The story of what happened to tens of millions of dollars deposited with the QuadrigaCX cryptocurrency exchange is as modern as the latest thinking in cyber-security. But why 115,000 clients would hand over their savings to Quadriga is as old as human folly.
Canadian CEO Gerald Cotten was Quadriga’s only employee when he died from complications related to Crohn’s disease in early December.
After his death, it was revealed that as much as $190 million worth of cryptocurrency owned by investors was likely held offline in what’s known as “cold wallets,” the passwords to which Cotten took with him to his grave. Another $70 million in cash owed to investors is mostly caught up bank drafts held by payment processors.
Quadriga was literally managed from Cotten’s laptop computer. The Globe and Mail summed up the business: “Quadriga had no physical office, no corporate bank accounts or even an accounting department. Mr. Cotten employed only a small team of contractors. Cryptocurrency exchanges in Canada are not regulated. No one was watching over the company.”
Investors entrusted their money to Quadriga with no safeguards amid a mania for trading in Bitcoin and other cryptocurrencies in recent years.
Sadly, for enthusiasts, Quadriga is far from the only trouble besetting the cryptocurrency market. After rocketing higher, the market has crashed in the last year. About 85% of the market value of cryptocurrencies has been lost since the market peaked at a value of US$800 billion, according to a recent Reuters article.
Last spring, the world’s greatest investor Warren Buffett, his partner Charles Munger and their friend Bill Gates branded the cryptocurrency market as an example of the greater fool theory in action. Since no value is produced by the cryptocurrencies, you have to depend on a greater fool to buy them from you to get a higher price.
Market bubbles based on greater fool trading stretch back all the way to the tulip bulb mania in 17th century Amsterdam. In our times, we’ve seen the dot.com bubble, the U.S. housing bubble and numerous other smaller-scale market manias.
Buffett, who’s seen quite a few in his time, says it will keep happening. “People like to speculate. They like to gamble.”
Clearly, it’s hard not to get caught up in the excitement of a market that seems to be headed for the stratosphere. The illusion that this time really is different can be very strong.
It won’t surprise you to hear that at PWL Capital we don’t think you should be gambling with your life savings. A calm, patient approach to investing, based on prudent, scientific principles is always our answer to the latest market enthusiasm.
It may take a while, but when the air comes rushing out of the bubble, it sure feels good not to be left holding losses and the knowledge you were not the greater fool.