{"id":10220,"date":"2022-11-29T13:12:42","date_gmt":"2022-11-29T18:12:42","guid":{"rendered":"https:\/\/rixtrema.com\/blog\/?p=10220"},"modified":"2022-11-29T13:14:23","modified_gmt":"2022-11-29T18:14:23","slug":"ftx-collapse-risk-management-lessons-to-save-your-money","status":"publish","type":"post","link":"https:\/\/rixtrema.com\/blog\/ftx-collapse-risk-management-lessons-to-save-your-money\/","title":{"rendered":"FTX COLLAPSE: Risk Management Lessons to Save Your Money"},"content":{"rendered":"\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><a href=\"#ftx-collapse-lessons-in-risk-management\">FTX Collapse, Lessons In Risk Management<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#elementary-mistakes\">Elementary Mistakes<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#going-beyond-risk-tolerance\">Going Beyond Risk Tolerance<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#why-did-ftx-collapse\">Why did FTX Collapse?&nbsp;<\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"#lessons-to-be-learne\">Lessons To be Learne<\/a><\/strong><\/li>\n<\/ul>\n\n\n\n<h2>\u00a0<\/h2>\n<h2><b><a id=\"ftx-collapse-lessons-in-risk-management\"><\/a>FTX Collapse, Lessons In Risk Management<\/b><\/h2>\n<p><a href=\"https:\/\/www.coindesk.com\/markets\/2022\/11\/12\/the-epic-collapse-of-sam-bankman-frieds-ftx-exchange-a-crypto-markets-timeline\/\"><span style=\"font-weight: 400;\">The FTX collapse<\/span><\/a><span style=\"font-weight: 400;\"> is a cautionary tale of many things, greed and hubris among them of course, but also a failure to really appreciate the importance of risk management. Many unsophisticated investors wonder why you would need to bother with complex models, when you can simply invest in an index fund or base your strategy on financial press hype.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Well Sam Bankman-Fried and his cohorts offer a pretty instructive masterclass about why risk management is not only important but vital to investors of all stripes.\u00a0<\/span><\/p>\n<p>\u00a0<\/p>\n<h2><b><a id=\"elementary-mistakes\"><\/a>Elementary Mistakes<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The crypto exchange that Sam Bankman Fried, or SBF, founded was FTX. It received institutional backing and support from popular media figures like<\/span><a href=\"https:\/\/consent.yahoo.com\/v2\/collectConsent?sessionId=3_cc-session_360e7509-a253-4d34-9295-1e81c4842629\"><span style=\"font-weight: 400;\"> Mr Wonderful of Shark Tank fame<\/span><\/a><span style=\"font-weight: 400;\">; even world leaders like Tony Blair and Bill Clinton were on the payroll. They all claimed to have done their due diligence; and yet the signs were all there. The CEO of Alameda Research, basically FTX\u2019s Hedge Fund, admitted on camera that she only used elementary school math for risk and that stop losses are not a good risk management tool, according to her a \u2018tolerance for risk\u2019 is all that\u2019s required.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<h2><b><a id=\"going-beyond-risk-tolerance\"><\/a>Going Beyond Risk Tolerance<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">This is a wild statement to make for a company whose founder was touted as the next Warren Buffett on the cover of Fortune magazine.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Math is the underpinning of risk management, even the worst risk model uses math that goes way beyond basic addition and subtraction. There is much more at play. It is perilous and shortsighted to focus exclusively on your tolerance for risk, the purely psychological aspect of investing. For example when the market is up, it\u2019s all about how much volatility you can take, but when it unravels in as little as 48hrs, it\u2019s all gone. At this point you should realize there is much more to this than simple tolerance for risk.<\/span><\/p>\n<p>\u00a0<\/p>\n<h2><b><a id=\"why-did-ftx-collapse\"><\/a>Why did FTX Collapse?\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Binance essentially set in motion a bank run after announcing they wanted to sell their FTT tokens issued by FTX. Binance was not only the major rival of FTX but had the largest holding of the tokens. Around this time it came to light that Alameda Research was making risky loans with FTT and after Binance wanted to sell, everyone rushed to withdraw funds.