FTX went bankrupt, SBF is now America’s most wanted (at least in the crypto sector), and the hole left by its actions is much bigger than it seemed. We’re probably about to see several companies related to bankrupt FTX.
No matter if you had assets on FTX and its related firms or not, you can always learn lessons from others’ mistakes and turn these into ways of becoming a smarter investor.
Lesson 1) Know the risks of where you’re holding cryptocurrency
If you’re not an avid trader but actually HODL your tokens thinking on the long term, it’s highly recommended that you keep your assets in cold storage. As it’s said: “Not your keys, not your coins.” Even though it seemed pretty reasonable to trust a billion-dollar company like FTX, given that minor competitors were still operational, if you had them stored in a cold wallet, you wouldn’t be worried about everything that went through these days.
But, of course, if you held them in a cold wallet, your assets wouldn’t be there for you to trade right away: you’d have less liquidity, and it would be harder to sell your assets faster, in case you needed to.
The FTX collapse has also renewed interest in cold storage or taking digital currency offline, making it less susceptible to hacks. However, the move makes assets less liquid and harder to trade quickly.
So understand the risks of holding your assets in cold and hot wallets, align them with your strategy and make the best decision according to your investment profile. Here’s an article I published a few months ago that is perfect for this occasion: Best practices to make sure your crypto is safe.
Lesson 2) Back up your crypto transaction records
Download your transaction history periodically regardless of where you’re holding digital currency. Collecting reporting data is one of the most challenging parts of crypto taxes, and if an exchange shuts down its business, you’ll still need records to file your return. If you can evidence your transactions, not only will you have more clearance from your PnL (profit and loss), but you’ll also be eligible to use some tax strategies, such as tax-loss harvesting.
Lesson 3) Regulation, to some extent, is more than ever a must
After Celsius’ crash in June 2022, here’s what I posted to our community:
What we see now is a pure lack of regulation of this industry. It’s more than clear that crypto companies (…) should undergo risk management procedures, stress testing, and other measures and restrictions that the same companies from traditional finance face. It is expected that other companies from the same industry (…) take extra caution, lower the leverages and get more attentive to the risks they previously did not take much into consideration.”
Clearly, FTX did not, and most companies in the sector were not considering this alarming situation when it happened with Celsius. Now, with a former Top 3 global exchange fiasco, institutional investors are expected to push a certain level of regulation into the market to avoid billion-dollar losses.
You, as an investor, should always do careful research on what offers companies present, related to the guarantee and integrity of their reserves:
- Trust companies that do not use their tokens as collateral;
- Trust companies with audited Proof of Reserves and with no debt.
Lesson 4) Events like these happened before — and might happen again. Dance to their tune
The current panic on the market makes people think that the chaos is exclusive to crypto, but it’s not. FTX is the latest in several crypto scandals: this year, we had 3AC, Luna, and Celsius, and eight years ago, we had the Mt. Gox hack. In the traditional sector, we had debacles of Lehman Brothers, Enron, and even the South Sea Company (back in the 1700s).
All those cases have similarities: they were all scandals where human greed was present, balance sheets were inflated, and data was manipulated or hidden in order to sustain the unsustainable.
Those events will happen again and create downward pressure. It will take a while for investors to trust digital assets again. Markets are cyclical, and your investment strategy should be based on how those cycles behave. As Warren Buffet said, be fearful when others are greedy, and greedy when others are fearful. We might be facing a valuable investment opportunity ahead.
Joe Robert He is currently the Chief Executive Officer of Robert Ventures, with over 20 years of asset management experience. Since he started Joe has created predictable double-digit returns for investors & partners. Joe has invested in seed rounds with equity and tokens, along with a portfolio of Bitcoin, Ethereum, and other top cryptocurrencies.
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