Misusing investors’ money, growing too fast and siphoning off money from one organisation to a sister concern can wreck any business. And when the business happens to deal in crypto assets, its future would not be any different.
Something similar happened in case of FTX which was earlier seen as a modern-day JP Morgan, but is now headed to bankruptcy. The comparison to Morgan was made after Sam Bankman-Fried, founder of FTX, tried to bail out some smaller failed crypto firms such as Voyager digital and BlockFi Inc.
The problems mounted a few days ago when the Bahamian crypto exchange faced severe liquidity concerns and it was taking a long time for investors to redeem their investments. The key reason is unethical siphoning of funds and FTT, an exchange token issued by FTX, from the exchange to Alameda Research.
Mr Bankman-Fried reportedly transferred $10 billion to his trading firm Alameda Research, out of which nearly $2 billion is still missing.
Regulators are now set to crack down upon the battered crypto exchange with a number of criminal and civil actions that will be slapped against the exchange and the executives including the boss Sam Bankman-Fried.
Here we list out the lessons investors can learn:
1. Exchange should use investors' money aptly: Investors’ money should be used for the purpose it is deposited in the exchange. When one investment is siphoned off to another venture contrary to the expectations of investors, it could be wreak a havoc in no time.
2. Look at the business model: Regardless of the lofty figures which appear on the business magazines or social media, the net worth of founder or massive market cap doesn’t make an organisation infallible. It's the ‘business model’ that matters. When the crypto exchange does things beyond its mandate of facilitating a buy-sale agreement, it could be a big red flag.
“There is merit in keeping things simple. A business model wherein you earn commission from trades, and just that, may seem unexciting. This is our model, and I can confidently say we are built to last,” says Ashish Singhal, Co-founder and CEO, CoinSwitch.
3. Prioritise transparency: Since the crypto sector, by and large, is still unregulated. No wonder then there have been several instances in the past including in Canada-based QuadrigaCX where crypto investors’ funds were used for purposes other than buying currency while buyers were kept in the dark. Investors, therefore, should trust the exchanges that are more transparent in their dealings with investors.
Quadriga also got defunct in 2019 and its illegitimate dealings came to the fore when investors wanted to exit but failed to redeem their investments at the platform.
So, investors must be apprised that FTX was not the first one to route investors’ money for purposes different than promised.
4. Do not go overboard with crypto investments: As the crypto sector has seen a number of exchanges going down under, being circumspect and cautious while placing bets is a rational thing to do – instead of ploughing in more money in a bid to earn more.
5. Avoid extreme positions: On one side, it is considered ingenious to refrain from investing a large sum in crypto assets. At the same time, one should not block out cryptocurrencies completely because these are innovations created out of a futuristic technology of blockchain – which is being embraced by fintech firms and even central banks around the world. But caution is the key, particularly until the time dust settles.
“It is advised to let dust settle before investing into crypto with unrealistic expectations of rebound,” said Gaurav Mehta, Founder of ‘Catax Simple Crypto Taxes’.