A Perfect Storm

This headline appeared recently

Canadian Exchange Insolvent After CEO Dies With Keys to US$145M of Cryptocurrency

Gerald Cotten, founder and chief executive officer of crypto exchange Quadrigacx, died unexpectedly in India last December. It seems that he was the only one who knew the password for about US$145 million of bitcoins and the like held by his firm. The confluence of odd things here was too much for me to pass on writing about it.

How could they have a single person with the password?

Coca Cola has a recipe that is possibly worth more than $145 million. (I suspect it not really unknowable but the secrecy is part of their mystique. Same for KFC’s blend of herbs and spices.) Coke has no problem writing it down and storing it safely. Maybe people in cryptocurrency businesses get caught up in the security hype they have themselves created and neglect the value of redundancy. As the IT folks will tell you, any file you don’t have three copies of is a file you don’t really care about.

On the other hand, maybe this is fabricated so others who do know the key can loot the accounts and have the bankruptcy tidy things up. Today is a cynic day.

How can people rationally trust tiny businesses with real money?

I am still cynical, but I think it is because there are many people who do not reason well when faced with a good story, a secret process, and obscure reasons for valuation. First does not always hold value.

I am reminded of a thought from an executive who worked with my father many years ago. On asked about being the first into a market, his reply was, “A pioneer is frequently a guy with an arrow in his belly. I don’t need to be first, I need to be first to be right.”

Trying to be first often leads to gaps in common sense. The first step in making money is not losing it. If you must speculate, the rule is don’t lose much.

How many businesses disappear at the loss of the founder?

You would be surprised. Many. The reason is much the same as the problem for Quadrigacx. The founder knows things no one else knows. The founder has relationships no one else has. The founder has powers no one else has. (Like signing checks.) Most founders think they are bulletproof and have little redundancy and even fewer plans in place.

When a founder dies, the business is usually not far behind. Value is lost. At the very best it will sold for a fraction of its previous value. Most often a small fraction. Estate sale is invariably a signal to expect a bargain.

An option

If you don’t see the need for redundancy or middle management, or cannot afford all of that yet, own life insurance. Most problems can be minimized with enough money. Even where the money won’t solve the problems, it will at least replace the value lost. I once mentioned to a member of a committee I was involved with that it must be unnerving to work for a proprietor who has less than 25% of the company value in life insurance coverage. He was CFO of The Thomson Organization. He just laughed and said, “That would be at least $5 billion.” I offered to take an application and arrange a medical. Sadly, it did not come to pass.

The reality for many business owners.

Life insurance lets you die neat. Understand that value.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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