Home Career 4 Lessons for Cryptocurrency Investors from the FTX Collapse

4 Lessons for Cryptocurrency Investors from the FTX Collapse

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Bahamas-based crypto exchange FTX filed for bankruptcy in the US on November 11, 2022, seeking court protection as it seeks a way to refund users.

Nurphoto | Nurphoto | Getty Images

After a difficult year for digital assets, many investors have been blindsided by the recent one the collapse of the FTX cryptocurrency exchangeas customers are waiting for an answer about the estimate Between 1 and 2 billion dollars are not enough funds.

While the future of the company – and the investigation into the missing assets – is in limbo as FTX enters bankruptcy protectionexperts say there are key lessons for crypto investors.

“The collapse of FTX is a stark reminder that there is no such thing as a free lunch when trying to make a quick buck in the still fairly new, unregulated financial industry,” said Chartered Financial Planner John Ulin, CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.

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You should invest “what you are willing to lose 100% like in Las Vegas” and “prudence and skepticism” should be exercised when weighing assets and related products. thrown by “pro-athletes, celebrities and media personalities,” Ulin said.

Here are four other investor lessons from the FTX crash.

1. Know the risks of where you store your cryptocurrency

Kevin Lam, CFP and founder of Foundry Financial in Los Angeles, works with young investors and said that about 50% of his clients hold some form of crypto.

While he doesn’t believe customers necessarily need to reduce their exposure, he said they should understand where the digital currency is stored and the potential risks of keeping assets there.

“I think the collapse of FTX will ultimately be good for traditional financial companies like Fidelity entering the crypto space because they have a certain level of trust,” Lam said.

Fidelity Investments announced its plans earlier this month launch a crypto product without commissionwhich allows investors to buy and sell bitcoin and ether.

The FTX crash has also resumed interest in cold storage, or take the digital currency offline, making it less susceptible to hacking. However, this move makes the asset less liquid and difficult to trade quickly.

2. Diversification is “always important”

Whether you’re investing in stocks, cryptocurrency or other assets, experts say a large percentage of one holding can be risky.

“Diversification is always important,” said George Gagliardi, CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.

“For individuals who had very large allocations to cryptocurrencies, whether in FTX or not, the fall in crypto prices this year has been a painful lesson in the importance of diversifying investment classes,” he said.

The [FTX] The crash should serve as a lesson that any individual company – be it a crypto exchange or a more traditional business – can go bankrupt in times of distress.

Kevin Brady

Vice President of Wealthspire Advisors

From the addition of an an all-time high of $68,000 in November 2021, the price of Bitcoin fell by more than three-quarters, falling below $17,000 as of November 17.

” [FTX] The crash should serve as a lesson that any individual company — whether it’s a crypto exchange or a more traditional business — can go bankrupt in a time of distress,” said Kevin Brady, CFP and vice president of Wealthspire Advisors in New York.

When weighing portfolio allocation, he says, 5% of a single asset “starts to be substantial” and 10% is “very concentrated.” Of course, there may be extenuating circumstances for some investors.

“Even if a financial asset is speculative in nature, it can still play a role in a well-diversified portfolio, albeit in small amounts,” Ulin & Co.’s Ulin said.

3. Expect more crypto regulation

There is an ongoing debate about how cryptocurrency should be classified and regulated, and it has intensified amid the fallout from FTX.

Sens. Cynthia Lamis, Wyoming, and Kirsten Gillibrand, D-Dame, in June introduced the bill create a regulatory framework for digital currency by defining most assets as commodities, such as gold or oil, which are overseen by the Commodity Futures Trading Commission.

Experts say the FTX collapse could speed up those discussions — and speed up the timeline for future recommendations. “I think we will see the rules,” he said Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington. “And I think those bad business models will go away.”

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House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and top Republican Patrick McHenry, R-North Carolina, on Wednesday announced plans to bipartisan hearings in December investigate the FTX crash.

While Congress will ultimately decide how government agencies can regulate cryptocurrency, the chairman of the Securities and Exchange Commission Gary Gensler insists on stricter rules. “Investors need better protection in this space,” he said CNBC’s “Squawk Box” Nov. 10.

4. Back up your crypto transaction records

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