The most recent – and perhaps surprising – cryptocurrency market crash has not been related to the global economy, at least not directly. The big factor was the collapse of a giant in the sector, FTX.
The company was launched in 2019, just a few months before the covid-19 crisis and the record high of Bitcoin (BTC) and most altcoins. During the pandemic, FTX grew rapidly, as did other exchanges and crypto projects, driven by the large amount of what can be called “free floating cash”, an expression that can be explained in Portuguese as “money without backing printed by governments”.
It is undeniable that, over the almost three years of existence, FTX has been very successful, with operations in several countries, including Brazil. However, everything changed in a short period. What was once one of the largest cryptocurrency exchanges in the world, valued at over US$32 billion (or R$170 billion) turned into nothing in a few days.
The ruin began when it became evident that the company would not have enough resources to return to customers if there was a mass request for redemptions in a short period, and this was exposed by a competitor of the company, who made provocative statements to FTX on Twitter.
Buying the doubt installed by the competitor about the solidity of FTX, the market panicked, which caused many investors – from FTX and other companies in the crypto ecosystem – to liquidate their assets, causing the market to drop 20% .
In the following days, there was a “bank run”, as they say when investors rush to redeem their investments in the face of some instability in the market. However, unlike crises in stocks and bonds, in the crypto universe, there is no securities commission to discipline the market, nor a central bank to help prevent companies from going bankrupt, which makes everything more chaotic.
In a second moment, already under the effect of the sharp devaluation of assets, the market tried to unravel what led FTX to insolvency. As new information appeared about how customers’ money – held in custody by the platform – was used, a new panic struck investors, causing even experienced investors to walk away from the market to watch from afar what could be the biggest scam in history. of cryptocurrencies.
As in many other markets, crises in the crypto world are followed by a new wave of assets and companies maturing. And this evolution has really happened over the years, with the crypto market imposing itself as a serious option in the high-risk asset segment.
After the FTX crisis, the market finds another opportunity to strengthen. Failures and weaknesses are exposed so that ways can be found to correct them. But what’s really important is to remember that even in times like these, the technology that allows the market to function is strong and its progress cannot be stopped.
Bitcoin was created to be decentralized and self-controlled; if we make mistakes in the way we use it, we can’t blame the technology. In the short term, there will continue to be impacts on both price and confidence as unsound projects and companies are exposed. In the long term, fear will be replaced by processes and regulations that will help strengthen the market.
One lesson every investor should take from this is to understand the amount of risk he is willing to take when he leaves his funds sitting somewhere over which he has no control.
There is a maxim in the crypto market that has become more and more accurate: “if the keys are not yours, neither are the coins”, in reference to the access keys to assets, which some companies in the segment hold and do not give to users. users the opportunity to redeem their assets in a time of crisis, which leaves investors in the hands of companies in times of apprehension.
Of course, exchanges for buying and selling assets are still important for investors to be able to participate in the market, but just as we buy products of all kinds and take them home, we should also be able to do this with cryptocurrencies.
Learn how to keep your money safe, either using a hot wallet application to have daily access to transactions, or keeping it in a cold wallet, more appropriate for long-term investments. Both options allow you to create and maintain your own keys.
Store your keys somewhere safe and never share them unless you really trust that person as they will have the control to move those assets elsewhere. Be careful when dealing with offshore grants. They may be trying to avoid regulation and oversight when domiciled in an offshore jurisdiction.
Faced with this scenario of the maturing crypto market, investors are also maturing, and part of this has been the increase in initiatives to safeguard their own assets. What’s yours, you need to have total control to be able to move with agility in the face of wrecks like the one on the FTX.
About the author
Isabela Rossa is CoinCloud’s country manager in Brazil