Last year the FTX crypto exchange was the world’s third biggest. Last week, the company, which had listed assets of between 10 and 50 billion dollars, went bankrupt. Sam-Bankman Fried, the erstwhile founder and CEO of FTX personal assets’ collapsed from $16 billion to zero in what Bloomberg described as “one of history’s greatest-ever destructions of wealth.”. The implosion was as sudden as it was shocking. Fried, known as SBF, had graced the front pages of Fortune and Forbes, attracted billions of venture capitalist investment and was the darling of the Democrat party – their second biggest donor this year after George Soros. The fallout of the fiasco is leaving us all asking, how safe is cryptocurrency?
What are crypto exchanges?
Exchanges allow service users to bypass many of the technical difficulties associated with buying and selling cryptocurrency. As the use of digital currencies has become more widespread, so too has the use of exchanges, which are easier to navigate than crypto wallets. Where once a cryptocurrency transaction was the preserve of those who understood blockchain technology, the rise of the cryptocurrency exchange made it accessible to all. FTX emerged as a major player in the exchange market in part because of its low trading fees, which beat out its competition. That emergence coincided with the spiking of the price of bitcoin from $10,000 to $64,000, prompting investors to flood billions into the scene.
Why did FTX collapse?
The cryptocurrency exchange had created a digital currency known as FTT. A large amount of FTT was being held by a company called Alameda Research, also owned by SBF. When the boss of the rival exchange Binance, Changpeng Zhao, announced his intention to sell holdings of FTT, FTX users moved to withdraw their assets. The exodus led FTX to ban customers from making further withdrawals. The gap between FTX’s assets and liabilities soared to the billions, resulting in a million people out of pocket and SBF reportedly under investigation by the Securities and Exchange Commission (SEC).
Are cryptocurrency exchanges safe?
Certainly, the CEOs of exchanges are saying so. Kris Marszalek attempted to reassure service users and the wider world at large of Crypto.com’s strong balance sheet and insisted his firm was not involved in any FTX-style shenanigans. However, Elon Musk thinks otherwise. Taking to his newly acquired social media platform, he advised in a Twitter space with Mario Nawfal that:
“As the saying goes – ‘not your keys, not your wallet,’ and so, you really do want to just keep in a cold wallet and not at an exchange,”
The Financial Times identifies several key structural weaknesses with exchanges, including opaque cross-holdings and circular lending practices, intense concentration, and a lack of opacity.
The future of cryptocurrency
Bitcoin has slid sharply from its December 2021 peak of $48,000 to just $14,000 today. Analysis has shown that most people who bought into Bitcoin did so when the price was high and that, as a consequence, 80% of those investors have made a loss. It’s not clear whether we have seen peak Bitcoin, but its value as a means to transact discreetly and bypass financial institutions is likely to serve as a bulwark against total collapse. Likewise, Ethereum, the second most popular digital currency, has also declined in value. Down from its 2021 peak of $3400, it now trades at around the $1000 mark.
But there are plenty of lesser-known digital currencies too, Tether, USD Coin, XRP, Dogecoin and Polygon, to name a few. They are held in common by the shared reality that they are all trending downwards. But according to Grayscale Investments, there might be life in the old DOGE, or at least some of the others, yet. Cited in Forbes, they talk about a so-called crypto Winter, a period of four years over which the value will decline, stagnate, partially recover, and generally perform poorly. They estimate that crypto is not set to recover until 2026. But crypto is still young, and its price is heavily impacted by speculation, making these kinds of predictions quite wobbly.
Jordan Belfort, better known as the Wolf of Wall Street, was a longstanding critic of cryptocurrencies. In 2018 he told RealMoney that the money had already been made in crypto. Not one to mince his words, he described the digital monies as “pure fraud” and “pump and dumps”. Though, this year, in an interview given to Yahoo Finance and as reported by the New York Times, he has reversed his position, endorsed Bitcoin and is reportedly an investor in crypto and adjacent entities such as NFTs. Make of that what you will.
Few people saw the rise of crypto coming, including many or even most who had bought in. Famously, rapper 50 Cent was pleasantly surprised after agreeing to accept Bitcoin payments on his 2014 album Animal Ambition when a Bitcoin was valued at around $600. When he checked his wallet a few years later, after Bitcoin has surged past the $10k mark, he had over $7 million holed up in there. Wherever it goes next is sure to be similarly surprising but not necessarily as pleasant.