November 2022 was one of the darkest months in crypto history. FTX’s insolvency crisis and bankruptcy shook the entire industry and left thousands of the exchange’s users in limbo with no way of accessing their funds. $10 billion is still missing from FTX, and customers are still waiting for answers.
While other exchanges have gone bust in the past, this incident was shocking due to FTX’s size. The firm landed a $32 billion valuation in a January 2022 funding round. Its leading figure, Sam Bankman-Fried, was also very popular. Bankman-Fried allegedly moved customer funds to Alameda Research, the quantitive trading firm he co-founded in 2017, after it faced trouble amid Terra’s collapse. It’s little wonder that he’s now crypto’s number one villain.
FTX and other exchange failures
After this disaster, some may be tempted to write off crypto altogether. Now don’t get me wrong, I feel heartbroken for those who entrusted FTX with their funds. But it’s important to remember that this space has weathered harsh storms in the past. Remember Mt. Gox? The ill-fated exchange accounted for 70% of all Bitcoin trading when it vanished in 2014, taking more than 850,000 BTC with it. Mt Gox’s death was a black swan event that crashed the market. But the top crypto went on to top $69,000 in late 2021.
Crypto has survived many disasters like this, and not just because of price speculation. Once you consider tokenization’s promise, events like the FTX collapse become noise. The end goal here is much bigger than one company and its ego-driven leader. We’re fighting for a new system that creates more equality, opportunity, and inclusion across society. The traditional finance system is opaque and closed off to regular people—much like the system that allowed $10 billion to go missing from FTX. Tokenization will create an alternative that benefits regular people.
“The end goal here is much bigger than one company.”
Many people pointed out that the FTX situation wouldn’t have played out in decentralised finance. It’s hard to disagree. In fact, events like this strengthen DeFi’s value proposition. At token.com, we’re huge believers in this space, part of the reason we launched a Collection of DeFi Blue Chips dedicated to boundary-pushing protocols like Aave and Uniswap. These projects are transparent and run on code in immutable smart contracts, so users’ funds can’t suddenly go missing.
Lessons we should take from the crisis
I think there are a few lessons we should take from FTX’s downfall. After all, assuming crypto doesn’t die, we’ll need to move forward. The incident highlighted the importance of exercising risk management and security practices. It’s risky to leave funds on crypto exchanges like FTX. More advanced users should consider cold storage wallets in addition to solutions like token.com. We should also be careful about the people we trust and deify. Some treated Bankman-Fried like a hero, but his actions suggest that he was an opportunist.
There were some warning signs; we would do better as a community to flag them the next time a suspicious actor arrives on the scene. Finally, I’d remind everyone of the first rule of succeeding in this space: survival. As the big events of 2022 showed, anyone can get wiped out in crypto—FTX and Alameda’s failure came down to excessive leverage and recklessness. But for regular users too, as long as you can practice risk management, think independently and explore the token economy according to your means, you’ll be well positioned to prosper in the future.
Mel Gelderman, CEO of token.com
Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.