AJ Bell press comment – 13 December 2022
Laith Khalaf, head of investment analysis at AJ Bell comments on the latest developments in the FTX scandal:
“Crypto buyers should be willing to accept a total wipeout on their investment as a result of the highly speculative nature of digital coins, but not because the exchange they used to make the purchase goes bust, taking their cash with it. That’s what many FTX customers are confronting, and the US securities regulator has now charged Samuel Bankman-Fried, the former FTX boss, with defrauding investors.
“This is a sorry state of affairs, but not entirely surprising, given the vast sums of money which have flowed into crypto, and generally low levels of regulation. As well as a return on their money, crypto investors should be seeking a return of their money, and should be wary about handing over large sums to companies they know little about, and which are not supervised by a robust regulator.
“Innovation should of course be encouraged, but the huge proliferation of coins and crypto ecosystems raises the question of whether this is an area where technology is running ahead of its utility, funded by a wall of blank cheque money looking for exposure to digital assets. Money which may be much harder to come by now interest rates have risen considerably.
“In the short term, crypto buyers are likely to become more discerning about who they use to buy and sell coins, and hopefully that is a positive development to come out of the FTX scandal. Likewise, the crypto industry might start to embrace more regulation in order to attract and retain customers, though this may dent its appeal for those who turn to crypto for its anti-establishment credentials. Greater regulation will also entail higher costs and more risk warnings, making crypto compete on a more level footing with existing financial assets sold through regulated exchanges.
“The FTX scandal is clearly a punch in the nose for the crypto industry, but it’s unlikely to be a knockout blow. The crypto community is sizeable, and neither demand nor supply is going to disappear overnight. This time next year, Bitcoin could be trading at $5,000 or $50,000 and neither would be a total shock, seeing as the market is almost exclusively driven by sentiment. Looking further out, the longer term adoption of crypto by consumers, businesses and investors is deeply uncertain, and that makes the underlying assets highly speculative. That’s especially the case seeing as many central banks have either launched, or are considering launching their own digital currencies, which could usurp many of the beneficial functions of crypto.
“Whatever the long term prospects for crypto may be, the journey is going to be one of lurching from feast to famine. 2022 has definitely fallen into the latter camp, with the FTX scandal deepening the crypto rout prompted by a sell-off in speculative assets. If 2023 is to mark a turn in sentiment, the crypto market is going to have to climb a sizeable wall of worry.”
