The debacle that ensued last week can trace its roots to an investment Binance made in FTX back in 2019. At the time, FTX was a newcomer on the crypto scene, and Binance wanted to promote solidarity (and make a couple of bucks) in the crypto sphere, so they invested early on when FTX was just starting.
Eventually, FTX grew to the point that they felt Binance's stake in the company wasn't necessary. So in the summer of 2021, FTX bought out Binance's position in order to distance themselves from the competing exchange. The buyout was valued at $2.1 billion and came in the form of FTX's native token, FTT (FTT), and Binance's stablecoin, Binance USD (BUSD).
Fast forward to a year later. In early November 2022, CEO of Binance, Changpeng Zhao, took to Twitter to announce that they would be liquidating their entire FTT holding. This sent the first tremor through the crypto market. The tweet referenced "recent revelations" as the reason to sell their holdings, but what could those be? In typical crypto fashion, speculation ensued, and the market had a knee-jerk reaction to the news.
It seemed that Zhao knew something the rest of the world didn't. A few days later, the cat was out of the bag -- FTX was going broke. After a series of losses in May and June this year, Bankman-Fried allocated at least $4 billion to FTX's trading firm Alameda Research. This $4 billion came in the form of client funds stored on FTX, FTT tokens, and even shares of Robinhood that FTX's CEO purchased back in May this year. Even with the extra injection of cash, Alameda Research was unable to recoup its losses, putting FTX in dire territory.
Binance entered discussions to bailout FTX, but after their due diligence, Binance executives came to the realization that FTX was too far gone. In the aftermath of the news that Binance was no longer interested in buying FTX, the crypto market shed around $250 billion, with some cryptocurrencies falling more than 25%.
While much remains unknown about the future of FTX, there are a few things that investors should take away from all of this.
Painful but valuable lessons
First and most importantly, stop storing your cryptocurrency on exchanges. When you purchase cryptocurrency on an exchange like Coinbase or Binance, you should send those funds to a crypto wallet. This can be a hardware wallet or a digital wallet on your phone. Hardware wallets are some of the most secure forms of holding crypto since they store funds offline without an internet connection. By using a wallet, you can prevent exchanges from using your funds to make their own trades, like what FTX did. In addition, you can protect your crypto from any hacks that could happen.
Second, crypto will look dramatically different in the future. This doesn't mean cryptocurrencies are going away, but events like this set a precedent for government regulation. The state of California has already announced an investigation into FTX is underway. Multiple senators have voiced their opinion that some sort of legislation is needed to create a "regulatory framework that allows for international cooperation and gives consumers greater confidence that their investments are safe."
Hopefully, these efforts by governments increase transparency in the market and provide more protection for investors. Registration with the government will likely become the norm. Exchanges, stablecoins, and even some cryptocurrencies will have to obtain approval, much like the stock market, and provide quarterly reports on holdings and other financial information.
Last but not least, the world of crypto offers investors a multitude of possibilities. You can invest in all kinds of cryptocurrencies that offer to solve some sort of problem. However, as promising as they might sound, things can change quickly and oftentimes for the worse. To ensure that your portfolio remains protected from any potential black swan event, investors should prioritize holding cryptocurrencies that are clearly head and shoulders above the rest.
Cryptocurrencies with large market caps like Bitcoin (BTC -2.76%) and Ethereum (ETH -1.93%) are deemed safer than the rest due to their massive acceptance and trading volumes. Together, the two make up more than 55% of the value in the entire cryptocurrency asset class. This strategy of investing in Bitcoin and Ethereum might not be glitzy or glamorous, but in the short history of cryptocurrencies, it's easily the most proven. There's no telling what the crypto market will look like in the future, but investors should have confidence that these two juggernauts will stick around for the long haul.
