The demise of FTX has seen investors losing billions of dollars. Here's what you can learn from the whole FTX debacle.
FTX has been making headlines after the company’s spectacular downfall in just a span of days.
At its peak, the company was one of the biggest crypto exchanges in the world, trading at US$16 billion a day and was valued as a billion-dollar company backed by investors such as SoftBank, Sequoia Capital, and Temasek.
Its CEO and founder, Sam Bankman-Fried (SBF), had a net worth of US$16 billion and was highly regarded in the crypto space.
Now, the company is filing for bankruptcy, and SBF has resigned as CEO. The shocking collapse of FTX also saw him lose 94% of his wealth in a single day.
Following FTX’s filing for bankruptcy and billions in missing funds, investors are still waiting for answers on what will happen to their funds, and whether they can recoup their losses.
Timeline of FTX’s epic collapse
- 2 Nov: a CoinDesk report revealed that Alameda Research, a trading firm that was also founded by SBF, held billions of dollars worth of FTT, “FTX’s own centrally controlled and printed-out-of-thin-air token,” said Cory Klippsten, CEO of investment platform Swan Bitcoin to CoinDesk. This meant that FTX was using FTT as collateral to fund its investments. The report also revealed that FTX had US$8 billion in liabilities
- 6 Nov: following the news, Changpeng “CZ” Zhao, CEO of rival Binance, announced that the company would be selling its entire stake of FTT tokens (about US$529 million) “in light of recent revelations”. Binance had acquired a stake in FTX for being an early investor
- 7 Nov: CZ’s announcement led to massive withdrawals; panicked investors rushed to withdraw their funds from FTX amid news of a liquidity crunch.
Within 72 hours, nearly US$6 billion of tokens were withdrawn from FTX and the price of FTT fell by 80% in two days. To prevent further withdrawals, FTX froze customer withdrawals.
- 8 Nov: in a last-ditch effort, SBF scoured Wall Street for funds before turning to Binance. CZ announced that Binance had signed a non-binding letter to acquire the non-U.S branch of FTX
- 9 Nov: However, a day later, Binance backed out of the deal citing “mishandling of customer funds” and “alleged U.S agency investigations” after doing their due diligence.
- 11 Nov: FTX — which also includes FTX U.S and Alameda — announced that it would be filing for Chapter 11 bankruptcy. SBF also steps down as CEO. Hours later, hackers hacked the platform, stealing US$600 million. FTX said it would move its digital assets to cold storage for safety
- 12 Nov: Reuters reports that at least US$1 billion in customer funds have vanished from FTX. They were part of the funds that SBF had secretly transferred to Alameda Research
- 17 Nov: Temasek became the latest investor to write off its US$275 million investment in FTX, after Sequioia Capital (US$210 million), Coinbase (US$15 million), and SoftBank (US$100 million)
The aftermath of the FTX collapse
FTX’s collapse has not only placed the company’s future in jeopardy, but also the broader crypto industry.
Crypto prices came crashing down swiftly following the news; Bitcoin and Ethereum saw their prices drop by 20% or lower over the past week, shaving off US$183 billion from the industry’s market cap.
Meanwhile, crypto lender BlockFi, which holds several assets in Alameda, is now preparing for layouts and filing for bankruptcy. It had earlier paused client withdrawals citing uncertainty around FTX’s liquidity issues. Other platforms, such as Crypto.com and Genesis, have also halted customer withdrawals.
Meanwhile, high-profile investors such as Temasek, who had invested millions in FTX, now have no choice but to write off their stakes in the company.
In particular, the Ontario Teachers Pension Fund also announced that it would also be writing off US$95 million from its investments in FTX, meaning that thousands who aren’t directly involved in crypto investments could also be affected.
But perhaps the biggest consequence of FTX’s fallout is the loss of trust among investors in crypto.
The alleged misappropriation of customers’ funds by FTX and SBF, who were regarded as trusted figures, has left a gaping hole in the credibility of crypto firms which will likely see more calls for regulating the crypto space.
For now, it’s unknown how far the damage will spread, but there’s bound to be further collateral damage and casualties as the situation unfolds.
What should investors do
FTX’s collapse serves as a reminder of the crypto industry's instability and volatility. Here are the key lessons you can learn from the whole FTX debacle.
Store your crypto investments in a non-custodial wallet
When you purchase a cryptocurrency, you’ll be given a choice to store your asset in a custodial or non-custodial wallet.
A custodial wallet is where you give the private keys of your wallet to a third party such as a crypto exchange.
While this offers more convenience and less responsibility, the downside is that have little control over your investments since these exchanges control the private keys to your wallet.
As such, if an exchange goes bankrupt or pauses withdrawals, such as in FTX’s case, you won’t be able to access or withdraw your funds.
Moreover, there’s also the risk of losing sensitive information to hackers.
Thus, one way to securely store your crypto investments is to store them in a non-custodial wallet. A non-custodial wallet holds your crypto assets offline on a hardware device such as a USB drive.
Storing your assets in a non-custodial wallet means that you hold your own private keys, giving you complete control of your information and funds.
Don’t invest in things without understanding the risks involved
Aside from storing your crypto assets in a non-custodial wallet, another takeaway is knowing the risks associated with crypto investments.
While cryptocurrencies have provided high returns in the past, they’re super volatile and speculative in nature.
The fact that even high-profile investors have lost millions of dollars, outlines the need to do your due diligence before investing. Don't invest in something that you don’t fully understand and only invest in what you’re willing to lose.
In an industry where there’s very little regulation, crypto firms aren’t obligated to be transparent about their assets and liabilities, which means that you don’t really know what is happening behind the scenes.
Diversify your investments
As the saying goes, don’t put your eggs in one basket; diversifying your investments helps to spread your risk. The idea is if one of the assets underperforms, the rest of your asset classes can help to minimise the risk in your investment portfolio.
To build a well-diversified portfolio, you need to have different stocks across different sectors, industries, and companies. One way to invest in a basket of different securities is through an exchange-traded fund (ETF). For example, when you buy an S&P 500 ETF, you're basically investing in the top 500 companies in the U.S
Apart from stocks, you should also invest in different asset classes, such as bonds and commodities to protect yourself from market volatility.
With rising interest rates and the stock market crashing, many have turned to less risky investments such as the Singapore Savings Bond (SSB), T-bills, and fixed deposits, especially now that their yields have reached record levels.
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