What lessons every investor should learn after FTX collapse?

Failures teach us a lot of lessons and learning from these mistakes makes us ready to not repeat the same mistakes in the future. The recent collapse of FTX, a famous crypto exchange, left many investors empty-handed and upset. Once a $32 company, FTX went bankrupt overnight, leaving many lessons for crypto investors.

What is FTX and what happened

After leaving his job at Jane Street Capital, a trading firm and liquidity provider, Sam Bankman-Fried co-founded Alameda Research, a quantitative trading house named after his hometown. This trading firm grew rapidly and, according to Bankman-Fried, made almost 1 million dollars in a single day.
The success of Alameda Research led to the launch of FTX, a cryptocurrency exchange in 2019. FTX was known for its leveraged tokens and in November 2022 it became one of the most popular cryptocurrency exchanges and fourth-largest by volume in the world at that time. Even the personal net worth of Bankman-Fried exceeded $16 Billion.

The question here is how Bank-Fried and FTX went bankrupt when everything was going well.
FTX was a centralized platform: when users came and deposited their money to buy cryptocurrency, they didn’t move their crypto assets into personal cold wallets. As a centralized platform, FTX had complete control over users’ funds and used this money without the consent of the users. For example, FTX used this money to fund its own subsidiary Alameda Research, to make political contributions, and to buy real estate in the Bahamas.

Alameda Research used these funds to buy FTT tokens, the native token of FTX. When the bubble burst, people came to know that FTX was holding FTT and they became concerned about their crypto assets. As a result, many users started to leave FTX and demanded their assets back, but FTX didn’t have enough funds to pay them back.
To pay the users back, FTX started to sell the FTT token, crashing the market and making the FTT token and FTX almost worthless.

Not having enough funds to pay back the users, FTX declared bankruptcy on November 11. Sam Bankman-Fried became zero from a hero, losing all his wealth in a single night.

Impact on the cryptocurrency market

The collapse of a renowned crypto exchange shook the crypto market, with major sell-offs making the headlines. On November 15, Bitcoin dropped by 15% and traded below $16000 for the first time since November 2020. Ethereum dropped as much as 30%, almost going below $1000, and altcoins like Avalanche and Doge also faced a decline.

What can we learn from the FTX collapse?

We can't change the past, but we can control the future and it is important to learn how these actions could have been avoided and how investors can save themselves from such losses in the future. Here is a list of the top lessons that can be learned from the FTX collapse.

1. Stop storing your cryptocurrency on exchanges – use cold wallets

Cryptocurrency exchanges are platforms where you can buy, sell and trade cryptocurrencies and some people entrust their funds to these exchanges, making them vulnerable to hacks and scams. Centralized exchanges like FTX have complete control over your crypto assets and entrusting your cryptocurrencies to a third party is risky.
The fraud of FTX has proved the wisdom of this advice: stop using crypto exchanges as wallets. Hot wallets are an alternative. Since they are used on devices like computers and mobiles connected to the internet, they may also be subjected to scams as all keys to these wallets are generated online.
The safest storage option for cryptocurrencies is a cold wallet. A cold wallet is an offline wallet that stores private keys on a device that is not connected to the internet and keeps them away from potential hackers and scammers.

2. Increased protection for investors in a post-FTX future

Many states are already trying to formulate different strategies to regulate crypto, and the regulation process has intensified since the fall of FTX. Authorities may increase their scrutiny of the cryptocurrency industry, imposing heavy fines on companies and exchanges that violate rules and guidelines and pursuing criminal charges against individuals responsible for crypto scams.

3. Invest just what you can afford to lose.

Users who trusted FTX with a huge amount of cryptocurrency ended up empty-handed. It is important to understand that you should only invest what you can afford to lose.
As cryptocurrencies are still in their infancy and their prices are highly volatile, it is crucial to understand the risks associated with them before making any investments.

4. The importance of diversification

Do not to put all of your eggs in a single basket, even in cryptocurrency. Those users who had invested all of their life-savings in FTX had nothing when the bubble burst. A diversified portfolio helps decrease the risks of loss from the failure of a single asset.

5. The importance of due diligence

Investors should conduct due diligence before investing in any cryptocurrency and exchange. Research a project’s team, vision, and regulatory compliance. Investors should also keep an eye on all the news related to the project in which they are investing.

6. Don't borrow to invest

Do not invest money that is not yours. This is particularly true in the FTX scenario, which created its native token FTT and then used it to take out loans. When this token lost almost all of its value, FTX was unable to repay the loans.

7. There is a point to regulation

Crypto regulations are somewhat necessary to protect investors' wealth. If you invest in an unregulated asset like cryptocurrency, you are on your own and there is no authority or a government body to provide oversight or protection. Overall, crypto regulations are necessary to prevent illicit activities like fraud, scams, and money laundering.

Conclusion:

Ultimately, these are valuable lessons for all crypto investors and crypto-related businesses. The fall of FTX has damaged people’s confidence in the crypto industry, and it will take some time to recover. It is a sobering reminder of the high risks involved in investing in cryptocurrency and you should always conduct your due diligence before making any investment decision.