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  • Writer's pictureMarc Primo

What crypto investors can learn from the FTX debacle

This is an article ‘What crypto investors can learn from the FTX debacle’ by Marc Primo

The recent collapse of the cryptocurrency exchange FTX has left many investors wondering what lessons can be learned from this event. While some details remain unclear about what exactly caused the collapse, there are a few key things that cryptocurrency investors can take away from this situation.

First and foremost, it is essential to remember that cryptocurrency investing carries a high level of risk. While the potential rewards of investing in crypto can be substantial, it is important to carefully consider the potential quicksand before making any investment. This includes not only the potential market volatility, but also the possibility of someone hacking your system or scamming you into a trader collapse like what happened to FTX.

To better understand the risks involved, let’s take a look at what happened to FTX and its embattled founder and CEO Sam Bankman-Fried.

The FTX collapse

FTX is a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried, a former quantitative trader at Jane Street and Susquehanna International Group. The exchange has seen significant growth and success in the cryptocurrency market, particularly in the area of futures trading.

Company CEO Bankman-Fried and Alameda Research soon became the targets of a complaint brought by the United States Commodity Futures Trading Commission (CFTC), which alleges violations of the Commodity Exchange Act. The Commission soon demanded a jury trial.

The CFTC commenced a lawsuit for injunctive and other equitable relief, in addition to civil financial penalties against Bankman-Fried, FTX Trading, and Alameda Research, according to court documents filed in the Southern District of New York on December 13. Per the complaint, Bankman-Fried personally instructed FTC officials to implement features allowing Alameda to leverage the crypto exchange as a source of financing for its lenders.

According to the CFTC, Alameda and FTX took hold of monies and freely used FTX client investments as if they were their own. The unjust use of funds included the equity to spend on their own trading and investing activities. Such actions contradicted the embattled CEO's assurances to FTX clients and were made without issuing proper information or public announcements. FTX client monies were allegedly utilized by Bankman-Fried, his parents, and other FTX and Alameda personnel for a range of personal expenses, including the acquisition of expensive real estate, the use of a private aircraft, both legal and illegal personal loans, and individual campaign contributions.

Bankman-Fried was recently indicted with eight criminal charges that can land him in jail for up to 115 years. Following an affidavit from the US Attorney for the Southern District of New York, the FTX CEO was charged with wire fraud and conspiring to misuse customer cash, among others.

He was detained at his residence in the Bahamas and showed up in court in Nassau. Commonwealth of The Bahamas Chief Magistrate Joyann Ferguson-Pratt also rejected the bail request.

The lessons we've learned

One lesson investors can take away from the FTX collapse is the importance of diversification. While putting all of your eggs in one basket is always tempting, especially when it seems like a particular investment is performing well, it is essential to remember that diversification can help mitigate the risk of any single investment going sour. This means spreading your investments across different cryptocurrencies and exchanges, as well as considering other asset classes such as stocks, bonds, and real estate.

Then, there's also the importance of doing your due diligence before investing. This includes researching the reputation and track record of any exchange or investment opportunity and understanding the risks and potential downsides. It is also a good idea to be wary of any investment that seems too good to be true, as this may be a red flag indicating that it is a scam or a risky proposition.

Finally, it is important to remember that investing in cryptocurrency is not a get-rich-quick scheme. While making significant returns from cryptocurrency investing is possible, it is also essential to have realistic expectations and be prepared for the possibility of losing some or a good percentage of your investment. This means having a long-term investment strategy and being prepared to weather any market ups and downs.

What's the future of crypto trading like now?

The ongoing discussion concerning the classification and regulation of cryptocurrencies has become more heated in the wake of the FTX scandal. In June, Senators Cynthia Lummis and Kirsten Gillibrand presented a bill to establish a regulatory framework for digital currency. The bill defines the majority of assets as commodities, which are regulated by the CFTC.

According to experts, the FTX meltdown may streamline these debates and pave the way for new regulations. Expert crypto traders already predict the presence of stricter rules and believe these poor business models will eventually disappear in time. For now, it’s best to keep up with crypto trends in order to come up with smarter investment decisions in the near future.

Gary Gensler, the chair of the Securities and Exchange Commission, has advocated for such regulations even before the FTX issue, stating that investors deserve additional security in cryptocurrency trading. However, congress must eventually determine how the government may regulate cryptocurrencies and related trading companies more meticulously.

In conclusion, the collapse of the FTX exchange serves as a reminder of the risks associated with cryptocurrency investing. By diversifying their investments, doing their due diligence, and having a long-term investment strategy, cryptocurrency investors can help to mitigate these risks and increase their chances of success.

Tips to protect your crypto investments

One of the best ways crypto traders can secure their investments is to consider resorting to cold storage or taking their digital currencies offline to prevent hacking attacks. Again, there is also a need to diversify, considering how crypto prices crashed this year, giving everyone a bitter reminder of the importance of spreading their investment portfolios, whether they were invested in FTX or not.

Plus, experts advise retrieving your transaction information regularly regardless of where you store your digital currency. One of the most challenging aspects of crypto taxes is gathering the necessary documentation. To remain safer, you'll need records to file your return, even if an exchange closes.

Lastly, reducing your bill with tactics like tax-loss harvesting would be simpler if you keep track of your income and losses all year. When tax season comes around, you'll have more leverage to remain tax compliant without losing too much of what you've gained from your crypto investments.

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