5 Lessons from FTX, Bitcoin and the Stock Market

I'm going to diverge a bit from the stock market - which is having its own very difficult times these days - to talk about crypto...

This is a message to everyone who owns (or owned) Bitcoin and other cryptos and now perhaps feels regretful or foolish.

Don't.

Learn from it - but make sure you draw the right lessons (listed below) that will help you in the future.

I mean, if you read about crypto in the last few days, the articles and social media posts are tinged with what the Germans call schadenfreude - taking pleasure at the misfortune of others. I hate that sort of thing.

The collapse of FTX - until a few days ago, one of the largest crypto exchanges - was the latest blow to crypto prices. A recent $17,000, Bitcoin prices are down 25% just in the past week, and off 75% since the highs at nearly $70,000 exactly one year ago.

If you don't know what FTX is...they had bucks big enough to put their logo on the uniforms of MLB umpires for the past season, sponsor an infamous commercial during last February's Super Bowl, and to rename the venue where the NBA's Miami Heat plays as "FTX Arena."

Put simply, crypto investors lost confidence in FTX. The simplest way to boil it down is that - in unregulated marketplaces, much like banks in the 1930s or Lehman Brothers in 2008 - confidence means everything.

When that confidence evaporates - and with it the ability of the business to raise new capital - then the company goes bust, simple as that.

Here's my view...

Lesson #1: Speculating on something new and exciting like Bitcoin isn't bad.

You had the courage to take a risk and buy it. Risk-taking is an important, valuable activity. Done properly, it will serve you well in your finances and your career.

Lesson #2: Bad trades are a part of being in any market.

Maybe the trade didn't work out the way you wanted. But it's going to happen, whether we're talking about crypto, stocks or even real-estate. We have to learn to accept the lows along with the highs.

Lesson #3: Don't fight the Federal Reserve.

Speculative activities like crypto trading, stock speculation, and real-estate flipping fall - and rise - with the Fed's interest-rate policies.

Remember that in 2023 and 2024. Last year, few took heed of the Fed's warnings that it was going to raise interest rates this year, and lowered their exposure to all markets when prices were generally high.

Likewise, as the economy weakens and stocks head lower next year - few will pay attention (and start buying) when the Fed signals it's ready to start cutting interest rates.

Lesson #4: It's OK to own speculative assets, but ...recognize the risks, and know what you own.

Big companies can go bust just as easily as small ones. But the more real assets a company has - manufacturing, real-estate, cash in the bank, etc - the harder it is for even the dumbest CEO to kill it off.

Speculative, unprofitable companies on the other hand - biotechs, startups, new device manufacturers - offer the promise of fast growth, but also typically burn through a lot of cash as they put those growth plans into action.

They have no ability to generate profits yet, so they live and die by their ability to stir excitement and raise new funds from investors.

When the excitement fades (because of a bear market, the loss of a private VC investor, or setbacks in the business), cash gets tight. When cash gets tight, investors flee and the business is in jeopardy.

Lesson #5: Avoid the "YOLO" you-only-live-once, all-or-nothing, mentality.

Our goal - as investors, traders, and speculators - should be to take chances - but to take them in such a way that if we're wrong, the setback does not become a massive, unrecoverable blow to our trading accounts and our confidence.

It's hugely exciting to make a "YOLO" trade. But the more YOLO-ing one does, the more likely it is that the odds will eventually catch up. It only takes one mistake, or a bit of random bad luck, to ruin everything.

Instead, just stay focused on one thing...keep your losses small, let your winners run.  

Jeff