crypto strategy

3 Lessons Every Investor Should Learn From FTX’s Collapse

The ensuing debacle last week may have its roots in an investment Binance made in FTX in 2019. At the time, FTX was a relative newcomer to the crypto scene, and Binance wanted to promote solidarity (and win a few dollars) in the crypto sphere, so they invested early on when FTX was just getting started.

Eventually, FTX grew to the point that they felt Binance’s stake in the business was unnecessary. So, in the summer of 2021, FTX bought out Binance’s position in order to stand out from the competing exchange. The buyout was valued at $2.1 billion and took the form of FTX’s native token, FTT (CRYPTO:FTT)and the Binance stablecoin, BinanceUSD (CRYPTO: BUSD).

Fast forward to a year later. In early November 2022, Binance CEO Changpeng Zhao took to Twitter to announce that he would liquidate his entire FTT stake. This sent the first tremor to the crypto market. The tweet referred to “recent revelations” as a reason to sell their holdings, but what could that be? In typical crypto fashion, speculation ensued and the market had a knee-jerk reaction to the news.

It seemed that Zhao knew something the rest of the world didn’t. A few days later, the cat was out of the bag – FTX went bankrupt. After a series of losses in May and June of this year, Bankman-Fried allocated at least $4 billion to FTX’s trading company, Alameda Research. That $4 billion came in the form of customer funds stored on FTX, FTT tokens, and even shares of Robinhood that the CEO of FTX bought back in May this year. Even with the additional cash injection, Alameda Research was unable to recoup its losses, putting FTX in dire straits.

Binance has entered into discussions to ftx rescue, but after their due diligence, Binance executives realized that FTX had gone too far. Following the announcement that Binance was no longer interested in buying FTX, the crypto market lost around $250 billion, with some cryptocurrencies dropping over 25%.

While much remains unknown about the future of FTX, there are a few things investors should take away from all of this.

Painful but valuable lessons

First and most importantly, stop storing your cryptocurrency on exchanges. When you buy cryptocurrency on an exchange like Coinbase or Binance, you need to send those funds to a crypto wallet. This can be a hardware wallet or a digital wallet on your phone. Hardware wallets are among the most secure forms of holding crypto, as they store funds offline without an internet connection. By using a wallet, you can prevent exchanges from using your funds to perform their own transactions, like what FTX did. Moreover, you can protect your crypto from any hacks that may occur.

Second, cryptography will be radically different in the future. This does not mean that cryptocurrencies will disappear, but events like this set a precedent for government regulation. The State of California has already announced that an investigation into FTX is underway. Several senators expressed their opinion that some sort of legislation is needed to create a “regulatory framework that allows for international cooperation and gives consumers greater confidence in the security of their investments.”

Hopefully, these government efforts increase market transparency and provide greater protection for investors. Government registration will likely become the norm. Exchanges, stablecoins, and even some cryptocurrencies will need to get approval, just like the stock market, and provide quarterly reports of holdings and other financial information.

Finally, the world of crypto offers investors a multitude of possibilities. You can invest in all kinds of cryptocurrencies that offer to solve some kind of problem. However, as promising as they may seem, things can change quickly and often for the worse. To ensure that your portfolio remains protected against any potential black swan events, investors should prioritize holding cryptocurrencies that are clearly above the rest.

Cryptocurrencies with large market caps like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO:ETH) are considered safer than others due to their massive acceptance and transaction volumes. Together, the two represent over 55% of the value of the entire cryptocurrency asset class. This investment strategy in Bitcoin and Ethereum may not be glitzy or glamorous, but in the short history of cryptocurrencies, it is by far the most proven. It’s unclear what the crypto market will look like in the future, but investors need to be confident that these two behemoths will stick around for the long haul.

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RJ Fulton has positions in Bitcoin and Ethereum. The Motley Fool holds positions and endorses Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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