This article analyses the underlying risk of cryptocurrency in general, as well as a deeper look into the collapse of FTX exchange. The article is only aimed to educate and should not be taken as investment advice.
The question that everyone has been asking since its inception and even more so after the recent collapse of FTX —is cryptocurrency safe?
In most people’s minds, cryptocurrency is synonymous with volatility. Let’s take Bitcoin as an example. Like most commodities and assets, Bitcoin’s price is heavily influenced by supply and demand. Due to the nature of its design, Bitcoin is limited to 21 million coins. This means the closer the circulating supply approaches the limit, the higher the prices will climb. Speculation and hype are also primary factors in the rapid and drastic change of Bitcoin’s price. The public can be easily influenced by market news from the media outlet or simply because of a tweet from Elon Musk. In May 2021, Musk tweeted a statement about Tesla’s plan to no longer accept Bitcoin payments. Consequently, Bitcoin fell drastically from 54,819 USD to 45,700 USD!
Cryptocurrency remains largely unregulated by governments around the world, at least so far. Currently, there are a total of nine countries that have fully banned cryptocurrency, these countries are Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia. With that said, government agency views of cryptocurrency can affect Bitcoin’s price some way or another. A sudden regulatory crackdown could make it difficult to sell cryptocurrencies, or cause a market-wide price drop. For example, when China intensified its crackdown mid of last year, Bitcoin was down 8%, which is a significant decline in its history.
Despite the blockchain technology that supports cryptocurrency being inherently secure itself, cybercrimes like phishing attacks can still happen. The attacker normally poses as a legitimate entity or person to gain the trust of the victim. Once the victim has been scammed, the attacker then uses their information to steal their cryptocurrency funds.
In November 2022, cryptocurrency exchange FTX collapsed after a run on deposits exposed a deep financial hole in the business. The company filed for bankruptcy, and its chief executive, Sam Bankman-Fried, resigned. Since then, John Jay Ray III, a veteran of several famous corporate implosions, has taken over as CEO.
This collapse has brought a series of damaging revelations about Bankman-Fried’s leadership to light. According to Mr. Ray, the company had many corporate missteps and suspicious management, including the use of software to “conceal the misuse of customer funds.” He also said he could not trust that financial statements assembled under Mr. Bankman-Fried’s leadership were accurate.
The CEO of cryptocurrency exchange Kraken, Jesse Powell, also shared his thoughts on the collapse of FTX. “This is a massive setback,” he began. “Our good, trusting nature makes us easy targets for con artists … This isn’t about aiming high and missing. This is about recklessness, greed, self-interest, hubris, sociopathic behaviour that causes a person to risk all the hard-won progress this industry has earned over a decade, for their own personal gain.”
What we can understand from this debacle is that the problem doesn’t lie in the fundamentals of cryptocurrency itself, rather it is an outcome of a company riddled with dysfunction and mismanagement. This isn’t a case of bad luck, but appears to be unsustainable layers of deception at play. Ultimately, it was a leadership crisis that led to the downfall of FTX.
As all investments carry risk, there are precautions that you can follow to make informed and educated decisions before taking the plunge. Here are a few tips that will guide you in starting your journey:
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