What is the underneath the FTX failure?
There is absolutely an immense information on the FTX, what happened, various analysis and mainly the blame but the ultimate question, what can an ordinary folk learn from it? From my perspective, this is an extreme example of when everything looking great on the surface and the only lesson that can be recommended do your own homework. In this article we will focus on a few things that may or may not be important:
- The background
- The issue
- What can you do about it
The FTX background story
The whole notion and ideology behind the Future of Exchange is actually fascinatingly accurate. The FTX like many other failed companies had a great ambition of providing quite unique service offering. Most of the exchanges even till today are providing general transfers / payments in and out of the crypto, where the FTX came from the Financial Services perspective by looking at providing an additional offering such as derivative products, futures and options. On the surface of the idea, it is an interesting approach to offer complex financial products in order to satisfy the growing interests by the crypto community.
On the other hand, we were facing with multitude of problems, a bunch of computer kids that have figured out that the quickest way to make the money is by creating something out of nothing. The process in itself is quite questionable where the FTX and the other sister companies were essentially acting as its own bank to issue its own tokens, coins to sustain its phenomenal growth. This has sparked a wider interest at the time which brought in a wide variety of instagrammers, influencers, politicians, sports people, you name it, everyone was wanting to get a piece of that luxurious pie. This is a recipe for disaster to an average folk especially when they hear the names like Sequioa or other large investment groups that poured the money in.
Intro: The whole idea of this article is to bring the intention to spending time on your personal development
In this world we have a little bit of time from our busy lives of surviving, the prices on everything is just going up, the inflation is getting out of the control and on top of that the salaries for an average person have been stagnant for a while, the only way to get out of this mess is to look at investing. The problem with the informational flow on the investment coupled with not enough time is reliance on the professionals to do their due diligence. In the case of FTX it has reached every single point of mirage image of the business that has been checked by the authorities, by the professional investment firm and most importantly the vision that it is actually a great idea to get phenomenal return on the investments.
Each person has a simple request, it’s not just to survive but thrive and in saying this, the reliance on other people’s opinions will get the person in trouble. Therefore, when you are purchasing a car, you won’t rely on a third-party opinion, but you will go and physically check the tires, the wheels and what is under the hood, so why is the investment is so different?
What if you had an opportunity to check the deal like you would check a car? Would it make you happier and at ease when investing in the financial products? There is no simple or right or wrong answer as yes or no, it would all depend. When it comes to the financial services, the first thing that the professionals would check:
- What is the ultimate financial goal?
- What is the size of the wallet? How Much are you looking at investing?
- What is your awareness of risk vs rewards?
- How old are you?
In this article, I’ll show you exactly how you can do this…
The different generations have different wants and needs, so as the size of the wallets. Although, in the FTX example, the founders and workers were in their late 20s or early 30s, this rule does not apply to every single individual. Also, it shows the naivety with their financial literacy. Yes, they may have generated quick income and were perceived as paper billionaires, in reality they have wasted a lot more money on all things not relating to the business and mostly on self-proclamation than doing other people a favour and generating strong returns. Which shows that the ultimate financial goal was not reached or yet properly defined.
By the way – if you are looking for a quick understanding of the financial goals, and not to be in the same or similar situation to what has happened to the majority of people, invest in your own education on understanding how to quickly check and perform financial due diligence on the person or the company. Learn how to perform fundamental analysis and most importantly do not follow the crowd.
“Quick summary: To generate yourself stable passive income you need to understand what you actually want to do with whatever the amount of money you have, whether you are going to put into the bank account or buy crypto or invest in a local store, it does not matter beyond the point of you understanding what you want to do.
I have put the 5 phases in the due diligence process
Step 1: Define your investment strategy
In this step, you will need to understand the simplicity of what you need and want
- What is your expertise?
- What industry do you understand and know?
- When and where can your industry move?
- How much are you prepared to invest in terms of time and money?
- Do you want this to be a long term or short term investment?
- Do you know how to trade?
- Do you know how to handle the losses?
Top tip: stick to what you know before investing in unknown like FTX
Step 2: Target Screening
Once you have defined your strategy, the investment length and industry. Next,
- Identify how many companies that are within your industry
- Do you know what they do in terms of service or products?
- Is it a public or a private company?
- Understand who is behind the company
- Reduce the research to 20 companies within your budget range
Don’t forget: if at any point of time you need help with any of the steps you can contact me to discuss and help you build your knowledge.
Step 3: Due Diligence
Since you have gotten to this step, the next points would be
- Plan your due diligence
- Define your approach, methods and protocols
- Conduct your due diligence
- Compile and Analyze the findings
This is going to be meatiest part of the work, and this is also the wondering point of where Sequioa went wrong when they dropped $250m into FTX
Step 4: Buy or Invest
Creating own valuation or assessment will help you with the entry and exit points
- What is your plan: buy and hold? buy and sell? swap?
- Develop your offer or structure
- Buy or Invest
Top tip: since you have completed a number of steps these far, you should be very proud of yourself and don’t stress it out, it’s just numbers based on logical decision making, you’ve done your homework
Step 5: Review and Repeat
Most importantly, regardless of your strategy and steps, you need to get into the habit of regular reviews
- Do you have a plan on following up with what you’ve done?
- Did you achieve your goals that you have set for yourself?
- Do not be scared to take the profits
- Do not be scared to take the loses
- Do not hold to something that makes no sense and stick to your plan
We have started the conversation on the lessons that can be learnt from the FTX fallout and what we have come up with is the steps to learning on how to do your own due diligence, we have also looked at the reasons why you should not be following the crowd or listen to the third-party opinions. If this is over marketed, then by default it should be something wrong. Having a critical thought is not being negative but learning how to think on your own feet and a show of your personal intelligence. So, if you learn how to follow the steps, you’ll be able to start generating your own passive income and having a better understanding on the investment that you are working so hard for. Remember that these steps are a guideline and is only the beginning. If you’d like a helpful hand to walk you through on how to do it, then feel free to get in touch with me.