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The real meat of the story is the<\/span><a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-11-10\/sam-bankman-fried-s-ftx-faces-8-billion-shortfall-possible-bankruptcy\"><span style=\"font-weight: 400;\"> $8 billion <\/span><\/a><span style=\"font-weight: 400;\">shortfall, it appears that Alameda was dipping into customer accounts and lost money on bad trades or perhaps something more sinister. At this point it is not clear how much malice or incompetence to assign to their operations. Either way it doesn\u2019t look good for people hoping to get their money back.\u00a0<\/span><\/p>\n<p>\u00a0<\/p>\n<h2><b><a id=\"lessons-to-be-learne\"><\/a>Lessons To be Learned<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Risk management is about more than how much tolerance you can take. But more importantly if it looks like a ponzi scheme, walks like a ponzi scheme and talks like a ponzi scheme; dear readers do not be fooled, it is a ponzi.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To get more on this story listen to the Investing Counterpoint podcast now.\u00a0<\/span><\/p>\n<p><iframe loading=\"lazy\" title=\"\u26a1FTX COLLAPSE: Risk Management Lessons to Save Your Money (Ep. 15)\u26a1\" width=\"960\" height=\"540\" src=\"https:\/\/www.youtube.com\/embed\/o82sywLDHp4?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" allowfullscreen><\/iframe><\/p>\n\n\n\n<script src=\"https:\/\/apis.google.com\/js\/platform.js\"><\/script>\n<div class=\"g-ytsubscribe\" data-channel=\"rixtrema\" data-layout=\"default\" data-count=\"default\"><\/div>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:33.33%\">\n<p>Follow us on <strong>LinkedIn<\/strong><\/p>\n\n\n\n<script src=\"https:\/\/platform.linkedin.com\/in.js\" type=\"text\/javascript\"> lang: en_US<\/script>\n<script type=\"IN\/FollowCompany\" data-id=\"1334326\" data-counter=\"bottom\"><\/script>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:66.66%\"><\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:66.66%\">\n<iframe loading=\"lazy\" width=\"100%\" height=\"166\" scrolling=\"no\" frameborder=\"no\" allow=\"autoplay\" src=\"https:\/\/w.soundcloud.com\/player\/?url=https%3A\/\/api.soundcloud.com\/tracks\/1392552361&amp;color=%23ff5500&amp;auto_play=false&amp;hide_related=true&amp;show_comments=false&amp;show_user=true&amp;show_reposts=false&amp;show_teaser=false\"><\/iframe><div style=\"font-size: 10px; color: #cccccc;line-break: anywhere;word-break: normal;overflow: hidden;white-space: nowrap;text-overflow: ellipsis; font-family: Interstate,Lucida Grande,Lucida Sans Unicode,Lucida Sans,Garuda,Verdana,Tahoma,sans-serif;font-weight: 100;\"><a href=\"https:\/\/soundcloud.com\/rixtrema\" title=\"Investing Counterpoint\" target=\"_blank\" style=\"color: #cccccc; text-decoration: none;\" rel=\"noopener\">Investing Counterpoint<\/a> \u00b7 <a href=\"https:\/\/soundcloud.com\/rixtrema\/ftx-collapse-risk-management-lessons-to-save-your-money-ep-15\" title=\"FTX COLLAPSE: Risk Management Lessons to Save Your Money (Ep. 15)\" target=\"_blank\" style=\"color: #cccccc; text-decoration: none;\" rel=\"noopener\">FTX COLLAPSE: Risk Management Lessons to Save Your Money (Ep. 15)<\/a><\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:33.33%\"><\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:66.66%\">\n<iframe allow=\"autoplay *; 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Many unsophisticated investors wonder why you would need to bother with complex models, when you can simply invest in an index fund or base your strategy on financial press hype.\u00a0<\/p>\n","protected":false},"author":3,"featured_media":10221,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[168,169,201],"tags":[7],"class_list":["post-10220","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-news","category-podcasts","category-video","tag-financial-advisor","post_format-post-format-video"],"jetpack_featured_media_url":"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2022\/11\/ftx.jpg","yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v15.9.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>FTX COLLAPSE: Risk Management Lessons to Save Your Money<\/title>\n<meta name=\"description\" content=\"The FTX collapse is a cautionary tale of many things, greed and hubris among them of course, but also a failure to really appreciate the importance of risk management. 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