The FTX collapse was one of the biggest moments in the history of cryptocurrency and damaging to the industry. FTX was a cryptocurrency exchange and hedge fund. FTX was founded in 2019 by Sam Bankman-Fried and Gary Wang and at one stage, was the third-largest cryptocurrency exchange by volume. However, FTX collapsed in early November 2022 but how did it happen and what can the crypto industry learn from the collapse?
What Happened to FTX?
In 2022, rumours surfaced regarding financial instability within FTX, including misuse of customer assets, and that led many investors to withdraw their funds. This led to liquidity issues for FTX, and the company looked for options, including funding from Binance and venture capitalists. Binance were expected to buy FTX’s non-U.S. business but having conducted their research, opted against the deal. Following a freeze of assets by the Bahamas, Bankman-Fried stepped down as FTX CEO and the company filed for Chapter 11 bankruptcy protection. In December 2022, Bankman-Fried was arrested by Bahamian authorities and extradited to the U.S. where he was released on a $250 million bond.
Impact of the FTX Collapse
Many individuals suffered as a result of the FTX collapse. Customers who had their money on FTX and did not manage to recover it before withdrawals were frozen are going to find it extremely difficult to get it back. There is a possibility that much of the money held with FTX is going to disappear and that is clearly bad news. FTX was not the only crypto exchange to collapse in 2022 but the scale of the collapse is what caught the attention of news outlets around the world. This painted cryptocurrency in a negative light and it is not often crypto makes the major news headlines but the collapse of FTX was widely reported. This led to many who were already involved in crypto trading to take a step back by withdrawing funds and those who were considering buying crypto as an investment, to walk away. In conclusion, the collapse of FTX was a big blow to the crypto industry. However, this has not stopped many industries accepting crypto as a payment method. Online casinos are a good example and there are many crypto slot machines to play at dedicated crypto based casinos.
The Major Takeaways from the FTX Collapse
In terms of lessons learned from the collapse of FTX from an individual point of view, an understanding of where you are holding crypto is important. Knowing the risks is key and taking crypto assets offline, into cold storage is something to consider. A single holding of cryptocurrency or any other form of investment, such as stocks, is risky. If you invest your funds all into one cryptocurrency and it crashes, you are left out of pocket but by diversifying your portfolio, crypto still has a role to play. Crypto regulation is one of the main talking points following the FTX collapse. There has always been debate surrounding the regulation of cryptocurrency and that debate has intensified following the collapse of FTX.
So, the main lessons from the collapse of crypto is to diversify investments, conduct due diligence of where you are holding crypto, and trade with the expectation there could soon be regulations in place.