5 Lessons For Crypto Investors To Learn From FTX Crash

Introduction

2022 will be remembered as a watershed year for the crypto industry. The world witnessed a war, followed by geopolitical tension and global economic stress. Inflation soared across countries owing to excess market liquidity and supply-side pressures such as increasing gas prices. Central banks worldwide rushed to increase interest rates and tighten liquidity.

Inevitably, the effects spilled over to the crypto space, which had just enjoyed a stellar run in 2021. Investors saw their holdings under huge losses and panic-induced sell-offs in the markets. Many crypto proponents continued to support the industry, however, underlying the scope of the fundamental technology supporting the entire industry. Amidst all these events unfolding in the crypto markets, November 2022 went on to witness the unexpected downfall of one of the world’s biggest crypto exchanges, FTX.

Experts deemed the incident one of the most unfortunate in the crypto space. The collapse of FTX has led to many investors pondering upon the lessons one needs to take from a bankruptcy of this magnitude. In this blog, we will try to explain some of those lessons which could help investors avoid such frauds in the future.

The FTX Crash

Founded in 2019 by Sam Bankman-Fried and Gary Wang, FTX was a crypto exchange that grew quickly, raising funds from top investors worldwide. Bankman-Fried became popular in the crypto community, regularly speaking at events and interviews.

Its value gradually swelled to billions while it acquired many companies. Traders and investors actively participated in the crypto markets through the exchange, and the company had over a million users at the time of the bankruptcy.

So what led to the crash of such a prominent exchange? Experts cite many reasons that may have contributed to its downfall. Some of them were irresponsible corporate governance issues and the lack of liquid reserves. Due to reports highlighting regulatory issues in the firm, investors started panic selling their holdings. It grew to such an extent that FTX had to block further withdrawals. It failed to raise more funds to save the company and ultimately filed for bankruptcy.

Key Lessons To Learn From The FTX Crash

Source | Sam Bankman-Fried

Unfortunately, the users of FTX lost their holdings in the entire incident. Millions of small individual traders and investors lost their deposits. The FTX saga offers a few important lessons to be learned by investors:

• Not following the herd: In the case of FTX and the entire crypto markets, many rookie traders joined the exchange owing to the huge media frenzy FTX was generating. With celebrities endorsing the exchange, huge popularity in the media, and public admiration for Sam Bankman-Fried, many investors felt the ‘fear of missing out’ regarding the exchange. Small investors cumulatively poured billions of their money into the exchange, only to be stuck there. Thus, experts have strongly advised against following the herd mentality and only investing and trading through such exchanges after thorough consideration.
• Proper research: Crypto exchanges have made it easier for small retail investors to invest in crypto through phones. Technology has evolved, and such high efficiency has brought millions of new users to exchanges. Unfortunately, only a small fraction of those invest after carefully researching the markets. With many new blockchain and web3 projects, crypto tokens have seen an exponential rise, but only a few will survive for a long time. Most amateur traders have suffered losses by investing in ‘pump and dump tokens.’
• Decentralization for exchanges: The basic motive behind blockchain was to create a decentralized and transparent world. Blockchain projects work on this same theme, trying to reduce dependency on third parties. Thus, the concept of a centralized exchange is completely against this philosophy. Soon, investors and traders should aim to store their holdings in hardware wallets or decentralized exchanges (DEXs). Experts have urged future blockchain and web3 projects to focus on proof of reserves and transparency.
• Regulation by authorities: This has already gained momentum as central banks, and legislatures worldwide have moved towards creating laws and regulations to regulate crypto firms in the future. This is an urgent need of the hour so that crypto exchanges are also regulated like other financial firms, and they make their liquidity and governance reports public to safeguard users’ interests.
• Learn from history: Economic disasters have always repeated themselves in some form or the other. Be it the dot com crash or the 2008 financial crisis; financial bubbles have always led to lingering stress in the world economy. One should take lessons from history, learn to identify bubbles, and stay away from one. Greed and speculation have only led to economic turmoil in the past and will continue to do so.

Conclusion

Industry leaders of crypto have claimed that the FTX crash has damaged the industry severely, with critics and governments viewing the community even more critically than before. On a positive note, the bankruptcy has revealed several loopholes in the system and urged authorities around the world to regulate the crypto markets. Crypto experts welcomed new regulations, claiming that new laws for the industry would further help the community grow sustainably. Hope readers were able to learn some important lessons from the FTX crash through this blog!