What happened to Crypto last week?
Last Monday, Sam Bankman-Fried, the chief executive of FTX, took to Twitter that FTX is fine and that clients assets are save. By Friday, he had resigned, his $16 Billion net worth went to $0 and FTX announced that it was filing for bankruptcy.
After some rumours circled last week, a run at the FTX Crypto Exchange started and they received $6 Billion in withdrawal requests over 72 hours but didn’t have enough liquidity. Turns out that Alameda Research, a quantitative trading firm specialized in cryptocurrencies, owes $10 Billion to FTX. Alameda Research is headed up by Sam Bankman-Fried as well.
While there is generally no issue with one guy heading up more than one company, in an unregulated environment like the crypto world, it is a sure recipe for trouble. The FTX story caused increased withdrawal activity in the crypto space around the world and saw prices taking another significant drop.
The question many have, is this is a sign that crypto currencies are nothing but a scam or is this an opportunity creating event, to enter or increase positions?
Exchanges, like FTX have a long history of funds that were misappropriated or even just disappeared. It’s important to distinguish between the exchanges and the actual crypto currencies. The problems are caused by how these exchanges are run. FTX, one of the 4 largest crypto exchanges in the world was led by a 30-year-old and his room mates out of a house in the Bahamas. Several other exchanges have a similar setup. The issue is the lack of regulation.
The SEC wants to be the lead regulator of Crypto in the US, but struggles working with the industry. They are way behind with their efforts and have trouble grasping some of the technologies involved. On top of that, many exchanges are unsupportive. If registered with the SEC, crypto exchanges would be forced to adopt technology systems to make their order books audit-compliant.
Crypto currencies itself remain a very volatile investment. The fact that we have now more than 12,000 of them, reiterates the fact that many of them are simply created for quick profit. Bitcoin has been the stable of the crypto world and weathered the recent storms better than most. Some other credible crypto currencies are Ethereum, Cardano and Solana. Bitcoin and Ethereum are down about 75% for the last 12month, Cardano 85% and Solana 95%.
At these levels, these 4 coins could represent a great opportunity for someone who can handle the volatility. But the flushing out of bad actors is not done yet and crypto levels can still sink lower. Regulation is needed and once established, it will also bring bigger players to the table. Just like with stocks, do your own due diligence and ignore advice from media and people who claim that they know which way it’s going.
