FTX Contagion Spreads
The FTX contagion is spreading. Emily Stewart at Vox asks: "Crypto probably isn’t dead, but should it be?" With public and investor confidence at an all-time low, what does the future hold?
The unraveling of Sam Bankman-Fried's (SBF) empire has sent shockwaves across the crypto world. In two short weeks, FTX tumbled from its throne as a leading centralized cryptocurrency exchange (CEX). Now, the company is embroiled in what will likely become 2022's largest bankruptcy settlement at $16 billion USD.
With FTX gone, public and investor confidence in crypto is at an all-time low. Emily Stewart at Vox posed a question that's been weighing heavy on a lot of minds: "Crypto probably isn’t dead, but should it be?"
After FTX, Is Crypto Dead?
Illia Polosukhin at CoinDesk has one of the best answers to Emily Stewart's timely question: "The failure of FTX was not one of insufficient regulation nor of a corrupted codebase, but a human failure. Rather than condemning crypto, FTX demonstrates that truly decentralized, transparent and open Web3 technologies can better protect users and support a more fair and more resilient digital financial system [than traditional centralized exchanges]."
In my opinion, SBF's fall from grace has emphasized the advantages of decentralized financial systems without intermediaries and serves as a cautionary tale against centralization and abandoning the promise of cryptographic and blockchain technology for short-term monetary gain. FTX's downfall may ultimately prove beneficial to crypto by convincing more people of the need for self-custody of digital assets, thereby popularizing decentralized exchanges such as Infinity Swap.
Impact of the FTX Contagion
Regardless of how one feels about the long-term prospects of blockchain technology, the immediate and negative impact of FTX's collapse on institutions and individuals is undeniable. People have been wronged, and people are hurting. We cannot lose sight of that fact and should help those in our circles who have been injured, according to our abilities and means.
Dozens of crypto firms still have assets locked up in FTX. Under Chapter 11 Bankruptcy, they are deemed unsecured creditors. In other words, these crypto firms are now at risk of not being able to pay their bills or redeem money that's been entrusted to them by customers. Similarly, any institution or individual who has assets tied up in one of these crypto firms is also at risk.
When a big, centralized business fails, it unleashes a domino rally of financial pain.
Yahoo News has done well tracking the collateral damage thus far. Genesis Trading has $175 million USD entangled with FTX and has paused customer withdrawals. BlockFi has also frozen customer accounts in view of a $250 million USD credit line with FTX. Crypto.com, too, has temporarily stopped customer withdrawals. It's unclear whether any of them could survive a classic bank run right now.
Impact on Retail Investors
However, the most tragic and infuriating aspect of FTX's implosion is the impact it will have on the individual lives of retail investors. People followed trusted, mainstream news sources like the New York Times, which arguably helped promote SBF's projects and encourage investment. Their trust was betrayed.
Big institutions will probably survive the fall of FTX; Temasek, for example, lost $275 million USD, but amounts to less than 0.09% of its $403 billion USD net portfolio value. Meanwhile, some teacher funds, a tech worker in Alabama, a musician in Thailand, and a man in Morocco may never recover from the financial blow.
This tremendous amount of human suffering could have been avoided, had people been steered by trusted media toward self-custody options, decentralized exchanges, or at the very least, organizations with insurance and fiscal protections.
What Happens Now?
No one can change what's happened. The past is done. SBF allegedly created money out of thin air - and something can't be brought back from nothing without causing further mischief. All that remains is to take immediate precautions to protect ourselves against ongoing FTX fallout, then work together to build a better future.
Dodging the FTX Fallout
I'm not in a position to give financial advice, but I can talk about my response to FTX's collapse. I've pulled all my assets from centralized cryptocurrency exchanges, including Coinbase, which has lost over a quarter of its value in the past four trading sessions due to anxieties about FTX's collapse.
All my crypto is kept in self-custody wallets, such as the Internet Computer's NNS. The rest of my assets are stored in diversified investment portfolios, 401K, and credit union and bank accounts insured by FDIC or NCUA. I believe wholeheartedly in mitigating risk; never bet more than you can afford to lose.
Building a Better, Decentralized Future
The financial crisis of 2007 to 2008 set the stage for cryptocurrency. However, by embracing centralization and succumbing to the temptations of get-rich-quick schemes, the crypto world has in many ways repeated the sad mistakes of traditional marketplaces that it sought to correct.
In the final analysis, I think people like Emily Stewart have a valid point: "For those who have been paying attention to the sector, [the fall of FTX] sort of feels like waking up from a worldwide hypnosis. The metaverse thing, which is basically Zoom meetings with legless cartoons, never made sense. Neither did this idea that images of pixelated punks and weird-looking monkeys were worth millions of dollars as NFTs. Thousands of crypto tokens and coins spun up out of thin air have been revealed to be nothing more than magic beans."
Instead, functional blockchains that provide traditional Web2 services and meet practical needs with the added benefit of decentralized architecture are the way forward. The Internet Computer serves this purpose wonderfully by offering site hosting, email, financial services, games, and interconnectivity with Web2, all completely on the blockchain.
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