This is an audio transcript of the Money Clinic podcast episode: ‘The crypto winter — will my investments ever recover?’

Claer Barrett
We’re in the grip of the crypto winter.

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New chaos in the world of cryptocurrency. FTX shocked investors by declaring bankruptcy.

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Investors now face billions of dollars in losses just as the collapse of the Lehman . . . 

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The ripple effect from crypto exchange FTX’s bankruptcy filing is growing . . . 

Claer Barrett
Over a million crypto investors around the world stand to be wiped out by the collapse of FTX, a crypto exchange based in the Bahamas. Several crypto lenders have folded, the prices of many coins have plunged, and regulators are now under pressure to intervene and force the crypto industry to clean up its act. On this episode we ask: is this the end of crypto? And where does this leave millions of young investors who bought into the dream?

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Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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It’s been a wild few weeks on the crypto front. FTX, a crypto exchange once valued at $32bn, collapsed into bankruptcy in November, but some believe its demise is an existential moment for crypto itself. Two of my colleagues at the Financial Times have been at the heart of reporting on this story and analysing the fallout, and they join me today in the studio. First up, Scott Chipolina.

Scott Chipolina
Hi. Thank you for that, Claire. Yup, I am Scott Chipolina. I am the FT’s digital assets correspondent. And as Claer said, it’s been knee-deep in FTX stories for the last few weeks.

Claer Barrett
And from the New York office, we have Rob.

Robert Armstrong
Hi, Claer. I’m Rob Armstrong. I write the FT’s Unhedged markets newsletter.

Claer Barrett
Well, great to have you both here to talk about this story, which has affected so many people on so many levels. Now, Rob, starting with you. Some people have gone so far to describe the FTX collapse as a Lehman Brothers moment for the cryptocurrency industry, referring, of course, to the start of the financial crisis in 2008. Does it feel that significant a moment to you?

Robert Armstrong
Well, I think it is very significant, but there is two crucial differences. The first is that this is . . . as big as $32bn is, this is a smaller event relative to the total world of finance, and which is connected to the second difference, which is that as far as we can tell so far — and here I’m vigorously knocking on wood — there aren’t deep connections between the rest of the world of finance and crypto. So the threat of contagion seems smaller, we hope.

Claer Barrett
So bad news for crypto investors, but good news for the rest of us in that contagion hopefully won’t spread. But when it comes to the crypto industry itself, do you think that it could be wiped out by this?

Robert Armstrong
Well, there is the classic distinction you have to make between individual cryptocurrencies or currencies, so-called. We should probably talk about whether these things were ever currencies or not. And an underlying technology of distributed ledgers known as the blockchain. And the blockchain may stagger on. But will we ever return to the kind of speculative fever around, and the kind of industry growth around tokens or currencies themselves? That’s very difficult for me to imagine.

Claer Barrett
Mm hmm. Well surmised. Now, Scott, why is the collapse of FTX such a big deal for all crypto investors, regardless of what exchange they might currently use?

Scott Chipolina
So I think one of the most important points to make here is that FTX was seen almost de facto as a, as a representative of the broader industry. And I think while Rob makes a very good point about there being little evidence of material financial contagion spilling out into the established financial world, there is a second tier contagion risk that I like to, I like to phrase as “reputational contagion”. And I think rightly or wrongly, just by virtue of the fact that other players inhabit the same industry that FTX inhabited, they’re going to be dealing with this problem for quite a long time. And to the degree that a crypto industry still exists in 15 to 20 years, I have no doubt that FTX will still be getting discussed at that point as well.

Claer Barrett
Hmm. Now, Scott, you got a great trip out of this. (laughter) You flew to the Bahamas with, I think, 12 hours notice in search of FTX’s 30-year-old founder Sam Bankman-Fried. As you said, what did you learn on your visit?

Scott Chipolina
I think one of the most curious things that I discovered on my trip was, you know, plenty of critics pointing the finger at the Bahamas and the regulatory framework that’s in place there and asking why was this not picked up by those who were claiming to oversee this company? I think that one of the most curious things that I found was that essentially that there was this collective unwillingness to, you know, be candid about what has happened, what’s taking place on the island, essentially. And I think that is part and parcel of the island’s ongoing bid to try and protect a reputation for this industry that it’s deemed to be part and parcel of a long-term economic strategy.

