What do stars Tom Brady, Steph Curry, Matt Damon and several professional sports franchises have in common? All of them have recently been part of large-scale advertising and sponsorship campaigns for cryptocurrencies, cryptocurrency exchanges or other related businesses. Curry, Brady and Miami Heat supported cryptocurrency exchanges FTX.
In the ads, celebrities portrayed FTX as “the future” and shared tales of their rise to the top in a thinly veiled attempt to pitch the cryptocurrency to investors as their Super Bowl or big break. In other words, this investment was their opportunity to take a chance and live the life they always envisioned. If the investment went right, they could have fabulous lives too.
It was a compelling pitch and investors bought in. Then the bottom fell out. It’s already been a difficult year for cryptocurrency investors, and the announcement of FTX’s bankruptcy made it even worse. Millions of crypto investors around the world will lose significant sums of money. While the losses are deplorable, a lesson can be learned. Your favorite celebrity’s life stats are no substitute for due diligence.
What is FTX?
FTX is a cryptocurrency exchange. Although cryptocurrencies are considered decentralized due to the lack of a central bank like the Federal Reserve or the European Central Bank, there is still a need for a centralized exchange where cryptocurrency traders can buy, sell, invest, trade or make other financial movements with their cryptocurrency. These exchanges hold crypto wallets where cryptocurrency holders and investors store their cryptocurrency.
Until its recent bankruptcy filing, FTX was one of the world’s largest cryptocurrency exchanges. Investors could buy, sell, or trade all types of crypto futures. Cryptocurrency holders could even leverage the value of their cryptocurrency by borrowing or lending money with the profits in their coins and earning interest. The platform also offered derivatives trading for all types of cryptocurrencies.
FTX was founded in 2018 by Sam Bankman-Fried, an exchange-traded fund (ETF) trader who graduated from the Massachusetts Institute of Technology. The variety of trading options and some timely confirmations combine to cause FTX to explode almost overnight. In just a few years, it has grown from a small startup into one of the world’s leading exchanges.
FTX offers spot trades for almost 300 cryptocurrencies in nine fiat currencies such as the US dollar, British pound, euro, Turkish lira and Swiss franc. It even issued its own token – the FTT. Aside from a very well designed online platform, another thing that made FTX so popular was that it allowed investors to use up to triple the value of their crypto wallets to trade on the platform.
Also see: Top 7 Best Crypto Exchanges of 2022
What went wrong?
The leverage and flexibility that cryptocurrency offers allows investors to make a massive amount of money in a very short amount of time. For its part, FTX made a percentage on all transactions completed on its platform. But the disadvantages are numerous. First, tripling the leverage means that the losses for the investor and the exchange are tripled.
The lack of a central bank means that investors’ deposits are not insured in the event of a cryptocurrency exchange failure. And without a regulator, stock market managers are not prevented from committing impropriety. FTX was primarily operated out of the Bahamas which has lax financial regulations.
That’s a problem for something as new as cryptocurrency, which remains largely unregulated in countries with fairly robust financial regulations like the EU, the UK, and the United States. In fact, US-based investors are forced to invest with FTX on a separate platform – FTXUS – which is more restrictive in the options offered to comply with US law.
The main problem is that there is no one verifying that the underlying figures from cryptocurrency exchanges can support the operation. When Coindesk released a report revealing that an inordinate amount of FTX’s liquidity (and value) was based on holdings in its own FTT token, and the same was true of FTX’s trading arm, Alameda Research, it came as a major surprise for investors and account holders.
When the news broke, FTX clients and investors did exactly what was expected of them. They all tried to empty their e-wallets or close their accounts at the same time, creating a liquidity crisis for FTX that resulted in the exchange filing for bankruptcy in multiple countries at once. Binance, the world’s largest exchange, considered a buyout but withdrew in less than 24 hours.
See also: What’s happening to FTX right now?
Where are the celebs now?
For celebrities and the companies they endorse, the arrangement only works if it’s a two-way street. Companies want to ride on the coattails of celebrities by paying them to lend credibility to their businesses. Celebrities get paid and get extra attention. They help each other. In this case, many of the celebrities were paid in FTX equity – likely through FTT coins.
That equity is now essentially worthless. When the bust is worked out, celebs might see a few dimes on the back. But they were already rich. Even if they owned some FTX, it was only part of what is likely to be a highly diversified portfolio that includes both traditional and alternative investments. In fact, the reality of celebrity investing is almost entirely separate from any investment product they offer.
Her wealth and access to some of the world’s top financial advisors make her a type of investment that very few people who watch her on TV will ever experience. NBA star Shaquile O’Neal was now an early investor in Google alphabet inc Google. It’s not a deal he endorsed on TV, but even if he did, only a small percentage of retail investors could have afforded the buy-in.
It’s one thing to buy a golf club or a pair of shoes because your favorite player supports it, but even that may not be a good decision depending on your shoe or club. A celebrity endorsement is probably the last thing they should allow to motivate you to take up an investment offer, but that doesn’t mean they’re lying to you or misleading in their advertising.
That means they are promoting the company that has agreed to pay their management team the most money. Much like a golfer you see playing a particular club, they would play a club from a competing equipment manufacturer if the sponsorship deal was more lucrative than the one they previously had. It’s unlikely that Tom Brady or Steph Curry knew of FTX from any other exchange other than the size of the check expected.
Your investment goals, risk tolerance, and access to capital are likely vastly different than any superstar athlete or actor you see promoting a product.
More information about the culture at FTX is leaking out almost daily, and none of it is good. It’s highly unlikely that a celebrity endorser looked deep enough to find out.
The same applies to the balance sheet, which showed how heavily indebted they were. It’s likely not a topic that came up during discussions between FTX and the celebrity’s management team. The thing is, they can afford to shoot big and miss big. You can not.
Check this out: Jeff Bezos-backed startup lets you become a landlord with $100
take that away
FTX became one of the largest cryptocurrency exchanges in the world. Now it stands on the brink of one of the biggest bankruptcies in history. According to some estimates, FTX has over 1 million creditors in dozens of countries. Governments in almost every country where FTX has operated are beginning criminal investigations into the exchange and how it spent money.
No matter how that turns out, many investors will hold the bag in their hands. There are other exchanges, and this probably isn’t the end of cryptocurrency. But it should be a cautionary tale for anyone who jumped on the FTX bandwagon because their favorite athlete said so, or because they saw the name emblazoned on their favorite basketball team’s home court.
All investment offers involve risk. Extreme caution should be exercised with an operation like FTX, where there is little transparency and the possibility of using leverage of 300%. Most everyday investors would be better served building wealth through proven approaches. Yes, it’s possible to catch lightning in a bottle, but it really isn’t a sound investment strategy.
If your portfolio is already built, it may be worth diversifying some funds into cryptocurrency offerings. However, building your entire portfolio on it has inherent risks, regardless of what your favorite quarterback says. In the meantime, combining real estate investment trusts (REITs), gold, and traditional investments in a strong portfolio is probably still the best way forward. Cryptocurrency isn’t a better mousetrap just because someone famous says so.
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