After a difficult year, the crypto industry received another major hit a few weeks back when the collapse of the cryptocurrency exchange FTX was announced. Huge amounts (at least $1–2 billion) of user funds are missing, BTC price is at an all-year low — $16k, major country leaders are announcing plans to further regulate crypto and even though the long-term industry growth is still anticipated, the general mood in the sector has become slightly dim.
What happened to FTX?
As Lane Brown humorously puts it: “Sam Bankman-Fried pitched himself as a humanity-saving crypto genius. Then he spent other people’s money to save himself.”
On 2nd November CoinDesk published some eyebrow-raising proof that Alameda, a crypto trading company owned by Sam Bankman-Fried was highly dependent on FTT (a token printed by FTX used to grant trading fee discounts for users trading on their marketplace). As reported in Alameda’s financials in early summer more than half of its $14,6 billion assets were loans of FTT. It meant that 1 — Alameda used FTX customer funds for their activities; 2 — both FTX and Alameda would become extremely vulnerable if the price of FTT was to sink.
Following the news, CZ announced that Binance would sell all of their FTT holdings which then lead to erratic withdrawal of funds and the FTT price falling below $22. Binance quickly stepped in with intentions to acquire FTX, however, backed out of its original offer citing that the user funds were allegedly mishandled.
Finally, the bankruptcy of FTX was announced on 11th November in a press release. In just over a week SBF went from an admired industry leader who was often compared to the likes of Warren Buffet with FTX being the top 5 exchange worth $32 billion to being a target of investigations by the Securities and Exchange Commission and the Justice Department.
What’s there to learn for a regular crypto investor?
1 — crypto remains a risky investment. A lot of highly regarded individuals vouched for FTX and endorsed the company publicly. It was considered a safe marketplace and a lot of traders were blindsided still. Trusting no one and doing your own research is the best way to go.
It is advised that crypto should not make up more than 5% of your total investment portfolio and the above-described situation is a clear example of why that is.
Vitalik Buterin held a discussion with a few major exchanges about cryptographic rather than government lead ways to prove solvency in a safe CEX. Read their thoughts here.
2 — storing all of your funds in one place is not a good idea — “not your keys — not your coins”. Large sums of cryptocurrency should not be kept in an exchange account. It is advised to keep it in your own personal “cold” wallet instead. Ledge, Trezor, Ellipal — just a few “cold” wallet examples to name. Wondering how to transfer your funds to a cold wallet? You might find this article helpful.
3 — having a diverse investment portfolio comes vital when managing risk
Don’t put all your eggs in one basket — a golden rule that applies to investing in crypto too in order to minimize risk — never invest all of your money in a single coin. The idea is that if one crypto goes down, another one might go up. In the recent case of FTT, many users lost their life savings which would not have happened had their investment portfolios been only a little more varied.
