Lessons from the Largest Collapse in Crypto History | FTX
A high level overview of the FTX debacle and what I've learned.
By now I’m assuming you’ve heard the news that FTX, one of the largest crypto exchanges in the world, has literally just collapsed. If you’re not up to speed, here’s a good primer.
TL;DR on FTX:
Sam Bankman Fried, a hailed genius and OG in crypto, ran a multi billion dollar crypto exchange, FTX.
Binance sold it’s position in FTX’s native token, FTT, causing widespread panic.
A ‘run on the bank’ revealed that FTX didn’t have the reserves it claimed to, leading the company to ultimately collapse.
Binance considered buying FTX, but bailed on the offer. As it stands, it seems nobody is coming to save them, and the most likely outcome is depositors will lose all of their funds.
I’ve learned a lot over the years in crypto, but events like these always shock one to their core. Similar to how one learns more from losing in a poker game than winning, a catastrophe in crypto that causes one to lose their hard earned assets can be a great, albeit harsh, lesson.
Fortunately, I was personally unaffected, but I know people who have lost large portions of their net worth in this fiasco. My heart goes out to all those who were affected. I feel for your loss.
I like my content to have a positive overlay, especially during this time, so today I’d to share some key takeaways I’ve learned or that have been reinforced in hopes they help you on your journey.
If you’re new here, my name is Alec Torelli and I’ve spent thousands of hours in crypto, investing and macro. My mission is to simplify it all so anyone can understand it. I’ll also share the latest, most exciting opportunities that I’m personally betting on. Join the thousands of others to stay up to date.
Lesson #1: Not Your Keys, Not Your Coins
This adage is something we all hear when getting into crypto, but few take it seriously. I’m reminded that one simply buying and holding Bitcoin in cold storage would have avoided this entire mess.
Sure, you’d suffer from temporary price depreciation as the baby goes out with the bathwater, but the Bitcoin blockchain keeps operating as promised, becoming stronger with every 10 minute block.
Notably, the need for a decentralized, unalterable and censorship resistant form of money has arguably never been greater. Long term, I’m more bullish than ever.
Lesson #2: Most Crypto is a Scam
When FTX went down, so too did their native token, FTT. My friend got caught holding the bag, as he justified needing the FTT token to get lower fees while trading.
To me, this forced use case is a clear sign of a ponzi. Why not just give people a discount for trading if their account has a certain net value? If a token isn’t truly needed, and in 99% of cases its not, the project is suspect. The best strategy in my experience is to avoid these projects with a 10 foot pole.
Lesson #3: Keep it Simple
There’s a lot of time required in keeping up with trends, finding new projects, trading, and attempting to time the market. The opportunity cost, or benchmark return is simply buying and holding Bitcoin.
The question I’ve been pondering lately is, ‘is it really worth it to invest one’s time to try and outperform a simple buy and HODL strategy, which ironically has the most long term potential of success and simultaneously the least risk?’
Put another way, for most people ‘crypto’ probably isn’t worth betting on, and I believe they’d be far better off simply buying and holding Bitcoin in cold storage, dollar cost averaging their savings into that using something like Swan Bitcoin, and then focusing on making more money doing what they do best.
Lesson #4: A Preview of What’s To Come
People are upset that FTX didn’t use best practices, show full transparency and keep 100% reserves on customer deposits. While I agree we need better practices in crypto, isn’t this the same nonsense that traditional banks were doing which led to the 2008 financial crisis? Is it possible they’re up to the same shenanigans now?
The only difference I see in crypto is the entire ecosystem acts more like a free market, and isn’t back stopped or bailed out the U.S. government through currency debasement.
I’ve learned that crypto is a proxy for how other markets would behave. As the FED is tightening monetary policy, which they seem to be keen on doing until something breaks, could our banking system or traditional markets be at risk?
Lesson #5: Verify, Don’t Trust
Group think in the media, especially on crypto Twitter, hailed Sam Bankman Fried (SBF) as a genius. FTX was considered arguably the most legitimate exchange, and some even touted that storing crypto on there was safer than self custody because ‘at least you didn’t have the risk of losing your keys.’ In other words, it was ‘as good as gold’.
These ideas proliferate on Twitter and within crypto because the community is small, and a handful of bright minds and influencers control the narrative and shape the way others think. SBF made his way to main street as well, drawing in 150M of capital from Sequoia (which they’ve since written off in a recent statement).
My point is, everyone was wrong. The people who didn’t buy into the hype, and remembered the first principles of why Bitcoin and blockchain were invented in the first place, faired well. The purpose is that when you control the access to your own keys through self custody, you don’t have to take counterparty risk. That’s the whole point of crypto!
Time and again throughout history, from central bankers debasing our currency, to Lehman Brothers and FTX, we’ve seen that trusting a handful of individuals to make good decisions on behalf of shareholders often ends in disaster.
What Happens Next?
Many are bearish in the short term, including myself. The contagion effects of the FTX collapse are not fully understood. While we’ve had a significant drawdown in price of late, and it’s possible we’re temporarily oversold and due for a bounce, (as we saw this morning), the way I approach is more though a macro lens than a technical one.
Not only do I believe we’ll see downstream effects from this, but in the short term, the macro environment seems to be getting worse, which should negatively impact risk on assets, like crypto. In the mid term, I’m bearish.
Nevertheless, I believe timing the market isn’t the best strategy for 97% of people, and this is not financial advise but just how I’m personally playing it.
Long term, after we get through this recession, which may last another 6-12 months or more, the adoption of crypto will continue to increase at an exponential rate, much like the internet.
Ponzi’s, new narratives and hype will come and go, but I believe Bitcoin will remain.
How are you playing it? What are your thoughts? Drop me your $0.02 in a comment!
Alec