FTX Saga: Social Responsibility of Reputable “Sophisticated Investors”

They implicitly lend their credibility in your investments

I’ve written an article just yesterday talking about the FTX saga and the one thing that we can learn from it. In summary, it is just saying that the last, almost vertical, run up from March 2020 was a euphoric run that ends the bull market and the downfall we have seen was just the first leg of the crash. The recent recovery is a “denial” corrective up-move.

In the article, I also touch on “sophisticated investors” that were seemingly sleeping on their job,, failing their due diligence and could possibly be blinded by the greed of being the “first” to invest in a budding exchange that could gave them outsized returns.

One thing that I haven’t point out is that the every day investors and users of the FTX platform were actually indirectly harmed by these investors because most had based on the belief that these “diamond hands” had conducted their due diligence and deemed FTX to be credit worthy and thus a much lower risk in the world of crypto where mines and traps are everywhere.

I cannot agree if these supposedly sophisticated investors deny such social responsibilities because firstly, the argument that individuals should do their own analysis and be fully responsible for their investment cannot be fully applied here because unlike retail investors and daily users of FTX, they have access to information and management in FTX. Their request for information would be entertained and they can conduct in-depth interviews with FTX senior management if they wanted. Such are not available to everyone else. Thus, when they decide to invest in FTX, they lend credibility to FTX. It is similar to how having an insurance to CDOs during GFC improves the credit ratings of those junks (now, I drew another parallel with 2008 GFC).

I know that nothing is going to happen to these big players and they are just going to shrug and say “every investment has a risk”, “this is just a small portion of our portfolio”, blah blah. But if this FTX saga taught us anything, it is this: Don’t even trust those supposedly sophisticated investors, they may be highly paid, but they may not be as competent as we (or they themselves) thought to be. High pay does not equal competencies, especially in an euphoric economy.