One of the world’s largest cryptocurrency exchanges, FTX, has filed for bankruptcy. FTX, which allows individuals to trade cryptocurrencies, options on cryptocurrencies, and NFTs, was founded in 2018. Ill-conceived speculations made by FTX’s trading arm, Alameda, using customer money – not the company’s money – has left FTX with a financial hole nearly $9 billion deep. FTX as recently as earlier this year was valued by private investors at $32 billion and just months ago Jim Cramer of CNBC referred to the company’s CEO, Sam Bankman-Fried, as “the next J.P. Morgan.” Now FTX’s valuation is zero, the CEO says he exhibited poor judgment (itself a massive understatement), and customers of the exchange are wondering if they will get their money back.
While we won’t speculate on what the wider implications are for the world of cryptocurrencies, we view FTX’s demise as the byproduct of imprudent and quite possibly criminal managerial stewardship in a relatively unregulated industry. To some, part of the appeal of cryptocurrencies is that they are not under the control of any government. But when foolish behavior meets lax standards, the odds of a favorable outcome are poor. Obviously, a greater level of regulation, to help protect individuals from outright fraud, appears warranted. The downfall of FTX, with what exactly caused it still cloaked in mystery, looks like an Enron moment for those involved.
Digital currencies (that, in actuality, have few characteristics of legitimate currency) which are sold as the future of decentralized global finance make for a great story. And impressive narratives are always behind popular speculations. This is one of the reasons why Charlie Munger refers to cryptocurrencies as “rat poison squared” because – other than their story – cryptocurrencies themselves have no genuine underlying value. (All the while, the mining of Bitcoin and other cryptocurrencies require as much electricity annually as the entire country of Argentina.)
Intrinsic value – the concept that an asset produces something; therefore, it is worth something – is at the heart of investing, as opposed to speculating.
It is crucial that the investor knows what he or she owns. Alternatively, it is crucial to trust the investment manager who is investing, and not speculating, on your behalf. We don’t know what the future holds for cryptocurrencies. Nobody does. In the investment world, as elsewhere, fads come and go. But intrinsic value remains a north star for those who invest and never speculate.
Some of you may recall that our firm’s founder, Fred Marks, kept a note taped to his desk that read: “Always invest. Never speculate.” We were reminded of that these last few days when it was made clear what Sam Bankman-Fried, whom Fortune Magazine merely three months ago posited might be the next Warren Buffett, had done at FTX. 
The next Warren Buffett? Obviously not.