The potential collapse of one of the world's largest cryptocurrency exchanges this week has seen a number of big-name investors get burned on their stakes in the company, providing yet another warning to smaller, mom-and-pop investors about the dangers of following major funds and celebrities on putting money to work in volatile sectors.
"This falls into, at the very least, the highly speculative investment category. Which tells you that, to me, it's kind of like going to Las Vegas," Lorne Steinberg, the president and portfolio manager of Montreal-based Lorne Steinberg Wealth Management, told Yahoo Finance Canada in a phone interview. His firm does not invest in the crypto sector.
Crypto exchange FTX shocked the market Tuesday after announcing its rival, Binance, signed a non-binding letter of intent to acquire the company as it grapples with a liquidity crunch. The preliminary agreement fell apart not even a day later when Binance scrapped its takeover offer.
Cryptocurrency prices slumped on the news as investor jitters rippled through the industry. FTX Token, FTT, cratered while bitcoin dropped to trade at its lowest point since late-2020.
Major funds including BlackRock, the Ontario Teachers' Pension Plan, SoftBank, Tiger Global and Sequoia Capital have all invested in the owner of the FTX exchange, FTX Trading Ltd. Star NFL quarterback Tom Brady and supermodel Gisele Bündchen have also bought into the company.
The fact that big names are in there, should mean absolutely nothing to anyone.Lorne Steinberg, president of Lorne Steinberg Wealth Management
But Steinberg cautions retail investors about being enticed to put money into speculative holdings just because influential funds and celebrities have bought in.
"What we all really know is that these massive companies or super wealthy people are putting, probably, pennies of their net worth or value into crypto. So, for BlackRock or Ontario Teachers', if they lose the whole thing, it is a rounding error," Steinberg said.
"The fact that big names are in there should mean absolutely nothing to anyone. It's a function of how much of their net worth do they actually have in these things?"
The FTX liquidity crunch is just the latest stumble in the crypto industry that some institutional investors have found themselves wrapped up in. Quebec's pension giant Caisse de dépôt et placement du Québec decided to fully write off its US$150 million investment in Celsius Network LLC earlier this year after the crypto lender went bankrupt.
Steinberg's advice to retail investors is that "the more speculative the investment, the tinier the investment."
He says it's easy to get caught up when a sector is flying high and it appears there could be easy profits to be made. Whether it was the dot-com era, cannabis stocks or the past craze over junior miners, smaller investors are at risk of putting too much of their portfolio into one sector, he says.
"A lot of smaller investors end up putting way too much of their net worth in these things. Because they look at it as a way of getting rich, so to speak. Without even knowing what they're buying. And this happens regularly," Steinberg said.
His firm prefers investments with a proven track record, though he acknowledges the approach can be considered "boring" to some.
"It's like watching paint dry. But, you know, these are profitable businesses that generate pretty good returns over a long period of time. It's how Warren Buffett made his money," he added.
"And this once again will undoubtedly be a good lesson to a lot of people. Because as human beings we unfortunately, all of us, learn best from our mistakes. Make sure an investment makes sense before you make it and if you don't understand it, don't make the investment."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.