Big Lessons from a Big Loss: Why Ontario Teachers’ Are Stepping Back from Crypto After the FTX Debacle

The world of cryptocurrency can be a thrilling rollercoaster, full of potential highs and, as the Ontario Teachers’ Pension Plan (OTPP) recently discovered, some significant lows. Imagine managing over $190 billion – that’s the scale of responsibility at OTPP, ensuring the retirement security of over 330,000 teachers and school employees in Ontario. So, when they made a foray into the crypto world with an investment in FTX, it raised eyebrows. And when FTX spectacularly collapsed, taking OTPP’s $95 million investment with it, it sent shockwaves through the financial community.

What Happened with OTPP and FTX?

OTPP wasn’t alone in seeing potential in FTX, which was once a leading cryptocurrency exchange. They dipped their toes in twice, first during the bullish market of 2021 and again in early 2022 during a Series C funding round. But as we all know now, the crypto landscape can shift dramatically, and FTX’s downfall in November 2022 was a stark reminder of the inherent risks.

OTPP’s Chief Executive, Jo Taylor, shared some candid insights with the Financial Times. He emphasized that the pension fund isn’t in a rush to jump back into the crypto pool anytime soon. They’re still processing the FTX experience and, understandably, will be approaching emerging asset classes like digital currencies with a much more cautious stance in the future.

“Extensive Due Diligence” – What Went Wrong?

One of the most striking statements from OTPP was: “We took our time and performed extensive due diligence on the business. It didn’t turn out the way we expected. We weren’t always given all of the information we needed to make an informed decision.”

This raises crucial questions about the nature of due diligence in the relatively young and often opaque world of cryptocurrency. What does ‘extensive due diligence’ look like in this space? And what are the limitations?

Here are some potential takeaways:

• Information Asymmetry: The crypto world can suffer from a lack of transparency. Even with thorough research, key information might be withheld or difficult to access.
• Rapid Change: The speed at which the crypto market evolves can make even recent due diligence outdated quickly.
• Regulatory Uncertainty: The lack of clear and consistent global regulations adds another layer of complexity and risk.

Is OTPP Alone? The Broader Picture

OTPP isn’t the only major pension fund that has felt the sting of crypto investment losses. The Caisse de dépôt et placement du Québec (CDPQ) also experienced a significant loss, writing off their entire $154.7 million investment in Celsius Network, another casualty of the 2022 crypto crash.

These examples highlight a critical point: even sophisticated investors with significant resources can face substantial risks in the cryptocurrency market.

Where Will OTPP Focus Now? Back to Basics?

So, where is OTPP shifting its focus after this experience? The answer seems to be a move towards more traditional and established asset classes. They plan to allocate 10 billion Canadian dollars ($7.4 billion) over the next three years to areas like real estate and private credit.

This strategic shift suggests a renewed emphasis on stability and predictability, especially when managing the retirement funds of so many individuals.

What Can We Learn from OTPP’s Experience? Actionable Insights

The OTPP’s experience with FTX offers valuable lessons for anyone considering cryptocurrency investments, whether you’re a large institution or an individual investor.

• Exercise Extreme Caution: The crypto market is volatile and complex. Approach it with a high degree of skepticism and a thorough understanding of the risks involved.
• Due Diligence is Paramount (and Challenging): Conduct thorough research, but acknowledge the limitations and potential for hidden information. Don’t be afraid to ask tough questions.
• Diversification is Key: Don’t put all your eggs in one basket, especially in a high-risk asset class.
• Understand Your Risk Tolerance: Are you prepared to lose your entire investment? Be honest with yourself about your comfort level.
• Regulatory Landscape Matters: Keep abreast of evolving regulations and understand their potential impact on your investments.

The Ripple Effect of FTX’s Collapse

The dramatic downfall of FTX, once the third-largest crypto exchange, had a far-reaching impact beyond just the investors directly involved. It significantly eroded trust in the crypto ecosystem, leading to a decline in funding and increased regulatory scrutiny worldwide.

In essence, it served as a stark reminder that even seemingly established players in the crypto space can be vulnerable.

Looking Ahead: A More Cautious Crypto Future?

Will OTPP ever venture back into the world of cryptocurrency? It’s possible, but it’s clear that their approach will be significantly more cautious and measured. Their experience serves as a cautionary tale, highlighting the importance of thorough due diligence, risk management, and a healthy dose of skepticism when navigating the ever-evolving landscape of digital assets.

The story of OTPP and FTX is a valuable case study for anyone interested in the intersection of traditional finance and the world of cryptocurrency. It underscores the inherent risks and the critical need for vigilance, even for the most sophisticated investors.