FTX collapse: Why do firms invest in early stage companies in emerging sectors?


Assoc Prof Theseira pointed to the two types of risk involved – idiosyncratic risk, meaning the risk specific to a particular company or investment, and systematic risk, meaning the risk that is general to the entire category of investments.

“Idiosyncratic risk is high because in general, crypto firms have been founded and run by persons with relatively little established track record,” he said, noting that FTX is a good example of this.

Systematic risk is also high, as the technology itself has no established profitable use case yet beyond financial speculation, explained Assoc Prof Theseira.

“Even if crypto technology does have a profitable use case, it’s also by no means certain that the profit will justify the current scale of investments, so that is the other element of systematic risk; you might not lose your investment, but you might get a much lower return than you were hoping for,” he added.

“ACTING APPROPRIATELY IN INVESTING”

Despite the FTX fiasco, there are still merits in investing in early stage companies in the digital token ecosystem, said Prof Loh.

He added that investing in such spaces may not be for everyone, particularly retail investors. But ignoring them entirely may be “regressive”.

“You win some and you may lose some in any portfolio of investments – in the overall scheme of things, we have to see the broader performances,” he said.

“It will take more than an FTX fiasco to write off the need to invest in early stage companies that advance the digital token ecosystem including cryptocurrencies,” he added.

Large investment firms need to invest in every major emerging investment asset class that is available, pointed out Assoc Prof Theseira.

This is because it is necessary to diversify the investment portfolio and also to have exposure to emerging categories which could be important. 

“I think the FTX debacle doesn’t change the underlying question: Is it riskier to invest in the cryptocurrency space, or is it riskier to stay out of it?” he asked.

“Not looking into such investments means accepting the risk of staying out, which is that your portfolio could miss out on a potentially high return, transformative industry.”



Read More: FTX collapse: Why do firms invest in early stage companies in emerging sectors?

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments