Crypto Billionaire Says More Platforms Will Fail

FTX's Sam Bankman-Fried warns that some exchanges are secretly insolvent.

The collapse of Terra's LUNA ecosystem was a catalyst for all kinds of decentralized finance (DeFi) doom. Several DeFi lenders have frozen withdrawals, and it isn't clear whether Celsius will be able to avoid bankruptcy. Most recently, crypto hedge fund Three Arrows Capital announced it would go into liquidation. Even more worrying is that a top crypto exec says this is just the tip of the iceberg. 

Crypto exchanges secretly insolvent

Sam Bankman-Fried, crypto entrepreneur and founder of FTX and Alameda Research, told Forbes that a number of crypto exchanges are in trouble and could fail. "There are some third-tier exchanges that are already secretly insolvent," he said. 

FTX has already stepped in to help two beleaguered crypto lenders. It offered a $750 million credit line to BlockFi and Voyager to help them survive the crash of Three Arrows. Three Arrows had borrowed money from both platforms. Earlier this week, Voyager said the fund had defaulted on payments on its loan of 15,250 BTC and $350 million USDC.

The bailouts are good news, especially if they stop some of the contagion sweeping through the industry. However, Bankman-Fried said that some companies were past saving. "There are companies that are basically too far gone and it's not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved," he explained.

What it means for investors

The main takeaway for investors who are hoping for an end to the price pain is that prices may still fall further. If more crypto lenders and exchanges fail, which Bankman-Fried believes they will, it will have a negative impact on prices. It could also cause further decentralized finance dominos to fall as there is a lot of interconnectedness in the market.

In addition to potential price drops, investors need to understand what happens if the specific platforms they use collapse. For example, Coinbase already warned that customer funds could be at risk if it went bankrupt. If you have money on a DeFi platform or crypto exchange, be aware that you might lose it if that platform fails.

Now might be a good time to consider the following:

1. Move assets to a non-custodial wallet that you control

During the good times, it probably suited many new investors to leave their assets in a custodial wallet on the platform where they bought them. Now that times are not so good, it's worth thinking about moving your funds to a private crypto wallet that you control. A wallet is essentially a way to manage the keys to your crypto. It's very easy to set up your own crypto wallet. You can either opt for a hot wallet that's connected to the internet or a cold wallet that's kept offline.

The biggest downside to using a crypto wallet is that you are responsible for everything. For example, if you lose the password, you could lose access to your crypto. But that's outweighed by the fact that your funds are protected against exchange failure. If your crypto platform fails, your funds won't be part of bankruptcy proceedings or used to pay other creditors.

2. Remove any funds from crypto lending platforms

Crypto lending platforms attracted investors with promises of high APYs and the potential to earn passive income on their assets. However, it is now becoming clear that some of these platforms took enormous risks with investors' money in order to generate those returns. 

If you remove your funds from these platforms today, you might lose some interest earning opportunities. However, given the high risk of platform failure, it may be worth it. Once the storm has passed, you can reevaluate this decision. In the meantime, it is better to lose a small amount of interest than risk losing your whole stake.

Bottom line

The ripple effect following Terra's collapse is far from over, and now is a time for extreme investor caution. This applies not only to the way you invest, but also how you store your crypto assets.