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Not Contagious

Mike Zaccardi

THE FTX FALLOUT IS something to behold. It’s said that the now-bankrupt cryptocurrency exchange has liabilities that could end up being twice what Enron owed when it collapsed more than two decades ago. The hubris of Sam Bankman-Fried (also known as SBF), founder of FTX, is something all investors can learn from.

It was just a few months ago that Bankman-Fried was dubbed the next Warren Buffett and 2022’s version of the late 19th and early 20th century financier J.P. Morgan. Crypto’s former so-called white knight has given the digital currency market a major black eye, adding to this year’s cryptocurrency market turmoil.

What’s encouraging, though, is that stocks and bonds don’t seem to care much about SBF misusing customer deposits, making excessively risky wagers and violating just about every corporate governance rule in the book. Consider that the FTX house of cards began to fall on Wednesday, Nov. 2, when CoinDesk reported that SBF’s trading firm, Alameda Research, held primarily FTT—the FTX native token. The drama rapidly escalated from there, with much of the damage done by Wednesday, Nov. 9.

But the damage to the broader market has been minimal. Since Nov. 2, the S&P 500 is higher by about 3%, while foreign stocks have jumped 8%. Treasury yields are down slightly. Ditto for corporate bond yields. There has been no contagion. Even crypto prices, while down significantly over the past few weeks, are performing better than many pundits expected.

The FTX saga will probably result in more scrutiny of corporate governance and more regulation of the crypto market. Still, investors shouldn’t devote too much attention to SBF and FTX. It’s now just a fascinating, cautionary tale, rather than anything that’ll significantly impact your portfolio.

Perhaps the biggest lesson is to resist FOMO, the fear of missing out, and to always be skeptical when the financial press starts heaping praise on some purported market wunderkind.

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