FTX and Binance were the biggest players in the Crypto exchange platform.
However, recently FTX collapsed due to suspended withdrawals and liquidity problems, and the Crypto coin that they issued, FTT, became worthless within a few hours. In fact, we already covered that in another story.
In addition, the valuation of the exchange went down from $16 billion to a negative valuation. What happened however in the span of six days was rather interesting.
So what happened?
The value of FTT became negligible as Binance, the largest cryptocurrency exchange, recently revealed that they were liquidating FTT. Once the news spread, FTT crashed, and most people lost confidence in the FTX exchange. So, from fear of losing money, the businesses withdrew billions of dollars from the market.
Binance, a side player in this equation, revealed that previously they had signed a non-binding Letter of Intent to purchase FTX.
However, after going through FTX’s books, they lost confidence and backed out. Therefore, FTX collapsed immediately, and Binance eliminated its biggest competitor from the market.
The aftermath of FTX
According to sources, FTX currently owes billions of dollars to their clients, and they do not have money right now. So now you might have a question: where did the funds go?
According to sources, FTX Founder Sam Bankman-Fried’s hedge fund owned a certain amount of FTT.
That FTT was used as collateral, allowing FTX exchange to use their clients’ funds to invest in other businesses. Hence, when their cryptocurrency collapsed, the exchange had no funds left to pay back the customers, and they were left with a huge liability.
We’ll let Coffeezilla explain the rest.
Lessons to learn from FTX collapse
Investing in cryptocurrency is a great way to profit from a developing technology.
However, you also need to tread carefully as the web 3.0 industry is relatively younger. The collapse of FTX is a testament to that.
So here is a list of lessons you can learn from the FTX collapse.
1. Debt Can Be Deadly
Even if you have your debt in control, the chances of recession are pretty high. FTX was only destroyed in a day if they were lending or investing in other businesses or sister companies.
Additionally, you also need to understand the margin. For example, your stock goes down about 40-50 %. You are fine unless you are not on the margin.
However, if you are on the margin and your stocks fall by 60 to 70%, there is a high chance that you will lose everything.
2. Always be Cautious while Investing in Stock Exchanges
Most crypto exchanges have their own cryptocurrency, and often these currencies have suddenly fallen.
Whenever an exchange makes its own token, they try different tactics to inflate its price. These exchanges use leverage and insider manipulation to increase the bubble until and unless it becomes unstable. And at the end, the entire exchange crashes.
Hence, you must avoid investing in self-produced crypto coins and exchanges that mint them.
3. Remember, Scarce Resources are Expensive
The scarcity of a product means that there is less supply of the product and high demand in the market. Scarce resources like diamonds and titanium are expensive. On the other hand, abundant resources like water are mostly free.
There are only a handful of scarce things in the cryptocurrency market, and one such scarce currency is Bitcoin.
Thus, you must invest in these items which are trustworthy and expensive. Avoid investing in any new cryptocurrencies as their market is volatile.
4. Avoid Storing Money in Exchanges
After everything that is going on in the market, businesses should not keep their money at exchanges. Crypto exchanges are centralized platforms susceptible to internal and external cyber-attacks.
When you let crypto exchanges and platforms handle your money, your hard-earned savings are at considerable risk from manipulation, regulation, and rug pulls.
Do not leave your money in crypto exchanges. Instead, immediately shift your coins to cold digital wallets.
5. Only Invest in Products you Understand
If you have yet to learn about a particular company or product and cannot explain your investment idea to a peer, then it is probably in your best interest that you should not invest in it. If you are uncertain about your investment but are still investing, then you are betting your hard-earned money entirely on luck.
So, it is advised that first, you understand the market, the company, and the product. Then, you can always contact an expert if you are still trying to figure it out.
Is this “the end” of cryptocurrency?
The crypto industry is susceptible to undergoing fluctuations and vulnerabilities left and right. However, there is always light at the end of the tunnel.
Previously, the cryptocurrency market has suffered many such events. Many businesses even feared the collapse of the entire market. However, the market has stabilized again.
The FTX collapse is just an inflection point and is a perfect lesson for businesses to invest carefully. Likewise, the crypto exchanges and platforms will also learn to tread carefully.
Will the FTX Customers Get Their Money Back?
FTX paused all withdrawals as customers pulled out their money from the exchange. To repay the customers, FTX has to go through a bankruptcy policy.
However, the businesses might not get anything if the crypto exchange loses all the funds while dealing with other companies.
Previously there have been many cases of crypto fraud and scams. Even the best players in the market have lost thousands of dollars.
And that’s why you must not be greedy and try to think clearly. Earning money is challenging, and you cannot be lucky every time.
Therefore, invest carefully and learn from this massive loss that FTX suffered. In the meantime, stay updated with your crypto taxations right here at KoinX.