As cryptocurrency crashes further in this painful bear market another major player in the crypto industry has collapsed. FTX, the second largest crypto exchange run by tech ‘whiz-kid’ Sam Bankman-Fried (SBF), who has been lauded as the next J.P Morgan spectacularly fell from grace late last week losing billions of dollars in the process. What can we learn from all this drama? Here goes…
The collapse of FTX and its CEO, Sam Bankman-Fried is probably the largest implosion in crypto history. It follows close on the heels of bankrupt exchanges Celsius, Voyager and others. It’s reported that Bankman lost 94% of his wealth approximating 16 billion dollars. Customers were prevented from withdrawing from the once popular exchange late last week after the founder of Binance indicated that he would dump several millions of FTX’s tokens due to alleged financial irregularities at FTX, including alleged misappropriation of client’s funds.
This caused a major ‘bank run’ that led to liquidity problems at FTX and eventually its collapse. Rumours of fraud at the company and a hack that drained customer wallets of millions of dollars of crypto followed leading to millions of FTX users being locked out of their wallets, and their life savings drained.
Given this situation, it’s easy to proclaim that crypto is a scam and tarnish the whole industry. Celebrity investors such as Kevin O’Leary of Shark Tank lost undisclosed sums in FTX and is publicly clamouring for regulation of the crypto industry. O’Leary claims that he will still invest in crypto but tighter controls are needed. But is there a clear way forward for entrepreneurs and wannabe investors in crypto? What can we learn from this?
Differentiate between Centralised and Decentralised.
This point cannot be ignored. If we take a look at many of the crypto businesses that have collapsed recently; FTX, Voyager, Celsius, BlockFI and more. Do they have one thing in common? Yes, they are all centralised entities. This is important since centralisation goes totally against the ethos of cryptocurrency. They simply attempted to create a digital version of the current financial system, where a single organisation or individual acts as custodians for your finances much like a bank. These firms are not true cryptocurrency ventures and simply collect your crypto to gamble with on the markets with the promise of high rewards.
A true cryptocurrency venture should be decentralised, in that multiple operators should have a stake in running the blockchain and no one individual should be able to easily pump or control your assets. The entities or individuals involved should not have direct access to your crypto and any crypto transferred to the entity should be locked in a smart contract that cannot be changed by the entity. The fiasco with the above-named companies would simply not happen in a truly decentralised environment (DeFi) notwithstanding a major hack.
What can we learn? Understand the difference between DeFI (Decentralised Finance) and CeFi (Centralised Finance). Understand that centralised finance in crypto is so much riskier in an already risky marketplace. FTX, Voyager et al, are all centralised companies. DeFi is not foolproof but unless there is a major hack or flaw in the code your crypto should be safe.
Not your keys, not your crypto.
This is the mantra that is repeated over and over again. But it needs to be said once again. If you do not have the keys and passphrases to the wallet holding your digital assets, they are not yours!
It really is that simple. Set up a digital wallet to hold your crypto yourself or even better a hardware wallet, often known as cold storage. Remember, this is the whole philosophy of crypto, that the common man and woman can take control of their finances. Do not give that control away by simply depositing your crypto in a ‘convenient’ centralised exchange.
What can we learn? Stay clear of any centralised entities that claim to store your crypto on your behalf. The whole point of crypto is that you store your assets yourself in your own digital wallet. Anything less is simply a disaster waiting to happen. If you insist on using centralised exchanges to purchase crypto, transfer out those assets immediately.
Do your own research.
YouTubers such as Graham Stefan , Andrei Jikh and others are coming under heavy fire for promoting FTX and other bankrupt exchanges such as BlockFi. These YouTubers are heavily sponsored by companies and are not operating in your best interests. If a great project comes along they are unlikely to promote it unless there is a huge fee attached.
They pump companies for a fee (sponsorship) and claim that they care for their subscribers but it’s clear they do minimal research and there is an obvious conflict when large sponsorship fees are available. Yes, these guys need to make a living, we get it but you should not trust your life savings on the advice of a YouTuber, that is simply financial suicide.
A simple search on Sam Bankman-Fried in Google will show that the so-called ‘genius’ has done nothing notable prior to FTX. How does someone with no history of entrepreneurship create a billion-dollar business in 3 years? That alone should be a major red flag. Where exactly did his money come from?
Another search on Daniel Friedberg an executive at FTX, shows he was linked to an online poker scandal, Ultimate Bet’s in 2008.
What can we learn? Google is your friend. Research any founders and key people. Simply typing their name in Google and looking back in history should give you a timeline of any of the founders. Go back a couple of years to find out if they have any history prior to the new venture. If not why not? It’s practically impossible to do anything of note and not have any press, articles or news these days. Do not rely on LinkedIn or social media as rogue founders can post whatever information they want there.
Final thoughts
If you have invested and lost money in any of the failed crypto companies mentioned we are truly sorry. Remember, the philosophy of cryptocurrency is that you should retain control of your funds at all times. Please do not beat yourself up too much if you have lost money on FTX.
Heavyweight institutional investors such as NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo have all seen their investment in FTX go to zero. If crypto is to thrive we need to do better and invest in projects that are genuinely great projects and not invest in projects that are all hype and empty promises.
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Please note this article is not financial advice and is for information and educational purposes only. As always, you should carry out your own research when considering investing in cryptocurrency. Prices can go down as well as up.
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