is just what Benjamin Graham said it was, “An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
Graham spoke of investments needing a margin of safety – meaning they are backed up by something real: assets and cashflows. The crypto universe, like so much in our time, isn’t real. There will be many FTX speculators who are finding that out the hard way.
We don’t take pleasure in other people’s suffering, but it is Thanksgiving, and we have much for which to be thankful. In keeping with our tradition, here is my list:
-> I am thankful that we did not speculate in FTX.
-> I am thankful that my wife and I both believe in monogamy and didn’t even know “polyamorous” was a thing (maybe I’m getting old, but that sounds gross and exhausting).
-> I am thankful for our children, who are keeping my wife and me very busy.
-> I am thankful that my son has his learner’s permit and is just one year away from driving solo so my wife can quit her current role of unpaid chauffeur.
-> I am thankful for my family, immediate and extended.
-> I am thankful for all of my friends.
-> As always, I’m thankful for Mama’s pumpkin cheesecake and for my loose-fitting pants, which – while no longer in style – still make enjoyment of said cheesecake possible.
-> Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.
Chuck Osborne, CFA