By Hanniz Lam
FTX appeared to be a model bitcoin exchange that was operating flawlessly.
FTX and its sister companies were taking cryptocurrency into the mainstream. They were run by Sam Bankman-Fried, a multibillionaire widely regarded as a once-in-a-generation genius who mingled with congresspeople and urged for “thoughtful regulatory leadership.”
The spectacular implosion of cryptocurrency exchange FTX, a so-called unicorn startup that was recently valued at $32 billion, is just the latest bit of bad news for investors in bitcoin, ethereum and other digital assets.
This isn’t the first time that there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they have still done better than many major stock market indexes.
What are the risks of buying crypto?
When crypto is crashing, someone who’s been intrigued from the sideline might think this is the time to get in and “buy low.” But while prices can recover — and have done so in the past — the recovery could take months or years.
Conditions might also get worse before they get better. Following a major crash, prices could also continue to go down for some time, especially if the event causes financial troubles for other exchanges or currencies.
Unlike traditional financial exchanges, crypto markets don’t have circuit breakers, which automatically pause trading when prices dive too quickly. This means prices could plunge much faster than traditional investments.
There’s also a chance any given cryptocurrency could go to zero, or close to zero, following a massive sell-off. Such was the case with Terra and Luna.
What’s the Lesson here?
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio. If you’ve done that, then don’t stress about the swings, because they’re going to keep happening, according to Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform.
As cryptocurrencies are meant to operate independently of conventional financial markets, it doesn’t appear like FTX.com or even the entire crypto market poses a systematic risk.
When it comes to the bond market, a significant failure affects everything and the entire market collapses.
With crypto, that’s not the case. However, there are still reasons to be concerned about the future of investing in FTX because many new cryptocurrency investors, those who bought high and then watched the price fall, tend to be lower-net-worth investors, some of whom were also new to financial markets. Hopefully they didn’t put more money at risk than they can afford.
As long as your crypto investments don’t stand in the way of your other financial goals and you’ve only put in what you’re ultimately OK with losing, Humphrey Yang, the personal finance expert behind Humphrey Talks, recommends using the same strategy that works for all long-term investments: set it and forget it.
