A little more fear, uncertainty and doubts about crypto are welcome

The silver strips of the spectacular collapse of FTX is difficult to see if they are one of the approximately 1 million creditors in the bankruptcy proceedings of the crypto exchange. This mix of professional groups and individuals will have difficulty getting their money back. Even the new CEO, a man who once supervised no less than the liquidation of Enron, said this was the most chaotic collapse of a company he has ever seen.

The whole episode "undermines confidence in the financial markets," said Citadel boss Ken Griffin this week in an interview with Bloomberg. "The trust of a generation in the financial markets is also shaken. This is really terrible, because the 20-year-old to 40-year-olds, who deal with crypto, have to save for their retirement, and if they do not believe in the financial markets or do not trust them, this is a huge problem."

I wonder if the opposite could be true. Correctly regulated markets may not be perfect, but they suddenly look much more attractive.

Apart from those directly affected, this explosion of the crypto hybris certainly does not seem to have caused any damage. The generally optimistic mood of the stock markets indicates that fund managers are pronounced in other asset classes.

shares in the crypto sector have certainly suffered. The shares of Coinbase, the crypto exchange, have fallen by about 16 percent since FTX got into skid, but after a decline of more than 80 percent since it was listed last year, who else? Galaxy Digital - the self -proclaimed "Goldman Sachs of Crypto" - has suffered a 19 percent drop in price. Microstrategy, the software company that works as a crypto fund, has lost about a third of its value. Together with the retail broker Robinhood, which deals with crypto and counts FTX's former CEO as a shareholder, the market capitalization has fallen by more than $ 6 billion to $ 23 billion.

But some perspective helps here. At $ 23 billion, according to UBS, these companies are only 8 percent of meta. The stress is real, but the effects on the whole world are minimal.

In addition, some of the worst fears of the supervisory authorities have not come true in relation to infection. Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, said that he had answered numerous questions from customers whether the FTX failure could infect the core financial markets. "We probably don't think," he says. "It becomes systemic when it comes to the mainstream financial system via banks. If banks accept large losses in crypto, this leads to liquidations elsewhere." So far, however, this does not seem to be the case.

Perhaps more important is that the decline of FTX has given a hard lesson in two of the guiding principles of money management: do your homework and just keep it.

If you ask enough questions about crypto or to express enough skepticism about his larger claims, the true believers will accuse you, fear, uncertainty and doubt or "fud". This is one of the greatest insults that you can show those who refused to jump on board with speculative zeal. The problem is not the tokens or the peculiar new stock exchanges, they say. It is your ignorance.

It turns out that the world needs more. The dirty little secret here is that too many otherwise rational financiers routinely missed asking fundamental questions about the companies with which they do business. Top -class risk capital companies, each of which have invested hundreds of millions of dollars, have completely deprived investments in FTX. One of them, Sequoia, made the trouble to write an article with almost 14,000 words about the genius of the former FTX boss Sam Bankman-Fried, who has now fallen into disgusted. The Singaporian investment house Temasek said that his $ 275 million support for the stock exchange was "out of place". But it defended its "comprehensive" eight-month Due diligence process.

It is difficult to imagine what it did for exactly eight months. The bankruptcy reports draw a picture of a cartoon-like amateur collection of FTX managers who are hopelessly overwhelmed and play quickly and easily with the rules.

If risk capital companies lose money, it is the case. The problem is that your support really gives credibility. Some crypto hedge fund managers said that they parked money from FTX because they assumed that risk capital companies carried out the Due Diligence. This is crazy. "The longer you carry out at VC Due Diligence, the higher the risk that you will lose the deal," says a former manager in this area. "There is a race down."

ftx is of course not the first example of this. But the profile of this case could help to encourage investors to think about their own thinking.

The former governor of the Bank of England, Mark Carney, made this point in a lecture in 2020. "If someone explains something in the financial area. and it makes no sense, ask the person to repeat the reason, and if this answer still makes no sense, you should run away."

Griffin is rightly worried about the fate of those who were hit by the FTX disaster. But if this gives you an impetus to train more for fud, it can be a good thing.

katie.martin@ft.com