January 10, 2022

CRYPTOMANIA AND THE MADNESS OF GREED

by Jeffrey R. Miller, CFA

2022 ended with a whimper, not a bang. The first two months of the final quarter reversed some misery, though December failed to deliver a Santa rally. I would therefore like to provide some comic relief (if you can call it that) in these troubling times.

Headlines have been filled with the ongoing saga of the collapse of cryptocurrency derivatives exchange FTX,  which “disappeared” billions of the crypto-wealth around the world. Shades of Bernie “Madeoff-with the money!”

Sam Bankman-Fried (SBF), the alleged perpetrator, is the son of Stanford University Law professors, and majored in physics and math at THE Massachusetts Institute of Technology. Incredible credentials, which helped him gather billions of capital from famous persons, only to collapse the scheme in less than a year. At least Bernie took several decades to fall. In a digital world things happen fast!

There are now many struggling companies in the cryptoverse—Voyager Digital, Celsius Networks, 3 Arrow Capital, BlockFi, Terraform Labs, and my personal favorite, Babel. Like the tower of biblical fame these business models are collapsing. With such intergalactic names, it’s like a Star Wars crime wave, in a galaxy far, far away. SBF is the alleged genius crypto-crime lord, with that wild hair and blank dark eyes. How could you deny his pitch? The peak of the current madness was the commercial featuring Matt Damon in space, shilling the future bravely, with crypto at the center. Interesting how fast that went off the air…

This story is not unlike financial scandals of the past—tulip bulbs, Ponzi, Enron, the internet crash, leveraged lending in 2008, and Bernie “Made-Off with the money”. History repeats and greed usually drives the boat. And greed unbridled leads to bad decisions. That is a human thing.

Years ago when asked, “what is crypto and should we invest in it,” I came up with a simple way to answer. I would hold out my hand, palm up and ask “what do you see in the palm of my hand?” Nothing. The origin of crypto was a nine page thesis authored by a yet to be identified digital cognoscenti. We have a copy of the paper and have read it. It is so smart we are too dumb to understand it. Always a red flag.

Cryptocurrencies represent unique numbers in which you have a proprietary ownership because of an exclusive algorithm. It also has value in that it can be traded anonymously on the internet, dark web, or even a portable flash drive, enabling tax evasion, money laundering, or other nefarious purposes. As recently as two years ago there were as many as 10,000 cryptocurrencies in existence or development. You can even find Bitcoin ATM machines at a convenience store near you.

The FTX collapse has taken down dozens of firms and billions in wealth as the value of Bitcoin plunged from $69,000 to below $16,000. I am reminded of the comment the CEO of JP Morgan Chase made in reference to crypto and NFT’s (non-fungible tokens). “They are today’s Pet Rock.”

I hope this has provided with you with at least a chuckle. Rest assured Armor has resisted any exposure to cryptomania, to your benefit. We remain skeptical and are not ready to invest.

I would like to close with this observation: when things appear to be at their worst they usually are, or are close to the bottom. The path before us is rocky but there were great returns to be had after 2008, the last time markets were this challenging.

Happy New Year!—J. Miller

Nothing contained in this post is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this post should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.