Claer Barrett
Hmm. Well, interesting. “Shady people in sunny places,” as they always used to say about these offshore locations. Now, Scott, we’ve put some links in the show notes to the pieces that you filed for the FT while you were in the Bahamas, if anyone’s interested to read about the final days before FTX collapsed. An absolutely fascinating tale, although obviously one with consequences.

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So the downfall of FTX has been a really big deal for crypto. Year to date, bitcoin, which is by far the biggest cryptocurrency, has lost around 65 per cent of its value. But at the FT’s crypto conference a couple of weeks ago, people in the industry didn’t seem to have lost their crypto optimism.

Conference attendee 1
Crypto is here to stay. And like, the technology is still there. So to be honest, like it doesn’t seem to be as bad as it sounds.

Conference attendee 2
But I’m not worried or concerned.

Conference attendee 3
And then we’ll see us rise from . . . like a Phoenix once again.

Claer Barrett
As well as mythical bird allegories (laughter), there were also people who felt like the FTX collapse was actually good for the industry.

Conference attendee 2
It’s made the industry maybe set back a slowdown in terms of adoption, but it also enhances good practices as well.

Conference attendee 4
Actually, I think it just gives some breathing space to those players that I really do believe in exploring the underlying value and the utility.

Claer Barrett
But while the industry tries to explain away what happened, retail investors have seen the value of their investments in crypto crumble. Persis Love, our producer, caught up with one listener, Monir, who has lost over £4,000. He got into crypto about 18 months ago and started off just adding in the old tenor here and there.

Monir
It was so heavily addictive. At the peak, I had about £20,000 invested. And it, it’s a lot of money for me.

Persis Love
And how frequently were you checking your investments?

Monir
Literally all the time. It was perhaps, in the middle of conversations and meetings, and then suddenly you just end up saying, well checking my crypto. Yeah, it was a lot and there was a constant kind of worry checking. I was waking up at night and checking my phone at 3, 4 in the morning.

Claer Barrett
It took a £4,000 loss for Monir to decide to cut his losses and sell out of crypto altogether.

Monir
It just felt like I was constantly gambling. And I, I, it, it just made me feel really uncomfortable, so I completely de-invested.

Persis Love
And could you ever foresee a future where you would reinvest in crypto?

Monir
For me to kind of reinvest in that, what would have to mean that I feel secure within the world to kind of reinvest. That felt very much like a game. I was playing it. The money didn’t feel real and that was a bit scary.

Claer Barrett
Well, Scott and Rob, you’ve listened to what Monir had to say and how uncertain he and other crypto investors feel about the future and importantly, how safe their money really is. Having heard that clip, what’s your reaction to how young people are using crypto?

Robert Armstrong
Well, I would say that we did a lot of people a disservice or the world did a lot of people a disservice by calling these tokens currencies in the first place. They were not before. They are not now. And they are incredibly unlikely ever to become currencies in anything like the way dollars or pounds or euros are. Not a store of value. That’s been proven. They’re not a unit of account. Nobody does their balance sheet in bitcoin terms, and they’re not a medium of exchange. Still to this day, very, very few things are bought using crypto. What these are is a highly speculative technology bet. They’re closer to being like an equity or an option on an equity than they are to being a currency. And I think people who got into this were tricked by the name. And I think that’s much to be regretted. And there’s a lesson there.

Claer Barrett
Well, certainly is. It’s been a costly lesson for Monir. But I mean, Scott, at least he got his money out before an exchange collapsed and took it away, which is obviously what’s happening to lots of the former customers of FTX. But what are other crypto exchanges doing to try and reassure customers that their deposits aren’t going to vanish in a puff of smoke like the FTX customers did?

Scott Chipolina
Yeah. I think that there’s, I mean listening to Monir there, actually quite sadly reminded me of a very similar conversation that we had earlier in the summer in the wake of the, the terra/luna crisis, where this is a, you know, a point that will stay with me really forever. A lot of the discussions that we have about crypto market crashes are about facts and figures, but we often forget that there are human stories to this and there is a bridge in Seoul, in South Korea, where the company behind the terra stablecoin was based, that witnessed this influx of police presence because law enforcement were worried that people in South Korea who had lost money were gonna be jumping off the bridge and trying to commit suicide. So I think it’s very important to remember and very happy to hear that Monir got his money out in time. But there are so many folks that are not as fortunate. But in terms of what competing crypto exchanges are doing, I think there’s now there’s a very significant discussion across the industry of providing proof of reserves. That is to say that, you know, exchanges are financially stable, unlike FTX proved that it wasn’t. We actually saw an email that Coinbase sent to its customers in the wake of FTX’s collapse, and they sort of jumped at this very quickly and said, you know, we want our customers to be aware that our assets are back 1 to 1 and all that sort of stuff . . .

