FTX Collapse and Humiliation of Bitcoin – Bitcoin Magazine

by James · November 10, 2022

This is an opinion editorial by Josef Tětek, Trezor brand ambassador for SatoshiLabs.

So FTX is right after all. As we’ve seen over the course of the year, even the “established” industry players are basically just big players who got lucky for a while – until reality catches up with them.

Bitcoin is an unforgiving phenomenon. The sheer reality of the 21 million limit and the inherent inability to print more should silence everyone’s ego; but from time to time there are individuals who think they are bigger than bitcoin. Zhu Su and Kyle Davies. Alex Mashinsky. Do Kwon. Sam Bankman-Fried. The one factor they had in common is called influence.

Lending may sound like sophisticated financial language, but it is essentially just borrowing money to buy financial assets. Since lenders in such transactions assume risk – the purchased assets may fall in value and the borrower may not be able to repay – they usually ask for some form of support, a security. And this is the crux of the problem: the named people had very little of their own security, so it seems they essentially did two things: (a) invented a thing – a “token” – and persuaded a sufficient number of people that it has real value and can be used as collateral; and (b) likely used users’ deposits as collateral.

In FTX’s case, the most likely scenario seems to be that they did both: leveraged the thinly traded FTT token to review “investments,” while running a partial reserve operation with users’ funds. After Binance’s CZ popped the bubble with a single Twitter thread, it appears that both FTT holders and FTX depositors will be wiped out (depending on the details of Binance’s potential acquisition of FTX). Also out of their money are equity investors, including Ontario’s Teachers Pension Fund.

Link to embedded tweet.

Source: @Crypto_crib_

Avoid The Crossfire

The spectacular collapse of FTX has also affected the bitcoin markets, indicating that it is not only those directly involved who can be hit hard by these games. At the time of writing, bitcoin has lost 14% of its exchange rate value over a seven-day period; which may not affect serious long-term HODLers, but it does affect many who are trying to exploit trade or speculate on short-term moves.

This is to say that there are several ways that the recent events could have caused a significant loss:

Holds a token. This one is obvious. Whoever has a sign of an exchange going down will be seriously injured. At the time of writing, FTT has lost over 80% over a 24-hour period.

Maintains an exchange balance. FTX account holders have seen their balances frozen and withdrawals suspended – this obviously affects holdings of all kinds. Anyone who thought they “owned bitcoin” when they only had a bitcoin account with FTX now knows better. I get it: some people simply feel more comfortable buying via an exchange than in a peer-to-peer setting; but if you do, at least withdraw bitcoin straight to your wallet!

Take advantage of trading with bitcoin. Every time a major exchange/crypto fund/crypto project goes under, bitcoin’s volatility increases. As the FTX events unfolded, bitcoin’s exchange rate moved +5%, followed by a -13% drop, all in the span of several hours. Having a leveraged position at that time would most likely have led to a liquidation.

Over exposure to bitcoin. This may sound like heresy to some bitcoiners, but there is such a thing as owning too much bitcoin. Let’s face it: bitcoin can be very volatile in the short term, and if you keep all your funds in the orange coin, you may have trouble making ends meet. Always remains solvent is as important to long-term inventory as “Not your keys, not your coins.” is!

Simply put, the only way to avoid the fallout of similar explosions is to patiently keep bitcoin in your own wallet (preferably the open source kind), and simply get on with your life: have a positive cash flow from a productive job and stack rate regularly . In addition to the significant financial benefits that this strategy is likely to bring in the coming years, you will enjoy peace of mind knowing that your bitcoin can never be frozen, leveraged or liquidated, and the exchange rate is not dependent on any individual’s decision .

Bitcoin is an unforgiving phenomenon, and the longer one is exposed to it, the more humble one becomes. Sometimes bitcoin feels almost like a living organism, choosing where to stay and when to move on. Zhu Su and Kyle Davies, Alex Mashinski, Do Kwon and now Sam Bankman-Fried – they all thought they dominated bitcoin, but bitcoin thought otherwise. They, along with their followers, were not worthy.

Are you?

This is a guest post by Josef Tětek. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.