Crypto started taking a hiatus — until it wasn’t anymore.
One of the largest and fastest-growing crypto exchanges collapsed last week, bringing down crypto prices that had recovered from a slump. Bitcoin had previously been on an uptrend after nearly a month of fresh lows, but FTX’s collapse quickly pulled the token back below $17,000, a price point not seen in two years. Ethereum The price is in a similar downtrend and it has been back in the low $1,200 area since Friday morning.
The fallout from FTX’s bankruptcy doesn’t stop there. Its implosion is affecting the entire crypto world. One example is BlockFi, a major crypto lender that it says is preparing for its own potential bankruptcy Wall Street Journal. And Genesis Global Trading, the lending arm of crypto platform Gemini, has suspended new lending and repayments following the collapse of FTX.
“When one person goes under, that balance sheet opens up holes in all of these other people who were owed money or who might have had funds on FTX,” said Ben McMillan, CIO of IDX Digital Assets, an asset management firm in the crypto and digital space Assets. “When leverage is wiped out, it leaves a huge vacuum, and a player like that can bring down a lot of other people in this ecosystem.”
Crypto investors on the FTX platform are seeing their accounts frozen and unable to withdraw funds, which could be coming soon for BlockFi users as well. Investors outside of these ecosystems are also not safe as their crypto assets are depreciating sharply. Here’s what investors need to know and what they should if FTX contagion lingers.
Where Crypto is Headed After FTX Collapse
The future is uncertain.
Just as no one could have predicted FTX’s sudden implosion, no one can predict where prices are headed. The market was already in one crypto winterand FTX’s bankruptcy may only serve to prolong and worsen the freeze, but perhaps not for as long as you might think.
“The immediate contagion is something I wouldn’t necessarily expect to linger over the industry for more than a month or two,” McMillan said. “But especially given the macro backdrop, I think this might dampen risk appetite a bit in the space.”
McMillan believes that the failure of FTX will eventually discourage large players from entering the crypto space, at least until 2023. For smaller investors, these new lows could present potential entry points, albeit with significant risk at this entry point.
Immediately following FTX, the value of Bitcoin and Ethereum fell rapidly by more than 20% last week, with Bitcoin in particular reaching the lowest prices in two years. The question is if this will be the ultimate low before the next bull run. But again, there’s no way to say for sure.
“Cryptos are weakening as risk appetite just left the building,” wrote Edward Moya, a senior market analyst at Oanda market pulse.
“We’ll be talking a lot about FTX in the coming months, but what will drive cryptos is if Binance, Coinbase, Lbank or Consbit run out of liquidity. A lot of bad news has been priced in, so it could take another downfall from a major crypto company or a de-risking move on Wall Street to take Bitcoin below its recent low. “
More institutional failure means more bad price moves for investors, especially as risk appetite wanes in these turbulent economic times.
What Crypto Investors Should Do
This is a good time to do some research.
The collapse of FTX underscores the risks of investing in the crypto market. Even a seemingly well-functioning exchange can go under and you may suddenly find that all your accounts are frozen and you can no longer withdraw your funds. Therefore, it is a good idea to carefully read and understand the terms of service and user agreement of your exchange and wallet (if you have one).
Speaking of crypto wallets, now might be a good time to get one if you don’t already have one. Cold wallets are the most secure as they store 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, making your keys more vulnerable.
Unfortunately, insurance won’t be your hero if something goes wrong with your exchange. Most exchanges’ insurance policies won’t cover you if the exchange goes bankrupt. Most policies only cover a few crimes, including fraud and theft.
Experts recommend devoting only 3-5% of your investment portfolio to crypto while maintaining a high risk tolerance. Furthermore, you should only invest what you can lose, as the last two weeks have shown us that it is not just price volatility that increases the risk of your crypto portfolio.