There is a major scandal unfolding in cryptocurrencies right now. And I’m reminded of the lyrics from Jimmy Cliff’s 1972 hit where he sang, “The harder they come, the harder they fall, everybody.” The words are a good description of the current state of cryptocurrencies.
Sam Bankman Fried, aka SBF, was the founder and CEO of FTX and Alameda research, high-profile players in the cryptocurrency world. Sam has become a multi-billionaire with a agenda. He eschewed suits for T-shirts and shorts; he has donated to political candidates and social and environmental causes. He has enlisted a bevy of celebrities, including Tom Brady, Giselle Bundchen, Larry David, Kevin O’Leary (aka Mr. Wonderful), Anthony Scaramucci (aka the Mooch) and more to promote FTX. The company’s branding was on sports and entertainment stadiums. In early 2022, SBF spent millions on one of the most memorable Super Bowl commercials starring Larry David. Ironically, David’s comic “I don’t think, and I’m never wrong about these things” was perfectly correct about FTX.
Today, SBF is at his parents’ home after a federal court judge set bail at a record $250 million. SBF faces a long list of indictments from the Justice Department that could lead to decades behind bars. SBF became one of the richest people in the world before his downfall. The harder they come, the harder they fall, all of them.
Financial scandals are nothing new, but they often push markets to levels that offer attractive value. Time will tell if the latest cryptocurrency debacle gives way to another in a series of explosive rallies since 2010.
Bernie Madoff hit a stock low in 2008.
- Warren Buffet once said, “Only when the tide is out do you find out who has been swimming naked.”
- The 2008 global financial crisis revealed Bernie Madoff’s infamous Ponzi scheme in late 2008.
- In October 2008, the stock market bottomed out.
- Bernie Madoff died in prison, serving a 150-year sentence.
- The Madoff scandal has added to the bearish sentiment in the general stock market.
Theranos generated bearish sentiment and caution in the biotech sector.
- In 2015, Theranos, a biotech company, began to fall apart when a whistleblower raised concerns about the company’s flagship test device, the Edison.
- The iShares NASDAQ Biotechnology ETF (
IBB – $131.29 0.05 (0.038%) ) fell from a record high of $133.60 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’s partner, Ramesh “Sunny” Balwani, received a 155-month sentence following his fraud conviction.
- Theranos has influenced sentiment in the biotech industry.
Mount Gox pushed cryptocurrencies lower in 2014.
- Mount Gox was a Tokyo-based cryptocurrency exchange that once accounted for over 70% of Bitcoin transactions.
- In February 2014, an attack 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 less than $220 per token in August 2015 in the wake of the Mount Gox hack and bankruptcy.
- Mount Gox has eroded confidence and caused bearish sentiment in cryptocurrencies.
Dust did not settle from FTX.
- FTX’s demise occurred in November 2022, after Bitcoin fell from over $68,900 in November 2021 to just above the $15,500 level in November 2022.
- The market capitalization of the cryptocurrency asset class has dropped from over $3 trillion to under $1 trillion.
- The US Justice Department has just begun its investigation, filing a long list of criminal charges against FTX founder and CEO Sam Bankman-Fried. Two of his inner circle have pleaded guilty and are cooperating with federal prosecutors.
- The full systemic impact of FTX failure remains evolving.
But… scandal can also create value.
- The stock market rallied and recovered after the Bernie Madoff scandal.
- The IBB Biotech ETF rallied to a new all-time high after the Theranos fraud.
- Bitcoin and the cryptocurrency asset class exploded to a series of new record highs after Mount Gox.
- Time will tell if FTX leads to similar price action in the burgeoning cryptocurrency asset class.
- The scale of the fallout from FTX – on regulation, the political environment and market sentiment – will determine the future of Bitcoin and cryptocurrencies.