Alternative Investment

It’s Time To Stop Making Celebrity Endorsements Your Measuring Stick For Investment Products

What do celebrities Tom Brady, Steph Curry, Matt Damon and several professional sports franchises have in common? They all recently were part of large-scale endorsement and sponsorship campaigns for cryptocurrencies, cryptocurrency exchanges or other related businesses. Curry, Brady and the Miami Heat endorsed the cryptocurrency exchange FTX.

In the ads, the celebrities pitched FTX as “the future” and related stories of their rise to the top in a thinly veiled effort to couch cryptocurrency to investors as their Super Bowl or big break. In other words, this investment was their opportunity to go for it and live the life they always envisioned for themselves. If the investment went right, they could have a fabulous life, too.

It was a compelling pitch, and investors bought in. Then the bottom fell out. It’s already been a difficult year for cryptocurrency investors, and the announcement of FTX’s bankruptcy has made it even worse. Millions of crypto investors all over the world will lose significant sums of money. While the losses are regrettable, a lesson can be learned. Your favorite celebrity’s lifetime statistics are no substitute for due diligence.

What Is FTX?

FTX is a cryptocurrency exchange. Although cryptocurrencies are considered to be decentralized because of the lack of a central bank such as the Federal Reserve or European Central Bank, there is still a need for a central exchange where cryptocurrency traders can buy, sell, invest, trade or make other financial moves with their cryptocurrency. These exchanges hold crypto wallets where cryptocurrency holders and investors keep their cryptocurrency.

Until its recent bankruptcy filing, FTX was one of the world’s largest cryptocurrency exchanges. Investors could buy, sell or trade crypto futures of all kinds. Cryptocurrency holders could even leverage the value of their cryptocurrency by borrowing against it or lending money with the profits in their coins and collecting interest. The platform also offered derivatives trading on all different types of cryptocurrencies.

FTX was founded in 2018 by exchange-traded funds (ETFs) trader Sam Bankman-Fried, a Massachusetts Institute of Technology graduate. The variety of trading options and some timely endorsements combined to make FTX blow up almost overnight. In just a few short years, it went from a small startup to one of the world’s leading exchanges.

FTX offers spot trades on nearly 300 cryptocurrencies in nine fiat currencies like the U.S. dollar, English pound, Euro Turkish lira and Swiss franc. It even issued its own token — the FTT. Aside from a very well-designed online platform, another thing that made FTX popular was that it allowed investors to leverage up to three times the value of their crypto wallets to make moves on the platform.

See also: Top 7 Best Crypto Exchanges of 2022

What Went Wrong?

The leverage and flexibility cryptocurrency offers allows investors to make a tremendous amount of money in a very short time. For its part, FTX made a percentage on all the transactions closed on its platform. But the downsides are numerous. First, triple the leverage means exposure to triple the losses for the investor and the exchange.

The lack of any central bank means that investor deposits are not insured in the event of a cryptocurrency exchange default. And without regulatory authority, exchange managers aren’t prevented from committing impropriety. FTX was mainly run from the Bahamas, which has lax financial regulations.

That’s a problem for something as new as cryptocurrency, which is still largely unregulated in countries with fairly robust financial regulations like the EU, U.K. and the United States. In fact, U.S.-based investors are forced to invest with FTX on a separate platform — FTXUS — that is more restrictive in the options it offers in order to comply with U.S. law.

The main issue is that there is no one to verify that the underlying numbers of cryptocurrency exchanges can support the operation. So, when Coindesk published a report revealing that an inordinate amount of FTX’s liquidity (and value) was based on holdings in its own FTT token and the same was true of FTX’s trading arm Alameda Research, it came as a huge surprise to investors and account holders.

When the news came out, FTX clients and investors did exactly what you’d expect them to do. They all tried to empty out their e-wallets or close their accounts at the same time, which created a liquidity crisis for FTX that led to the exchange filing for bankruptcy protection in several countries at the same time. Binance, the world’s largest exchange, looked at a buyout but backed out in less than 24 hours.

See also: What’s Happening With FTX Right Now?

Where Are The Celebrities Now?

For celebrities and the companies they’re pitching for, the arrangement only works if it’s a two-way street. Companies want to ride on the coattails of celebrities by paying them to lend credibility to their operations. Celebrities get paid and gain additional exposure. They help each other. In this case, many of the celebrities were paid in FTX equity — probably through FTT coin.

That equity is now basically worthless. When the bankruptcy is all worked out, the celebrities may see a few pennies on the back end. But they were already rich. Even if they owned some FTX, it was only part of what is likely a highly diversified portfolio that includes both traditional and alternative investments. In fact, the reality of celebrity investing is almost entirely divorced from any investment product they pitch.

Their wealth and access to some of the world’s best financial advisers make them privy to the kind of investing very few people watching them on TV will ever be part of. NBA great Shaquile O’Neal was an early investor in Google, now Alphabet Inc. (NASDAQ: GOOGL). That’s not a deal he endorsed on TV, but even if he had, only a small percentage of retail investors could have afforded the buy-in.

It’s one thing to buy a golf club or a pair of shoes because that’s what your favorite player endorses, but even that may not be a good decision depending on the shoe or the club. A celebrity endorsement is probably the last thing you should allow to motivate you to take advantage of an investment offering, but that doesn’t mean they’re lying to you or being misleading in the advertisements.

It means they’re pitching whatever company agreed to pay the most money to their management team. Much like a golfer you see playing with a certain club, they’d play with a club from a rival equipment maker if the sponsorship contract was more lucrative than the one they had before. It’s unlikely that Tom Brady or Steph Curry knew FTX from any other exchange apart from the size of the check they were expecting.

Your investment goals, risk tolerance and access to capital are likely very different from that of any superstar athlete or actor you see advertising a product.

Almost every day, more information trickles out about the corporate culture at FTX, and none of it is good. It’s highly unlikely that any celebrity endorser looked deep enough to figure that out.

The same thing goes for the balance sheet that showed how overleveraged they were. It’s probably not a subject that came up during discussions between FTX and the celebrity’s management team. The thing is, they can afford to shoot big and miss big. You can’t.

Check out: Jeff Bezos-Backed Startup Lets You Become A Landlord With $100

The Takeaway

FTX became one of the largest cryptocurrency exchanges in the world. Now, it’s on the verge of one of the largest bankruptcies in history. By some estimates, FTX has over 1 million creditors in dozens of countries. Governments in almost every country where FTX operated are beginning criminal investigations into the exchange and how it spent money.

No matter how that shakes out, a lot of investors will be left holding the bag. There are other exchanges, and this is probably not the end of cryptocurrency. But it should be a cautionary tale for anyone who jumped on the FTX train because their favorite athlete said so, or they saw the name emblazoned on their favorite basketball team’s home court.

All investment offerings carry risk. In the case of an operation like FTX where there is little transparency and the opportunity to use 300% leverage, extreme caution should be exercised. Most everyday investors would be better served by building wealth through proven approaches. Yes, it’s possible to catch lightning in a bottle, but that’s really not a sound investment strategy.

If your portfolio is already built out, it may be worth diversifying some funds into cryptocurrency offerings. However, building your entire portfolio around it has inherent risks, regardless of what your favorite quarterback says. In the meantime, combining real estate investment trusts (REITs), gold and traditional investments into one strong portfolio is still probably the best way forward. Cryptocurrency isn’t a better mousetrap just because someone famous says so.

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