Fallout of the FTX collapse
If you invest in crypto, you should know how risky it is to keep your coins on an exchange. “Not your keys, not your crypto,” as the saying goes. It is no doubt that it is convenient to keep your coins on a platform—the ease of being able to trade, withdraw, store, or otherwise transact with your coins is much simpler. But in the wake of the latest crash of a once trusted exchange, we are reminded of this now more than ever.
The saying essentially means this: Investors risk their crypto holdings when keeping it in an exchange. Unless they store it in a cold wallet where they personally hold the key, it remains vulnerable and open to uncertainty. The “middleman,” so to speak, has power over your coins, and the simple way to remove this risk is to just have the coins in your own wallet, with your own key, where you know it is safe. The problem with keeping crypto in an exchange is that it may lead to what has been going on with (many) exchanges lately. It not only makes it vulnerable to cybersecurity issues, but it is at risk of the exchange itself—they may mismanage or lose your coins. Most recently, this is what happened with Futures Exchange (FTX). FTX was a trusted exchange—they bought Super Bowl ad time, its name was on an NBA arena, and celebrities like Tom Brady backed it (does anyone really trust celebrity crypto endorsements?). The founder, Sam Bankman-Fried, also founded Alameda Research, a hedge fund that invests and trades crypto.
This month, FTX apparently hit a “liquidity” problem. It turned out that FTX was loaning customer assets to Alameda for trades without customer consent and used its own FTX crypto for Alameda to use as collateral. Sam Bankman-Friedman is now under investigation by the Securities Exchange Commission and Department of Justice. It is kind of ironic since he was a proponent of government regulation of cryptocurrency. This collapse has been compared to the Enron scandal by former US Treasury secretary Larry Summers. Two thirds of the money that FTX owed to people was backed by coins created by FTC itself (FTT). As it turns out, this coin was illiquid, and people could not sell it. FTX now owes more money to customers than they can pay out. In fact, FTX owes almost $3.1 billion.
He really made a fool out of those affected by this collapse. According to The Globe and Mail, Bankman-Fried was able to get institutional investment managers and celebrities to back his exchange, including the likes of Tom Brady, Ontario Teachers’ Pension Plan, Miami Heat, and Steph Curry.
According to the new CEO, John Ray, he says the following about Bankman-Fried’s management: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” He goes on to say a lot of things about the mismanagement, including the fact that FTX corporate funds were being used to purchase homes and other things for its employees.
So, what are the takeaways? First, remember that crypto is a speculative investment and it is inherently risky. Second, even trusted exchanges can collapse. Choose wisely. And third—this is the most important—if you do not hold keys to your coins, they are not yours.