FTX Bankruptcy and Crypto Crash: 7 Lessons Investors Can Learn

By Chika

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Last Updated: November 18, 2022

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In 2022, big crypto losses have become a familiar tale for many people.

Lenders like Celsius Network and Voyager Digital filed for bankruptcy, with many investors losing their funds. Even the so-called stablecoin, Terra meant to maintain a set value, crashed this year, leaving traders with little recourse.

Perhaps the one which has caused the most ripples this year is the winding down of one of its biggest players.

Cryptocurrency exchange FTX filed for bankruptcy after it was unable to meet a deluge of customer withdrawals in a run prompted by concerns over its financial health and links to Alameda.

The bankruptcy marked a stunning collapse of the $32bn exchange which many considered a savior of many crypto firms. FTX has been acquiring stakes in other crypto firms to keep the industry afloat after the bear market negatively affected the operations of numerous companies, with some suspending withdrawals.

The firm provided BlockFi with a $250m credit facility in July.

In that same month, Bankman-Fried’s crypto-trading firm, Alameda Research, gave Voyager Digital a $200 million cash and stablecoin revolving credit facility and a facility of bitcoins. Two months before, FTX acquired a 7.6% stake in Robinhood.

However, in a twist of fate, the savior needed saving as FTX turned to Binance to help save the exchange this week. The deal fell through after Binance revealed that due diligence showed insurmountable financial losses.

While the crypto world is reeling from another casualty, there are lessons that investors can learn from the FTX fiasco which could help in making sound investment decisions. 

 

 

7 Lessons Investors Can Learn From the FTX Bankruptcy & Crypto Crash

1. If it's too good to be true, then it is.

Cryptocurrencies have come on with a huge promise of creating financial equality and ridding the financial world of gatekeepers (central banks, commercial banks, brokerages, etc.).

The allure of a decentralized financial system, coupled with huge price gains attracted many people to invest in cryptocurrencies. However, the flurry of bankruptcies hitting the industry has proven that when the promise of returns on an investment is too good to be true, then it probably is. 

 

2. Don't buy into the hype.

Cryptocurrencies were touted as a hedge against inflation.

However, the price action of these digital assets has been anything from that. While inflation has spiked to a 40-year high, prices of Bitcoin and other cryptocurrencies have plummeted by over 70%. 

The hype surrounding cryptocurrencies was amplified by celebrities like Kim Kardashian and popular figures like Elon Musk and Maren Altman who used their platform and clout to attract people to invest in them.

But like the old saying on Wall Street goes: “If shoeshine boys are giving stock tips, then it's time to get out of the market."

 

3. Risky assets should carry minimal exposure.

Several investment products are offering cryptocurrencies to investors as part of their portfolio.

Fund managers, IRAs, ETFs 401(K)s, etc. now offer investors the option of including cryptocurrencies in their portfolios. Given their volatile nature, and the dwindling confidence of the public in these assets, it would be best to have minimal exposure to them. 

 

4. Invest in what you know.

Investing legends like Warren Buffett and Peter Lynch have always emphasized the importance of investing in what you know.

This is because you will understand the business, how it makes money and can tell when it is struggling. 

A lot of people invested in cryptocurrencies without popping the hood to understand what was going on. As a result, they invested in crypto coins that did not have any use case or fell victim to pump-and-dump schemes. 

 

5. Invest in regulated assets.

Having compressed most of the mistakes made by finance over the centuries into just over a decade, cryptocurrency speculators may finally be discovering the fundamental flaw of trying to build an alternative to government-backed finance: no government backing. 

The wave of bankruptcies hitting crypto exchanges highlights a severe case of mismanagement. Many investors will not be able to get their money back, and without government protection, their monies may be lost forever. 

As such, this has underscored the importance of investing in assets that are regulated by the government. This would not only ensure fiscal responsibility, but also give investors some protection. 

 

6. Due diligence

The benefits of due diligence in investing cannot be overemphasized.

It should be the compass to guide your investment actions. Due diligence allows you to evaluate an asset or investment without bias. Due diligence on cryptocurrencies or exchanges may have prevented investors from raking in losses. 

 

7. Cryptocurrencies are not decentralized.

A painful lesson that cryptocurrencies are learning is that these digital assets are not decentralized.

The price action of cryptocurrencies has shown that they are affected by stocks, Fed monetary policies, and economic cycles. Also, since funds are stored and held on exchanges, this implies there is still a middleman holding these assets on behalf of people.

When things go south, accessing those assets may not be possible. 

Photo by Worldspectrum

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