Lessons Investors Should Learn From FTX Crypto Exchange Collapse

  • November 15, 2022
  • Jennifer Moore

FTX, the second-largest crypto exchange in the world crumbled overnight. The crazy incident led the company falls down to bankruptcy from a sixteen billion dollar valuation to a negative valuation due to debt and liquidity crisis. The FTX exchange issued a coin, FTT which descended in its value as Binance, one of the largest crypto exchanges announced that it was liquidating the coin. The crash of FTT, caused a confidence crisis in FTX as the clients started withdrawing billions of dollars. The world’s largest crypto exchange platform, Binance then announced that it had signed a non-binding “Letter of Intent” to purchase FTX. However, when Binance went through the books of FTX, they backed out leaving the company to collapse overnight and defeating their biggest competitors in the industry.

Also Read: EU Policymakers to Pass Cybersecurity Legislation for Cryptocurrency and FinTech Industry

Did FTX Violate its Own Terms, and Misused Its Client’s Funds?

FTX was one of the largest crypto exchanges around the world, and its collapse raised several questions among crypto enthusiasts. The company has billions of dollars for its clients, but is bankrupt and has no money to pay them back. Where did all the client’s money go? Allegedly, the founder of FTX, Sam Bankman Fried owned a hedge fund, Alameda Research which owned a number of FTT, the native coin of FTX. since FTT was a collateral, FTX used the client’s funds in some other platform. Therefore, when FTT collapsed, FTX was left with a huge liability.

the terms of service of the company state the cryptocurrency present in the customer’s accounts is “not the property of FTX, and shall not be used in FTX trading”. The terms also mentioned that the exchange does not treat the customer’s money as belonging to the FTX trading. The platform cannot utilize the client’s crypto assets for other purposes rather than just holding them. The dispute solicitor in the UK, Louise Abbot deals with crypto and asset recovery and states that “the use of the client’s crypto assets to support Alameda research is a huge problem and might result in claims for fraudulent breach of trust”.

Also Read: Climate Finance: What it is and Why is it Important?

FTX Insolvency Left Crypto Investors Insecure 

According to Sequoia, Sam bankman Fried was supposed to be the “savior” for investors. Rumors have it that Bankman-Fried invested made an investment of forty million dollars in the midterm elections which might have made him a puppet of politicians. After his net worth was sixteen billion dollars last week, the collapse of FTX has bought it in the negatives. If the regulators discover fraud in the fiasco, situations might worsen for Fried. Now that he has lost his powers, the celebrity endorses, and politicians might stay far away from him.

Lessons to be Learnt From the FTX Collapse

After the FTX collapse, it is important for the investors to learn some lessons. The most important lesson learned from FTX is that if you own assets, keep them in your own wallet instead of an exchange. No matter how big the exchange is, you may never receive it.

Keep 10% of your Portfolio on Speculative Investments

A speculative investment includes investing in NFTs or investing in a startup. In case you fall into a scam, you will still have 90% of your remaining portfolio. Speculative investments can be anything ranging from high-yield junk bonds to micro-cap growth hacks, and crypto. In today’s world, many investors enter the crypto market due to FOMO (Fear of Missing Out). Portfolio diversification is very important when you are investing in the crypto industry.

Funny Money into Assets

Any money with zero utility is known as “funny money”. It can be anything that doesn’t provide utility or earn money. Cryptocurrency, stocks, and bonds are often regarded as funny money. Real assets are anything that generates profit and income, such as real estate. Several rich people buy rich mansions, yachts, and real estate properties to protect and enjoy their wealth. Therefore, if you earn profit invest in real estate or properties that will benefit you in the future.

Avoid Debt

During a recession, you can enjoy your life if you are in manageable debt or no debt. FTX could have withstood the collapse if it didn’t lend billions of dollars to its sister company which then invested the same in speculative assets that didn’t work. If you are not on margin and lose 50% of your stock, then it is fine. However, if 70% of your stocks blow and you are at a 50% margin, you might lose your entire investment, and owe the brokerage.

Trust is everything!

People might argue that cryptocurrencies and FTT are Ponzi schemes. Sam Bankman Fried inferred last year that his yield farming business was a  scheme. However, it is important to understand that once the trust is lost, it is impossible to get it back. After this incident, no one will want to invest in FTX, as they broke the trust and their own “terms of service”.

Invest in what you know!

It is important to understand that if you don’t know your investment strategy or what company you are investing in, it is best that you don’t. Many people are yet to digest the fact that the world’s second-largest crypto exchange FTX which was worth sixteen billion dollars goes bankrupt overnight. The lawyers are still in shock and are yet to process what went wrong, creating crap coins or yield farming.

FTX Collapse is Scary!

In December 2008, a huge Ponzi scheme of fifty million dollars by Bernie Madoff shook everyone. Over the years, there have been several scams, however, the FTX collapse has created a huge hole that will take a long period of time to bring back people’s confidence in the crypto industry. There is a silver lining in every story, and with the FTX collapse, many people are entering the market to take advantage of the plunge in crypto prices to invest. Crypto investors must take the lessons from the worst and move on.

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