The Crypto Collapse and a New Profit Opportunity

I’ve had a long journey with crypto assets like Bitcoin. 

When they were first introduced, I had no idea what they were, how they worked, or whether or not they’d last.

However, certain aspects were intriguing — the notion of a digital currency or an alternative to the dollar, for example.

So over time, I warmed up to them. And ultimately it became clear that Bitcoin and others were here to stay. 

That’s no longer a question for me. And it shouldn’t be for anyone else either. 

The problem, though, is that the crypto ecosystem is not only complex, but still relatively new. 

It hasn’t been battle-tested over centuries of use and experimentation the way gold and fiat currencies have, and it’s poorly regulated. 

That makes it volatile. 

As a result, every so many years, we get a crypto crisis. 

There’s some black-swan event that tests even its most ardent backers and brings laughter and scoffing from its harshest critics.

We are now in the midst of one of those events. 

This week, crypto, which was already battling a newfound sense of risk aversion from the investing class, descended into a full-blown crisis. 

Ground zero for the implosion is FTX — one of the crypto industry’s largest trading platforms. 

If you’re not familiar, FTX was founded by a guy named Sam Bankman-Fried and has its own linchpin cryptocurrency called FTT. 

That’s important context for what I’m about to tell you. 

Because, again, getting back to crypto’s shortcomings…

It can often be influenced, or even dominated, by popular trends, cults of personality, and unscrupulous billionaires. 

You might remember, for instance, last year when Elon Musk dumped a bunch of Bitcoin and Dogecoin after pumping it up for months. 

Well, in this case, Bankman-Fried, or SBF, was the crypto messiah crowned by the crypto community. And everything was going great for him — until suddenly it wasn’t.

You see, SBF rode into the crypto landscape on the coattails of another big-time player named Changpeng Zhao, or CZ. 

CZ is the founder of Binance, another crypto juggernaut. They started off as partners until SBF split off to launch FTX. Again, that was fine, until CZ apparently learned that SBF had sicced government regulators on him (or at least accused SBF of doing it).

“We are not against anyone,” CZ said in a tweet. “But we won't support people who lobby against other industry players behind their backs. Onwards.”

And with that, CZ sold off $584 million in FTT, flooding the market and tanking the currency. 

On top of that, spooked investors following the fight withdrew more than $6 billion out of FTX’s exchange over a three-day period.

That was devastating because SBF, his crypto hedge fund Alameda Research, and FTX are all stacked with FTT. So when the price of the digital currency imploded, SBF’s liabilities suddenly exceeded his assets by a wide margin. 

Thus, earlier this week, FTX, one of the world’s biggest crypto exchanges, was insolvent. 

For a minute, it looked like a full-scale crisis would be averted because CZ and Binance offered to buy FTX. But that deal has apparently already fallen through. 

And now everything is a mess.

Unlike banks, deposits on crypto exchanges aren’t insured by the government, and it’s not likely FTX has enough assets left to pay out its remaining customers.

More importantly, though, there’s a question of whether the collapse will set off a broader market failure the way Lehman Brothers’ fall dragged down the entire financial system.

Nevertheless, I want to make something clear: This is not the end of crypto. 

In fact, we’ve seen this type of thing happen before. 

Back in 2014, the largest Bitcoin exchange in the world, Mt. Gox, suspended trading, shut down its website/exchange service, and filed for bankruptcy. 

Additionally, some 850,000 Bitcoins, worth $473 million, had been lost or stolen. 

It was devastating for the crypto industry, eradicating roughly 70% of Bitcoin’s value. 

However, it’s also worth remembering that at the time, that meant Bitcoin tumbled from over a $1,000 at its peak to a little more than $300. 

And here we are today, with Bitcoin now worth more than $17,000 — even with all that’s transpired. 

I called it, too.

Amid the Mt. Gox collapse I predicted that Bitcoin would come back, chalking the whole thing up to a learning experience for the industry.

That’s what this is too. 

This is another hard lesson for many crypto enthusiasts.

You can’t just blindly trust crypto institutions or the people running and promoting them. 

The industry is opaque and poorly regulated.

But again, it is here to stay. It’s not going anywhere. It will ultimately resume its upward trajectory. 

And this teaching moment will pave the way for better, stronger, smarter institutions. 

That’s how the industries evolve, adapt, and expand. 

Still, investors might want to wait to load up on Bitcoin or any other cryptocurrency. 

Especially since there’s another threat to the crypto industry looming on the horizon. 

For more information on that, you should check out Keith Kohl’s latest report. 

He’ll give you all the details about a tiny tech firm that could deliver massive returns as soon as Nov. 15. 

Find out more about that here.

Fight on,

Jason Simpkins

@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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