Financial influencer says FTX promotion is a ‘scar’ on own credibility

Financial Analyst and YouTuber “Meet Kevin” Kevin Paffrath sits down with Yahoo Finance Live to address the FTX collapse and the influencer's past promotion of the exchange, while also discussing regulatory framework for crypto and Tesla's stock performance tied to Elon Musk's acquisition of Twitter.

Video transcript

- Among the many gems mined by Sam Bankman-Fried in the last 24 hours regards telling the truth. Quote, I was as truthful as I'm knowledgeable to be. I can't wait for my teenagers to take that one for a spin. Here with reaction, Kevin Paffrath. You know him as "Meet Kevin" on YouTube, where he once pushed FTX to his more than 1.8 million subscribers.

Kevin, good to see you. First, let's start with George Stephanopoulos asking SBF about what he makes of the frequent Bernie Madoff comparisons. I want your reaction. Listen.

SAM BANKMAN-FRIED: I don't think that's who I am at all, but I understand why they're saying that. People lost money. And people lost a lot of money. When you look to the classic Bernie Madoff story, there was no real business there. The whole thing, as I understand it, I think was just one big Ponzi scheme, right? FTX, that was a real business.

- So Kevin, I want your general reaction to SBF on both these interviews. I'm going to give you a multiple choice. Is he Bernie Madoff? Is he Elizabeth Holmes? Or is he Billy McFarland minus the cheese sandwich, a.k.a. Fyre Fest?

KEVIN PAFFRATH: You know, I don't know, man. He is a little bit of all three of the above, mostly a big cluster of a disaster. And thank you, first of all, for having me. But look, even if you have inexperience, you can't be negligent with customer funds. And everyone was duped by this business, and it wasn't because it was a bad business. It was because it was managed terribly.

And I think that's what this comes down to, is I don't actually believe that Sam Bankman-Fried meant to defraud people. He just did by being negligent, and that's almost as bad. So hey, would I rule out Sam Bankman-Fried hanging out with Bernie Madoff?

Maybe not because maybe he deserves to so there's finally a message that sent to not only Wall Street, but everybody in the crypto community, that if you screw up and you lose people's money doing stuff you say you're not doing, like protecting people's assets, you deserve to be in prison.

- Well Kevin, I guess, what have you learned? Because you had a partnership with FTX. You have 1.8, nearly 2 million subscribers to your YouTube channel, a lot of loyal followers. I'm sure some of them were a little bit upset with you over the last couple of weeks? What have you heard from them and I guess the biggest lesson that you personally have learned from this.

KEVIN PAFFRATH: Yeah. Personally, the biggest lesson that I've learned is I just can't trust external companies. When you've got massive hedge funds, like Sequoia, or people like Kevin O'Leary saying the safest place to put your money is FTX, boy, oh, boy, I say to my audience, hey, if you want to speculate a little bit on crypto and maybe a small portion of your portfolio, FTX is a great platform.

I said that. I regret that. I wish I could go back and undo that because now that's a scar on me as an influencer. Now people are like, well, I mean, you had a partnership with them. So it looks bad. What I do now and after this, what I've decided, is I've said, you know what? I'm just not going to do partnerships anymore with anything other than what I create.

So if I have a real estate startup-- which I do. It's called House Hack. Or a stock startup or whatever it, is like my ETF, then I can promote my own products. But I'm not going to promote anybody else's products anymore because you've got people like Sam Bankman-Fried who say everything's fine. Don't worry about it one day, and the very next day, they freeze customer withdrawals. And it's terrible.

So understandably so, some of the folks who follow me-- hopefully they still do-- are upset. Many of them fortunately watched my warning videos and tweets that I sent at least a week before the collapse and said, look, the collapse is starting at FTX, the international division. It's going to spread to the US one. Get out as soon as possible.

So many folks send me thank you letters and saying thanks for the warning. The problem is not everybody was able to watch that week. What if they were on vacation, and they came back, and oh, my gosh. It's collapsed. It's terrible. And I think the buck ultimately stops with Sam Bankman-Fried, and at bare minimum, he was criminally negligent and deserves to serve time since he can't serve money since he's bankrupt.

- Yeah, he's probably going to do some considerable time. And you acknowledge you were paid $2,500 per mention of FTX. Given that relationship, how difficult is it to build or in this case rebuild trust as you are starting your own ETF?

KEVIN PAFFRATH: Yeah, absolutely. Our ETF, the Pricing Power ETF, ticker PP, just launched yesterday. We're very excited about that. We hope it goes very strong, the assets go up over time. But ultimately, I just have to put one foot in front of the other. We go through life, and we get scarred. This FTX thing is a scar, and I've apologized for it.

I've changed what I do going forward, which is not working with external companies anymore. I'm just going to work on things I control. That way if we do something wrong, at least we can fix it. But we don't expect to do things wrong to the level of an FTX because that's criminally negligent.

I work with the SEC and regulations. I see what we have to go through. And honestly, what it does is it shows, wow, being a licensed series 65 financial advisor, I see why the regulation is in place, why there are audits, why there are systems and controls. It's to prevent an FTX. It's all there for a reason.

