What happened to FTX?

This week we're discussing the recent implosion of the cryptocurrency exchange FTX. The exchange, established in 2019, allowed users to trade and earn a yield on digital currencies.

So what happened to cause this juggernaut to fail? Well, they ran out of money. FTX reportedly had just $900 million in liquid assets to cover about $9 billion in liabilities.

As a liquidity crisis for FTX turned into insolvency. As a result, according to documents filed in bankruptcy court this week, FTX could owe money to more than one million creditors.

Unfortunately, what's coming to light is that Alameda Research, a hedge fund business owned by FTX owner and CEO, improperly used client funds held in custody with FTX.

At this point, you may never want anything to do with a cryptocurrency exchange ever again. That's fine. You certainly don't need to. And for many, that will be the end of the story.

After past large-scale bankruptcies, government regulation and corporate restructuring came out of the ashes. This time around, as before, we expect new scrutiny, disclosures, and rules for the exchanges left standing.

Shifting gears to wealth management. "Diversification" and "allocation" are important concepts to review in the wake of scandals like FTX. We can think of diversification as investing in various asset types, each working for different goals across time. Allocation, or position sizing, considers an investment's risk attributes relative to the portfolio's overall size.

The dose can make either the poison or the remedy. At Vector, we believe that no single asset or investment should make or break a financial plan.

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