Untitled 1 2

Five takeaways from the FTX crypto exchange collapse

The crypto winter that began earlier this year with Russia’s invasion of Ukraine turned into a catastrophe with the default last week of crypto exchange FTX. With rumors flying that the fund founded by industry icon Sam Bankman-Fried was unable to satisfy its creditors, a massive sell-off by users of the platform hastened the company’s demise as well as an additional collapse in the prices of some of the world’s tops. cryptocurrencies. Bitcoin itself lost 25% of its value in a matter of days; today it stands at less than $15,000. A year ago it was trading at $60,000.

While the final outcome for FTX remains unclear, here are five key takeaways about what its collapse means for the digital asset market more broadly.

1. Unlike traditional financial institutions and exchanges where investors’ and depositors’ money is protected, crypto exchanges are much more risky. The reason is that, given the nature of cryptocurrencies, exchange users must transfer ownership of their holdings in order for their trade to take place (meaning they are no longer depositors, but creditors). This is why crypto traders should never hold their holdings in an exchange like Binance or Coinbase. Given the volatility of cryptocurrencies, when prices drop significantly, investors sell quickly, this may cause the exchange to be unable to satisfy the liquidation demands of investors – meaning users may have a difficult claim on their crypto holdings.

2. FTX isn’t just broke — it sought Chapter 11 protection in Delaware bankruptcy court, which favors a reorganization aimed at satisfying creditors’ (in this case, mostly dealers) claims. The bankruptcy filing was preceded by a week of panic over the exchange’s financial health and an increase in withdrawals that only made matters worse. The final outcome remains unclear.

3. The FTX episode could be another step in the once-and-for-all collapse of these permissionless, privately issued cryptocurrencies. There was some optimism over the past month that once the dark clouds on the horizon caused by the pandemic and the war in Ukraine cleared, prices of crypto-assets would recover. Now there seems to be something more structural going on, revealing that they – given that, in the absence of full adoption of cryptocurrencies, their price depends only on investors’ willingness to hold them.

Traxer Czu07W8Tpv8 Unsplash Scaled

4. However, there is good news to come out of FTX’s collapse: The revelation that cryptocurrencies may not be the golden hen for unsophisticated investors is a positive development for markets. In market microstructure, these investors are called “irrational traders”, which are usually taken advantage of by more informed traders. In the past, irrational traders had too important an impact on prices, which is not desirable for an efficient market to work. Once they’re gone, we could end up with a market that prices crypto-assets for what they’re really worth

5. This brings me to an additional point. Bitcoin, the most popular cryptocurrency, does not have a business model and therefore its price (and its value) is in the eye of the beholder, and as such is always determined by the intersection of supply and demand. But the others (Ether 2.0, Cardano, Solana) should be considered much more cryptocurrencies than utility tokens. In this sense, they facilitate decentralized finance (DeFi) transactions, allow non-fungible tokens (NFTs) to have value, and are ultimately the currency of new Metaverse applications. They are the future. The good news is that we can start seeing these tokens as sources of value and not as cryptocurrencies in the true sense. To provide a useful analogy, we are now in a similar situation as we were right after the bursting of the Internet bubble in 2001, where the true Internet-based business models were finally able to surface.

Despite the collapse of FTX, it is my opinion that blockchain technology remains healthy and is the reality of many interesting initiatives that are revolutionizing our financial system and our economies. Applications in financial markets, blockchain solutions to price carbon emissions, utility tokens that disrupt traditional internet platforms, smart contracts and digital assets as financial solutions for individuals and companies: these are only a few of the applications of the technology that hopefully get the attention they deserve.

Related Posts