The FTX crypto exchange collapsed. Sam Bankman-Fried (owner of FTX) was overleveraged, and everything went wrong.
It all started on Nov. 6, 2023. CZ, the owner of Binance, sold all their FTX tokens. They had around 23 million FTT tokens worth about $529 million. The CEO of Binance, CZ said that they decided to sell their FTT tokens because they wanted to manage the risks of the market, especially after the Terra (LUNA) crypto token crashed earlier in 2022.
The next day, FTX had some problems with money. Bankman-Fried tried calming the FTX investors down and told them the company had enough money. But his customers still withdraw $6 billion worth of FTX after the news about the incident spread. Bankman-Fried tried to get money from other investors before asking Binance for help. The value of FTT fell by more than 80% in just two days.
On November 8th, Binance said it had agreed to buy FTX’s non-U.S. business for a secret amount. This means that the world’s largest cryptocurrency exchange helped its close competitor by buying its business.
At first, it seemed like Binance would help FTX, but that hope was soon over. The next day, on November 9th, Binance changed its mind and said it would not go through with the deal with FTX. During their investigation, they found some problems with how FTX handled customers’ money and other issues.
Bankman-Fried eventually got arrested and is now facing trial in October. The FTX website is unavailable, but the most disturbing is that many people lost a lot of money.
What can we learn about a collapse of an exchange?
Today, I want to share three tips on how to prevent losing money when a crypto exchange collapses.
It is all about risk management
Preparing for the worst-case scenario is the biggest way to avoid losing money. The worst-case scenarios are:
- You can’t access your crypto on the exchange
- The coin you invested in is down by 80% in a couple of days
Both scenarios can be devastating for your wealth. It can cause long-lasting issues in your life.
If you can avoid this or manage the damage, you will be ahead of most people.
To always prepare for an exchange crash, you must determine your exposure against that exchange. If you take Binance as an example. What coins are you using that have an alliance with Binance? BNB and BUSD?
Secondly, you need to know how exposed you are to the exchange. How much crypto do you have stored on the exchange? Do you off- and onload money on the exchange? And do you use staking or leverage trading?
You need to ask yourself, what will happen if the exchange (for example, Binance) crashes today?
Will I lose all my money, or did I use measurements to secure the most?
Tip 1: Keep your coins in a (hardware) wallet
The problem with FTX is that they put their assets in cold storage. The assets you put on the exchange are now collateral for their liquidation.
So forget your coins. They are gone forever.
The best way to avoid this is to reduce the time you have assets on the exchange. Do your thing on the exchange and withdraw your crypto.
Withdrawing it in a hardware wallet would be the smartest decision. With a crypto wallet, you always have control over the keys. Check my latest post on the most secure crypto wallets.
Tip 2: Diversify your crypto portfolio
To hedge yourself against wild drops, you need to diversify your portfolio. This won’t remove the pain of losing wealth, but it will protect you from losing a significant portion of it.
If your portfolio is 75% exposed to FTT (the FTX coin) and this drops by 80%, you will lose a lot of money. But if you are just exposed for 5%, it will be painful but not that big of a deal. If your other crypto gains a lot in the next bull run, it will compensate for the crash of FTT.
You can check out my previous newsletter about how to set up a diverse portfolio.
Tip 3: Stay up-to-date with the news
The last tip I want to give you is to stay up-to-date with the news. I mean with news, the big headline news of exchanges and coins you invested in. You can, for example, make a list of people on Twitter that only give you the most important news. This way, you don’t have to be up-to-date with all the small news but only the important news for you.
For FTX, you could have sold your coins after the first breaking news article. This way, you could at least take a breather and see if the storm flies over or if the exchange crashes big time.
Simple changes like building a diverse portfolio while using hardware wallets to store your crypto can save you a lot of money. Hopefully, you will never have to deal with this scenario.
Stay safe, and best of luck.
Daniel Donselaar
