By John Sarson | Sarson Funds, Inc.
What a difference a year can make. This time last year crypto was still riding high and we were looking at the market sell-off as being something that might slow down- but certainly not derail the crypto movement. We were wrong. 2022 has been an eventful year for cryptocurrency, to say the least. The cryptocurrency industry experienced major trauma. A lot of this pain was self-inflicted and there are people to blame.
As the head of our firm at Sarson Funds, I get a unique perspective on the market. Specifically, I get to watch our wonderful team respond to clients as they ask us tough questions and expect (and deserve) fast answers.
During the past year, titans of the crypto industry fell. Both projects and companies imploded, and worst of all, the fraud was rampant. A failed project takes its toll on investors and the industry but that’s part of the nature of capitalism and it’s what we know that comes with VC investing. The true thief of confidence, what we’ve watched nearly cripple our nascent industry, has of course, been the fraud.
Fraud, in any industry, shakes its investor community. Financial crimes are not, of course, a function of cryptocurrency, but are instead associated with timeless short comings of human nature itself. However, the fact that this happened in the crypto industry and at crypto focused institutions, ones that clearly should have warranted additional oversight, but didn’t receive it, causes me to stop and try and ascertain where the roots to this failure can be found. It’s my conclusion that the answer lies in the enthusiasm that comes with being an early adopter of a new technology. And even though we avoided most of these disasters at Sarson Funds, collectively as a market, we trusted too easily. The problem I believe is that investors started to think that they were so right about this new technology and how great it is, that they couldn’t imagine that anyone would need to commit fraud.
We overlooked the reality that human nature remains. Titans forget their disciplines, violating their own standards (looking at you, Celsius) and other infamous operators like FTX’s chief Sam Bankman-Fried (SBF) failed in different ways that investors just as happily turned a blind eye towards noticing. The systems and safeguards that we expect in other industries, and honestly that most of us probably assumed were in place in crypto, obviously were not present.
Crypto is still quite a young industry, and one that grew up a lot in 2022. It will survive. When it does come out the other side, perhaps it will have transitioned from childhood to adulthood. While it’s bad that the transition occurred a little late and came only after learning hard lessons, it’s not unusual that “growing up” comes packaged this way.
So here we are, with our innocence of youth shattered. Personally, I’m encouraged to see SBF arrested. As Spiderman eloquently articulated, “with great power comes great responsibility” and clearly since SBF has admitted to spending “essentially no time on risk management” for his $24B firm, there’s gross negligence there if nothing else. This should and will be criminally addressed in federal court.
For FTX investors (5 million of them!) the outlook is not good. Expectations are that it will take many years to sort through that mess. Sadly, FTX liability claims are trading in the secondary market at pennies on the dollar (sometimes as low as one penny).
All of these events have served as a reminder that counterparties are not to be trusted with crypto assets. A lesson we take to heart at Sarson Funds. We have many exchange accounts set up as a firm, but we are careful to not leave assets on exchanges for longer than necessary to access their exchange. At the time of writing, less than 5% of our fund assets (on average) are exposed to third party crypto exchanges, a year ago this number was closer to 50%. This is likely a permanent change in nature of the market. Some will say it’s a step in the right direction, after all, crypto technology makes the need to trust a third party like a bank or brokerage unnecessary, but it was a hard-earned lesson for many.
Although battered, our investment strategies and our firm remain alive and we believe we are positioned to participate in the recovery that we know will be inevitable for our industry. A lot of what has happened in was a function of inadequate structures, safeguards and the actions of a few bad actors. What didn’t occur was a failure in the underlining technology or a change in the rapid rate of adoption for our industry’s technology around the world. Indeed, we see the movement towards decentralization alive and well in many areas. As businesses around the world begin to see the benefits associated with being a Web3 business and streamline their businesses using cryptocurrency technology.
As the power of nation states and other legacy community groups gradually decline, they are being replaced by new community groups, many of which are located online, and all of which can utilize the same technology that empowers Bitcoin to enrich the experience of their community members. This is the Web3 movement that will forever change the way we interact with companies and communities online and it is alive and well and largely insulated from the volatility and disfunction of Wall Street.
So, as we enter 2023, as an industry we are all still reeling from the traumatic events that have occurred in the past year, however, none of us have lost our belief in blockchain technology nor have we changed in our expectation that this technology will permeate and improve many aspects of our lives.
