over 1 year ago • 2 mins
Citing a failed corporate due diligence and investigations into the mishandling of customer funds by US regulators, Binance yesterday bailed on its offer to take over FTX, just hours after being lauded as its savior.
This is hardly good news for anyone. For the crypto exchange, it means that unless they find the capital needed to remain solvent (estimated at between $4 billion and $8 billion), they’ll have to file for bankruptcy. For FTX clients, it means they’re increasingly likely to only recover a fraction – if any – of their assets at the exchange. For crypto in general, it means potential ripple effects, less trust in its ecosystem, and an ever closer look by the regulators.
Now, regardless of whether you’re investing in crypto, there are three lessons to be learned from that mess:
Always study carefully what is used as collateral. In the case of FTX market maker Alameda Research, the fund was borrowing money using FTX tokens (FTT) as collateral. That sounds like a great idea when things are going well, but a terrible one when things go south, because the collateral value would drop when the company needs it most. As Jon explains here, it’s exactly what happened this week.
Expect the unexpected and trust no one. FTX was widely perceived as safer and more responsibly run than some other smaller exchanges. It took just a few tweets and news articles to realize that things were a lot more complicated than that. Make no mistake, crypto is still the wild, wild west and remains incredibly opaque, so don’t trust anyone and always plan for the worst.
“Not your keys, not your coins”. When you buy crypto on an exchange, just be aware that you are trusting that exchange to look after your crypto. And while they’re not all bad, there are always risks. So unless you’re using your crypto for trading, always opt for self-custody crypto storage solutions when you can.
But perhaps the biggest lessons will be learned over the coming weeks. Crypto might be facing its biggest test to date, with stricter regulation, a drop in investors’ risk appetite, and falling liquidity. But perhaps that’s what needed to help the industry come out stronger on the other side.
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