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Crypto was starting to catch a break — until it wasn’t.
One of the largest and fastest growing crypto exchanges collapsed last week, and it’s brought crypto prices down with it, which had been recovering from a slump. Bitcoin had previously been trending upwards after nearly a month of fresh lows, but FTX’s collapse quickly pulled the token back down below $17,000, a price point not seen for two years. Ethereum’s price is on a similar downward trend, back in the low $1,200s, as of Friday morning.
The consequences of FTX’s bankruptcy don’t stop there. Its implosion is having an effect throughout the crypto world. One example is BlockFi, a major crypto lender, which is preparing for its own potential bankruptcy, according to the Wall Street Journal. And Genesis Global Trading, the lending arm of crypto platform Gemini, has paused new loan originations and redemptions in the wake of FTX’s collapse.
“When one person goes under, that balance sheet opens up holes in all these other folks that were owed money or might have been custody money with FTX,” said Ben McMillan, CIO of IDX Digital Assets, an asset management firm in the crypto and digital asset space. “When the leverage gets wiped out, it leaves a big vacuum, and a player like this can bring down a lot of other people in that ecosystem.”
Crypto investors in the FTX platform are seeing their accounts frozen, unable to withdraw funds, which may soon come for BlockFi users, too. Investors outside of those ecosystems aren’t safe either, seeing their crypto assets severely dip in value. Here’s what investors need to know and what they should as the FTX contagion continues.
The future is uncertain.
Just like no one could’ve predicted FTX’s sudden implosion, no one can predict where prices are headed. The market was already in a crypto winter, and FTX’s bankruptcy may only serve to elongate and worsen the freeze, but perhaps not as long as you might think.
“The immediate contagion isn’t something I wouldn’t necessarily expect to hang over the industry for longer than a month or two,” McMillan said. “But, especially given the macro backdrop, I do think this could just mute some of the risk appetite in the space.”
McMillan thinks FTX’s failure will ultimately stave off big players from entering the crypto space, at least through 2023. For smaller investors, these new lows may present potential entry opportunities, albeit with significant risk attached to that entry point.
In the immediate aftermath of FTX, both bitcoin and ethereum’s value swiftly fell by more than 20% last week, with bitcoin in particular hitting price lows not seen for two years. The question is whether this will be the ultimate low before the next bull run. But again, there’s no way to definitively say.
“Cryptos are weakening as risk appetite just left the building,” Edward Moya, a senior market analyst at Oanda, wrote on Market Pulse.
”We will be talking a lot about FTX for months to come but what will drive the cryptos is if Binance, Coinbase, Lbank, or Consbit have any liquidity crunches. A lot of bad news has been priced in so it might take another downfall of a major crypto company or a de-risking movement on Wall Street to take bitcoin below its recent low. “
More institutional failures will mean more bad price activity for investors, especially as risk appetite goes down during these economically turbulent times.
This is a good time to do some research.
FTX’s collapse underscores the risks of investing in the crypto market. Even a seemingly well-performing exchange can go under, and you can suddenly find yourself with all of your accounts frozen and unable to withdraw your funds. So it’s a good idea to carefully read and understand the terms of service and user agreements of your exchange and your wallet (if you have one).
Speaking of crypto wallets, now may be a good time to look into getting one if you don’t have one. Cold wallets are the most secure, as they hold your crypto offline on a hardware device similar to a USB drive. In contrast, hot wallets are accessible online, and the downside is that your private keys are usually known to the website owner, which makes your keys more vulnerable.
Unfortunately, insurance won’t be your hero if something goes wrong with your exchange. Most exchanges’ insurance policies don’t cover you if the exchange files for bankruptcy. Most policies just cover some crime events, including fraud and theft.
Experts recommend that you dedicate only 3-5% of your investing portfolio to crypto, and that’s with a high risk tolerance. Moreover, you should only invest what you’re OK with losing, as these last two weeks showed us that it’s not just price volatility that adds risk to your crypto portfolio.
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