And the SEC is doing a great job, or at least the best that they can. And that's why we need an SEC for crypto. This is exactly why we need regulation, to prevent this kind of disaster from happening again in the future.

- Kevin, more on that regulation because I think everyone's trying to figure out what exactly that should look like, how quickly we will see regulation. What do you think about that?

KEVIN PAFFRATH: Well, first and foremost, we need essentially either the SEC or an institution like the SEC to regulate the brokerages so that we know the exchanges are actually safe, where people can deposit their money. Ideally, we need SIPC insurance, which you have at brokerages, like Robinhood or M1 Finance or TD Ameritrade.

You're insured up to $500,000 against loss if the brokerage goes bust. It's kind of like an FDIC insurance, which is usually for savings and checking accounts. That's the first thing we need. People need to have faith that their institution or money in an institution is going to be protected. That also prevents a bank run, which could lead those brokerages to collapse in the first place.

But we didn't have that at FTX. Of course not because it's unregulated. Then people need to trust the actual things they're buying, which are probably securities in many cases. Some say maybe Bitcoin isn't. But whatever you call coins, there should be some form of regulated process for making sure these coins are actually legitimate and that they've had some form of regulatory vetting process.

Now people can exchange in a marketplace they trust with insurance and government backstops, and they can actually purchase things that have at least been vetted. See, the SEC says the goal is not to help you make a good investment. The goal is to help you make a fair investment.

So you should be free to make good or bad investments, but all investments should be fair and free from fraud. And that's the goal of regulation. And I 100% support regulation, and it can't come soon enough.

- All right, so you mentioned your ATF-- ETF, excuse me. It is 1/5 Tesla, 36% Tesla and Apple. The Big Short investor Danny Moses joined us earlier this week. He is short on Tesla, admittedly, and he lays out his reasons right here. Listen.

DANNY MOSES: I believe that Tesla is the one company that represents, to me, everything that's been wrong in terms of valuation, capital markets, and it's the king of the meme stocks. I think over time, we'll start to see earnings degrade.

And I just can't understand how people don't question more about his operating expenses. You're building gigafactories in Berlin and Austin, and you want to produce more cars, yet as a percentage of sales, they don't seem to track accordingly. So something's up there.

- If your ETF does well, Danny has to be wrong. Why is he?

KEVIN PAFFRATH: Hey, well, we'll see. But look, I mean, no disrespect for anybody. I think Danny could brush up on the research a little bit for Tesla. In fairness, look, the operating expenses for Tesla are growing because they are building two new factories. But they're producing free cash flow in excess of $2 billion in just the last quarter. We expect free cash flow to exceed $10 billion within the next year on $116 billion of sales. That's phenomenal free cash flow.

In addition to that, you've got a company that's trading for about 45 times 2023 earnings right now. They're growing at a 45% to 50% pace. When you divide those two, you get a number right around 1 for the PEG ratio. That's how you value companies' growth, with a PEG ratio. That's how we do it.

And what we're looking at is the valuation of Tesla on the basis of PEG, very reasonable. Around 1, if anything, it's low. When you look at companies like Apple or Google, you start getting more expensive. You're in the 1 and 1/2 to 2 range, 2 multiple range. And therefore, we think Tesla is a phenomenal deal.

The reason we have the allocation as high as we do at 23% is because we think there is a possibility-- not guarantee, obviously, but we think there's a possibility Tesla could double in the next year alone.

And then what we'll do is we will pare down the allocation to Tesla and diversify out of it. Because of the tax benefits of an ETF, we don't actually expect to pass many of those capital gains along to investors. That's one of the benefits of an ETF. But people should Google those or talk to their CPA.

- Well, Kevin, Tesla stock is off 44% this year. More people on Wall Street, more analysts coming out saying that Twitter has been a massive distraction for Elon Musk. It's a risk here for Tesla going forward, as Musk does focus on Twitter. Morgan Stanley's Adam Jonas was one of those analysts that come out and said that. Wedbush's Dan Ives has also said something similar in recent weeks. How big of a risk do you see Twitter being to Tesla's success?

KEVIN PAFFRATH: Yeah, Twitter right now has a beautiful aspect of it going on for its investors, and that is that Tesla is the hedge for Twitter. If Twitter has problems and Elon Musk needs more money, he sells Tesla stock. He said it himself. His actions have said it himself. It's not a secret, and it sucks for Tesla.

But it's a short-term buying opportunity for Tesla because guess what happens when Twitter actually starts functioning? Even what we saw with Elon Musk meeting Steve Jobs in person to clear the tension between the two. Brilliant move, by the way, by Tim Cook. Guess what happens?

All of a sudden, once that Twitter overhang goes away, Tesla is off to the races. And your last analyst talked about EPS downgrades and a potential recession. Guess who probably won't have EPS downgrades? Tesla, no matter the recession.

- We will see. All right, Kevin Paffrath, great to have you on. Thanks so much for joining us this afternoon.

KEVIN PAFFRATH: Thank you.