Claer Barrett
We don’t want anybody else pulling their money out in a panic.

Scott Chipolina
Yeah, I think that there’s a, you know, we also mentioned earlier this idea that, you know, in some sense FTX’s collapse is good for the industry because it clears the industry out of bad members. I don’t entirely know if that’s a very good analogy. Again, I think it’s important to point out that FTX was a giant of this industry.

Claer Barrett
Yeah.

Scott Chipolina
And it’s almost, it reminds me almost as though, you know, imagine an American football team loses its star quarterback and says, “Oh, well, you know, we can use this to our advantage because perhaps that quarterback wasn’t actually a very good player after all.” But you’ve lost a key member of the team, right? So I don’t, I think it’s a really favourable way of looking at things. It’s hard to sort of, you know, rationalise the way that this is good for the crypto industry.

Robert Armstrong
Several times we’ve mentioned regulation and whether there’s been a regulatory failure here. I actually take a different view on that issue, which is that, if anything, the regulation we had, the financial regulation we had, was probably a bad idea. I mean, this was always the Wild West and sort of halfhearted efforts at regulating, or pretending to regulate, just made things worse. We all would have been better off if regulators everywhere had said, “Sorry, guys, this is beyond us. This is not finances. We understand that. Buy at your own risk.” And if anything, I think the people who need to have a hard look in the mirror are the traditional finance institutions that put their toes in the water, with those being asset managers or custody banks. I think it was totally inappropriate — of course, this is easy to say in retrospect — but I think it is totally wrong for them to say, in an effort to seem cutting edge, “We’re really looking into this area. We want to grow a business helping our customers with this stuff.” They should have stayed miles away.

Claer Barrett
Hmm. I mean, to really take it back to basics here, why isn’t crypto regulated while other asset classes are? Because if you go online, if you look on TikTok, it’s so ridiculously easy to find out about cryptocurrencies, to see influencers peddling different currencies, to be able to go online, set up an account and buy and trade cryptocurrency. It feels no different as a punter from trading shares, but yet somehow the consumer has to get their heads around that they could lose all their money, as people have done. And there’s absolutely no comeback.

Robert Armstrong
Well, everything that you just said, Claer, could equally be well be said of sports betting. And I think the two are probably very similar. It’s very easy to find places to bet on sports online. It’s very easy to lose your money. And it’s very easy to trick yourself into thinking you’re engaged in a profitable activity when you’re just involved in a kind of wild speculation. So maybe it should be regulated, but it should be regulated like sports, sports gambling or smoking or alcohol or something like that. Whereas if it’s a financial regulator that regulates it, it is sort of saying in advance, this is real finance. Right? It’s giving it a patina of legitimacy, I don’t think it has any business ah receiving. Scott may, Scott may take a different view. Yeah.

Scott Chipolina
Well, no, I think, I think that that’s a, it’s certainly a conversation that I’ve been very interested in following over the last, certainly throughout 2022. But, but before then as well, I think that, you know, what regulators decide to do, but more importantly, sometimes what they decide not to do is very telling. But again, I think that conversation to a degree is changing. Certainly in the European Union, we’ve got the Markets in Crypto-Assets or Mica regulation that’s expected to make landfall in the next couple of years or so. And Mica is, you know, sort of widely considered this watershed moment for regulators to try and get a grip on crypto. But then, you know, so the folks that I speak to on that subject in Europe will tell me that they think about that same problem that Rob has just done a really good job of summarising on the podcast, which is to what degree are we concerned that we’re by virtue of welcoming this industry into the regulatory sphere, legitimising things that we perhaps don’t want to legitimise. But then the other side of the coin is there is a desire for consumers to be protected by, you know, onshore regulation rather than transacting with platforms that chief regulators don’t have a clue about because they don’t fall within their purview. So it is a balancing act, I think, that regulators across the world have been trying to balance, but I think different, you know, jurisdictions have been taking different approaches to this. And it’s certainly not gonna end. That’s a conversation for 2023 as well.

