We are currently witnessing the unravelling of what will likely one day be a Netflix original film.
Earlier this month crypto publication CoinDesk released a bombshell report that called into question FTX’s liquidity and the health of SBF’s other main business, a hedge fund called Alameda Research.
Just days later, CZ Zhao, the CEO of Binance—arguably FTX’s chief rival—decided to liquidate roughly $530 million-worth of FTT, a utility token issued by FTX. Customers raced to pull out, and FTX saw an estimated $6 billion in withdrawals over the course of 72 hours, which it struggled to fulfill.
The value of FTT plunged 32%. The next day Binance announced it was walking away from the deal, citing findings during due diligence, as well as reports of mishandled customer funds and the possibility of a federal investigation.
FTX, the hedge fund Alameda Research, and dozens of other affiliated companies filed a bankruptcy petition in Delaware on November 11.
Elevated to a high pedestal under the guise of “Effective Altruism,” SBF has screwed over millions of innocent people and also severely tarnished then reputation of cryptocurrency exchanges—and the people who run them.
While this unbelievable story is only just beginning to unravel itself, many Canadians are already asking how to avoid ever being caught up in such a dire situation. Here’s how Fintech.ca suggests protecting your assets.
The most beautiful thing about Bitcoin is the fact it is truly decentralized. This was critical to the foundation of Bitcoin. Most other cryptocurrencies are centralized—that is to say they are attached to teams of people with potentially ulterior motives and who can at any time alter the destiny of their coin from top-down.
Regardless of which coins you possess, placing them on a centralized exchange opens them up to all the risks of centralization (the biggest risk being losing all your funds as in the FTX case). Exchanges are designed to allow users to do just that: buy, sell, and exchange coins for cash or other coins.
This is a crucial function to crypto gaining mass adoption, of course, but leaving your funds on exchanges indefinitely keeps you unnecessarily exposed to financial risk separate of your coin’s volatility. Despite liability insurance and empty promises, exchanges cannot guarantee protection of assets. This has now been proven multiple times.
“While the news of the collapse of FTX is empowering crypto skeptics, we would point out that all of the recent collapses in the crypto ecosystem have been from centralized players and not from decentralized protocols,” stated JPMorgan equity analyst Steven Alexopoulos recently.
And what of staking? This is a newer incentive increasingly offered by crypto exchanges that acts as a sort of dividend or savings interest on crypto holdings. Multiple Canadian companies such as BitBuy and Wealthsimple are entering the staking market because it encourages users to leave more money on their platforms for longer periods of time.
Be aware that while staking may enhance your crypto returns, staked crypto is exposed to all the same risks of centralization.
The lesson? Favour centralized coins and use exchanges only for their core function. Store the majority of your crypto offline in cold storage, where it is immune to human corruption.
Don’t Bite Off More Than You Can Chew
This is ancient investing wisdom: Don’t invest more than you can afford to lose.
Here is more modern wisdom: Crypto is currently still closer to gambling than to traditional financial investing.
In fact when I buy Bitcoin, I consider my money gone. That fiat I had? I didn’t invest it. I didn’t even gamble or spend it. It just disappeared off my balance sheet. But now I have Bitcoin—and the value of a Bitcoin in Canadian dollars is completely irrelevant in a true crypto world, so I don’t have to sweat a “return” on my “investment.”
Just HODL, as they say. In cold storage.
This approach to thinking—that investing in crypto is equivalent to flushing your cash down the toilet—will keep you from piling up too much crypto in a portfolio by tapping into excess funds only. If crypto is to take over the world, it will not happen through the pursuit of moonshots.
The lesson? Whether crypto is the bulk of your portfolio, a minor hedge—or not considered part of your financial portfolio at all, such as in my case—it is vitally important to be aware of the volatility and risks that come with these bleeding-edge currencies. It’s a digital Wild West out there.
Stay safe and keep stacking sats, friend.