Is the FTX Collapse the End for Cryptocurrencies?

The collapse of FTX last week, which was the second largest crypto exchange, has sent a stark warning to all about the risks in the cryptocurrency space. The collapse also brings to light how far this asset has to go in terms of shedding the label that cryptocurrencies are akin to the Wild West.

What lessons can we learn from the FTX collapse?

A lot has been written about the collapse of FTX and the highly speculative investments they made with client’s money that ultimately led to its downfall. Interestingly, a lot of high profile athletes and other well-known people were caught up in the debacle.

There were also companies that got caught in the collapse including Telstra Ventures and Sequoia Capital. Despite recognising the high risk nature of such investments, venture capital companies are often caught in a ‘damned if you do and damned if you don’t’ situation, as they appreciate the need to invest in growth areas without leaving their run too late.

While Bitcoin is down around 78 percent in the last 12 months, investors are continuing to hold on to the hope of a return to better days of rampant speculation. Unfortunately, the collapse of FTX has created a huge hole and further increased the uncertainty in this area. It has also raised the question again of whether cryptocurrencies are just one big Ponzi scheme that will leave investors very disappointed.

The lessons to be learnt are those that have been carved in stone for centuries. If you chase big wins, you will eventually have big losses, as history repeats itself. It is important for all investors to remember that you should only invest money in highly speculative markets that you can afford to lose.

What were the best and worst performing sectors last week?

The best performing sectors included Materials up 1.82 per cent followed by Information Technology up 1.21 per cent and Consumer Staples up 0.48 per cent. The worst performing sectors included Energy down 1.27 per cent followed by Consumer Discretionary down 1.24 per cent and Communication Services down 0.85 per cent.

The best performers in the S&P/ASX top 100 stocks included Fortescue Metals up 12.39 per cent followed by Illuka Resources up 7.07 per cent and Orora up 5 per cent. The worst performing stocks included Allkem down 13.47 per cent followed by Pilbara Minerals down 11.36 per cent and Lynas Rare Earths down 8.75.

What's next for the Australian stock market?

While at times the market has shown indecision, over the past six weeks the All Ordinaries Index has been bullish rising over 11 per cent. More importantly, last week it rose above its last major high of 7,386 points from 16 August.

While the All Ordinaries Index traded higher last week than the previous week, it wasn’t up strongly given that it only closed four points higher. The lack of strength last week may just signal a turning point for the Australian stock market, which means the short-term fall I have been expecting is likely to occur this week.

If the market does start to fall, it will only be short term and last for one or two weeks with strong support between 7,000 and 7,200 points likely to stop the fall. The sectors currently showing opportunities include Financials, Materials and Consumer Staples, which should all do well into 2023.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.