Claer Barrett
Well, all of those health warnings clearly haven’t put young investors off. For the next part of the podcast, we’re gonna focus on the millions of investors who are still holding crypto, probably sitting on some significant losses and wondering what to do next. Thank you to all of the listeners who responded to my recent Instagram story on the topic of “Will you keep your faith in crypto?” I’m gonna read out a couple of the responses that I got. “My husband invested £3,000 of our savings in crypto, and now it’s worth less than half that amount. He’s convinced it will rise, but I’m not so sure.” And here’s one from another investor: “I’m not buying any more crypto, but I have enough faith in crypto to hold on to what I’ve got. Thankfully, I only invested a small amount of my overall portfolio.” Well, I was relieved to hear that many of you only hold a small amount of crypto in relation to your overall investment. So while these losses are unwelcome, it hasn’t wiped you out and you have the luxury of hanging on for some potential upside in the future. But will it ever come? Now, Rob and Scott, you’ve heard what the listeners have to say. How do you feel all of these ructions will affect the crypto world going forward? Starting with you, Scott.

Scott Chipolina
I think, you know, the response that you read out there that was quite telling was that somebody is planning on sort of holding what they have and sort of hoping for an upside in the future. That’s part and parcel of really it strikes at the essence of what the crypto investment scene is for a lot of retail investors. We hear the phrase hodl a lot on crypto Twitter and sort of on Reddit.

Claer Barrett
Hold on for dear life.

Scott Chipolina
Exactly. Hold on for dear life. And I think that, you know, that’s, that’s a part or basis of the crypto industry that I don’t think is going to go away anytime soon. It’s worth pointing out that while a lot of folks maybe were attracted to crypto over the last two years, at least the beginning of that period during the bull run where we saw not only FTX but other crypto exchanges sort of plaster a lot of advertisements really in prominent places like the Super Bowl, for example. A lot of people would have come into the industry at that point, but there is this sort of underbelly of the crypto industry where there are really truly faithful folks that believe in these markets because of their sort of ideological libertarian foundation on their world view of politics. Right? They don’t want a third party intermediary in their financial life. They believe that there is a right to total financial privacy. Some of these things are sort of central to the, to the values statement of crypto, so to speak. And I think that won’t go away anytime soon, regardless of any potential volatility that we’ll see next year.

Claer Barrett
One of the speakers at the crypto conference we mentioned was the famous crypto sceptic and author of The Case Against Crypto, Stephen Diehl. He had this to say about the value of crypto.

Stephen Diehl
I mean, it’s an investment that has no fundamentals. It’s not a tangible asset. It has exactly the same economics as a Ponzi scheme. So then you can ask in developing economies, is it functioning as a medium of exchange? And the answer is objectively no. It doesn’t function as money. As an investment, it pays out old investors from new investors. This to me does not seem to be a vehicle for financial inclusion in the developing world. It seems to be a vehicle for predation.

Claer Barrett
Well, some strong words there. Rob, what do you make of what he had to say?

Robert Armstrong
I am more or less with him there.

Claer Barrett
(Laughter) I thought you might be. (laughter)

Robert Armstrong
Well, you will hear from some crypto enthusiasts, say a Bitcoin enthusiast, “Well, if you bought your crypto, say, in late 2018 or 2019, you’re still up 400 per cent.” And that is true. But the fact is that most of the people that bought crypto — and various studies have shown this — bought while the price of crypto was way higher than it was now, when it was $60,000 in 2021. So most of the people who have ever bought a crypto coin are way down on that crypto coin. That makes it hard to come back, I think. And when this happens to stocks — and this kind of total lock, lack of faith, revulsion or capitulation, happens to all asset classes — but when it happens to stocks, eventually the stocks become so cheap that the fundamentals of those stocks, the dividends they pay out, the profits they earn, look so absurdly underpriced that people start coming back. The yields are just too high to pass up, despite the sentiment being totally washed out. The problem for crypto, as was just pointed out, is that there are no fundamentals, so there is nothing to get so cheap you can’t pass it up. So how do we get back to $60,000 on bitcoin? I just don’t see it.

Claer Barrett
Now we know that crypto is unregulated. But Scott, is there any faint hope that millions of investors who have lost money in the FTX collapse could ever see any of it ever again?

