The cryptocurrency market has been shaken by the FTX saga which has cost investors billions of dollars. It is quite an unfortunate incident, especially for the customers who are counting their losses and we truly sympathize with them. Despite one company’s downfall creating a ripple effect on the whole cryptocurrency ecosystem, there are some hard lessons to be learned for the community.
First, what happened?
FTX is a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried which was one of the largest crypto exchange platforms by volume globally. Sam also founded Alameda research, a crypto trading firm.
The whole saga starts with the CoinDesk report that indicated that Alameda foundation holds its reserves in the FTX Token, FTT instead of another crypto or fiat. The trading firm, Alameda’s assets were $14.6 billion with its biggest assets being billions of unlocked FTT.
Binance, which holds $2 billion worth of FTT declared that they would sell their remaining FTT tokens worth $529 million based on the new CoinDesk revelations This created a panic withdrawal from investors consequently causing a liquidity crunch that saw over $5 billion withdrawn.
Binance CEO, Changpeng Zhao struck a deal with Bankman-Fried to acquire the non-U.S FTX in order to prevent a larger market crash. This did not last long as they withdrew from the deal with claims of FTXs mishandling of customer funds. Without investors injecting into the company, Bankman-Fried filed for bankruptcy for FTX, FTX.US, and Alameda.
FTX also suffered a hack that drained over $600 million from the wallets that attempted to access back accounts linked to FTX.US. This prompted the company to move its assets offline.
What are the learning lessons?
The downfall of FTX has caused shockwaves to the crypto industry with Bitcoin and Ethereum prices dropping at a significant rate. The story of FTX is one of History repeating itself in the case of Terra-Luna. Investors are skeptical, rightly so as the majority of them lost their investments in a matter of hours. Then again the saga does not mean that the crypto space is a dead end, rather it opens us up to some critical hard lessons for investors or anyone holding any form of digital assets in order to secure their digital assets.
1. Always store your digital assets in a custodial wallet
There are two types of crypto wallets; custodial and non-custodial wallets. A non-custodial or self-custodial wallet is a wallet in which you have sole control of the private key or seed phrase that proves that the digital assets you hold are yours. You’re solely responsible for protecting your keys and your digital assets. A custodial wallet, on the other hand, uses a third party to control your private keys. The third party which in most cases is a crypto exchange i.e. FTX is responsible for the security of your digital assets. A custodial wallet can be easy to use but rather vulnerable to hacking as seen in the case of the FTX saga.
With this in mind, you would rather have a digital wallet that will let you hold your private key and allow you to store, send and receive your digital assets. Alternatively, you could store your digital assets in a hardware wallet which is the most secure way of storing your digital assets and private key offline and inaccessible to digital threats. Or just simply have a hybrid approach where you store your digital assets online and offline for maximum security. Once you make an exchange or a transaction, consider withdrawing your digital assets to a digital wallet or hardware wallet.
2. Do your due diligence.
The idea might be good, the platform might be good, the hype could be loud and so could be the endorsement but always verify the information for yourself. As a business person or an investor, always do an internal audit before investing or buying any digital assets.
It is important to check how digital assets are collateralized. A good example would be the Terra-Luna crash which saw the algorithmic stablecoin TerraUSD(UST) depeg from the dollar and over $2 billion UST unstaked, hundreds of millions liquidated due to its connection to Luna. The UST liquidity and stability were not strong enough as it was not supported by an asset with a stable value under pressure. Due diligence on the investors’ part would inform them that if many UST holders were to exchange their holdings at the same time, Luna’s value could fall.
Also, check the team, and evaluate their past records and reputation. Do a thorough check on the partnerships and affiliated companies of the digital assets. Read on the multiple use cases of the digital assets and don’t shy away from reading the digital asset’s whitepaper.
3. Always backup your seed phrase
A seed phrase is a series of words that helps back up your digital asset wallet. Think of it like a master password where if you lost access to your device, you can always retrieve your wallet and regain access to your digital assets. A seed phrase is automatically generated anytime you create a wallet as a series of random words that are easier to remember than a private key.
Knowing the power of a seed phrase, it is important not to skip the seed phrase step when creating your wallet. You can choose to store this data in a hardware wallet or write it on paper and store it in a safe place. Make sure that the paper is not exposed to water or fire that can damage this. Also, ensure that you write the words as they appear for accuracy and access. Taking a screenshot or saving the seed phrase in a device can be dangerous as you can either lose your device or your device can be hacked leading to exposure of your seed phrase.
Protect your digital assets
The FTX saga has not only affected the cryptocurrency market but also companies exposed to FTX in any way across the world. It is a very unfortunate incident and we empathize with anyone who was affected by this.
We also want to assure our users that they have nothing to worry about. Kotani Pay is in no way affiliated with or exposed to FTX. Kotani Pay wallets are non-custodial and we encourage our clients to take the relevant measures to protect their digital assets.