scorecardresearchWith collapse of FTX, trust in crypto as an asset class takes a blow

With collapse of FTX, trust in crypto as an asset class takes a blow

Updated: 11 Nov 2022, 10:32 AM IST

As investors face long delays in redeeming their investments due to severe liquidity crunch at the Bahamian crypto exchange , the credibility of crypto market hits a brick wall again. Experts argue that crypto companies should now stop selling the so-called ‘the crypto dream’ to gullible investors.

FTX faced liquidity crunch, leading to extraordinary delays in honouring the redemption requests

FTX faced liquidity crunch, leading to extraordinary delays in honouring the redemption requests

If you are keeping track of the events unfolding around FTX, you will realise that some of the arguments given by crypto naysayers are not misplaced. After facing liquidity-related issues for some time, Bahamian crypto exchange FTX became the latest casualty of uncertain future which crypto investments tend to stare at.

Until Wednesday, there was a glimmer of hope for the beleaguered crypto exchange as Binance promised to throw a lifeline. But now with Binance walking away from the deal, the last hope got also dashed, at least for the time being.

The Samuel Bankman-Fried founded crypto exchange was facing a severe liquidity crunch following which it saw Binance, which happens to be the largest exchange in the world in terms of daily trading volume, as its saviour.

FTX was founded by Samuel Bankman-Fried (above).

Binance CEO Changpeng Zhao on Tuesday even announced that a provisional agreement was signed to acquire the battered exchange FTX following the concerns around its insolvency, triggered by a slowdown in withdrawals and drop in the price of FTX’s native token.

However, Binance later walked away from the deal – leaving FTX out in the cold.

The development has left crypto investors in utter shock. Bloomberg reported that the sudden collapse of crown jewel, has left crypto investors in stunned disbelief.

ALSO READ: Cryptocurrencies plunge as Binance scraps deal for rival FTX

Crypto industry insiders and experts in India believe that the FTX, just as any other tragedy, offers a number of lessons for investors.

Ashish Singhal, Co-founder and CEO, CoinSwitch, said, “The market is experiencing turbulence as international exchange FTX appears to be in trouble. A takeaway from the episode: Irresponsible risks can be costly.”

Gaurav Mehta, Founder of ‘Catax Simple Crypto Taxes’ believes that this would damage the public’s faith in digital currencies and blames it on the lack of transparency in the sector.

“It is advised to let dust settle before investing into crypto with unrealistic expectations of rebound,” said Mr Mehta.

“The market has already witnessed crypto’s failure to deliver on its promise, and now industry titans tumbling like dominoes will damage the public’s faith in magic internet money and companies selling crypto dream. The bank run caused by the panic liquidation of FTT tokens by their largest holder highlights lack of transparency in blockchain industry. The transparent feature of blockchain should have been employed first by crypto industry participants to generate confidence, but the over-leveraged and, opaque nature have led to the deepening of the industry crisis, and there will be no sunlight in crypto winter for long time,” he added.

A word of caution

In the light of FTX episode, Mr Singhal proposes the best-case scenario for crypto investors and slams the misuse of investors' money. He believes that misusing investors’ money to borrow or investing it elsewhere is uncalled for. Because when a number of investors make a beeline for redemptions, things could spin out of control.

“Do not use customer assets to borrow money or deposit it elsewhere to earn interest without their knowledge and consent. When all goes smoothly, this may look smart and can help you grow fast. But when things hit a rough patch, and customers suddenly rush to sell their assets and take cash out, you may find yourself in a tight spot,” said Singhal.

He also says that exchanges should keep their books “kosher, if you are offering customers lending or borrowing.” They should also maintain healthy reserves for exigencies, he adds.

There is no doubt that when things go down, there are spill over effects in the wider market. So, the key is to follow the unexciting model of earning only commission.

“As I have always said, there is merit in keeping things simple. A business model wherein you earn commission from trades, and just that, may seem unexciting. This is the CoinSwitch model, and I can confidently say we are built to last,” he adds.

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First Published: 11 Nov 2022, 10:32 AM IST