Scott Chipolina
Well, I think that, you know, one hopes that’s the case. Of course, I think that, you know, the, the bankruptcy case is obviously still ongoing. And we’ll have to, we’ll have to sort of see how that unfolds over the coming weeks and months. I think one — potentially even longer than that — one, one thing that comes to mind when you, when you ask me that question, Claer, was I spoke with a, with a insolvency practitioner recently who said one of the chief problems with crypto insolvency cases is that the risks involved in recovering assets are not really very clearly understood. You know, with some of these firms, because there is a lack of regulation or at the very least, regulatory clarity, these assets are completely opaque, was a phrase that someone actually gave me recently. So I think that’s a really significant problem. But if I could also just add to what Rob mentioned on the back of Steven Diehl’s clip there where, you know, this idea that if you bought in 2017, you’d still be up. And as Rob said, that is true. But I think it’s also quite a lazy argument and you can make that claim, you know, from the sort of inception of any crypto coin. You can say, well, have you bought it on day one, no matter what’s happened this year, the chances are you’re still up. It’s sort of like, if I could use a bit of an analogy, it’s as though I say I don’t go to the gym or I do no exercise for the next 30 years of my life. And in 30 years' time, chances are I’m gonna be quite unhealthy. I’ll have all sorts of health problems, but I’ll say, well, I’m still stronger than I was when I was a newborn baby. That doesn’t really say very much. And I think that’s a, you know, it’s a pretty bad argument. And it’s a hard sell, I think, for those folk, those folks that have been wiped out this year through a period of all sorts of crises that have come, FTX just being the last one.

Robert Armstrong
This is also a classic example of survivorship bias. Right? The coins that are still around are the ones that happened to still be around. And yeah, those are up. But there is a lot of coins that you might have bought at their inception that don’t even exist anymore. Right? And so if you, in your analysis of whether crypto has been a good investment or not, you have to include all the coins that don’t exist anymore.

Claer Barrett
Yeah. No, I think that’s a really good point. Now, one popular topic of discussion on messaging boards at the moment is about crypto wallets, which people think could be a way to protect their digital assets rather than just leaving them on the platform that they’ve used to buy and trade. You can have a hot wallet. You can have a cold wallet. Scott, do you think that there is any advantage to, to people of using these things? What’s your take?

Scott Chipolina
I wouldn’t, I wouldn’t say from my own perspective, per se, whether or not that’s an advantage. But I will say that sort of the industry, the common industry assumption is that it’s generally better practice or safer to hold your crypto coins in a cold wallet. That is to say one that’s not running on the internet than, say, on an exchange, perhaps for obvious reasons. But I think, you know, it’s a really useful segue to discuss security in this space. That you know, we see almost on a weekly basis, a new hack that’s targeted one particular crypto protocol or application or some such. And I think that, you know, the industry is, from a bird’s-eye view, sort of fraught with a whole host of cyber/security problems. So I would just suggest to anybody who holds any crypto to be as careful as they possibly can, but be aware that there are these risks. And, you know, the industry has a you know, if I can be candid, a terrible track record of security, broadly speaking.

Claer Barrett
So even if it’s in a wallet, sadly, it’s no guarantee that it’s gonna be safe. Well, great advice, as always, from our experts. Thanks once again to Scott Chipolina, the digital assets correspondent based in London, and Rob Armstrong, the FT’s US financial correspondent and author of the Unhedged newsletter. You can sign up at FT.com/unhedged. Thanks so much for joining me on the podcast today.

Robert Armstrong
Thanks a lot Claer. This was fun.

Scott Chipolina
Thanks, Claer. Appreciate it as always.

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Claer Barrett
That’s it for Money Clinic this week and we hope you like what you’ve heard. If you want to dive even deeper, do check out our crypto series on Tech Tonic, where Jemima Kelly casts a sceptical eye over the industry. It is free to listen and you’ll find episodes on your usual podcast, platform or app. If you’ve got a money issue that you’d like to chat to me about on a future show, then get in touch. Our email address is money@ft.com or DM me on Twitter, Instagram or TikTok. I’m @ClaerB. Money Clinic was produced by Persis Love. Our executive producer is Manuela Saragosa. Our sound engineer is Breen Turner, and the original music is by Metaphor Music. And finally, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s the small print over and done with. See you back here next week. Goodbye.

Copyright The Financial Times Limited 2023. All rights reserved.
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