As Established Firms Collapse Across Globe, Here’s How Crypto Investors Can Stay Safe

A Do-Your-Own-Research (DYOR) approach is crucial before investing in any asset or platform.

Diversifying asset investments can be a risk management strategy.

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In 2022, the entire cryptocurrency market underwent a testing phase due to several factors that included macroeconomic influences such as central banks worldwide raising interest rates to combat inflation and a pervasive apprehension about a possible recession.

Even though the crypto market appeared to be consolidating, it began to decline since mid-May. Several factors could have contributed to the emergence of bearish sentiments. The collapse of Terra, a stablecoin, resulted in a $50 billion loss in the market. 

The liquidation of Three Arrows Capital (3AC), a hedge fund, and issues with Celsius followed this. Vault, a crypto exchange registered in Singapore, also halted its withdrawals. These consecutive occurrences generated unease among market participants. 

FTX Collapse And Its Ripple Effect

In an already bearish market, at the beginning of November 2022, FTX, a significant cryptocurrency exchange, declared bankruptcy. Its CEO, Sam Bankman-Fried, eventually resigned. This unexpected downfall sent shockwaves throughout the industry. As a result of the collapse, the Securities and Exchange Commission and the Justice Department have launched investigations into whether FTX misused customer funds to support Alameda Research, a trading firm also funded by Bankman-Fried.

The effects of FTX were felt throughout the industry, with lenders like BlockFi and Genesis announcing operational pauses. Consequently, the value of FTT, FTX's native token, plummeted by over 90 per cent. The decline in FTT's value also had a ripple effect, causing the prices of Bitcoin and Ethereum to hit their lowest levels.

The Silvergate Bank faced a setback in the same period when investors withdrew $8.1 billion following the FTX incident. This event triggered a chain of negative consequences, such as selling debt at a $718 million loss. In its most recent financial report, the bank reported enormous losses of $1 billion for Q4 and $949 million for the entire year of 2022, compared to its $76 million profit in 2021. Due to these circumstances, the bank could not meet its further payment obligations and ultimately had to liquidate its operations in early March this year.

Two days after Silvergate Bank's collapse, regulators seized the assets of Signature Bank, a crypto lender in the United States, in anticipation of a potential spill.

How Crypto Businesses And Startups Are Affected

Due to the two primary crypto-friendly banks collapsing, startups and companies now might face difficulties obtaining lending services, these were the prominent banking institutions catering to crypto companies. Although this may temporarily impact crypto liquidity, it presents an opportunity for emerging innovative challenger banks to fill the void left by Silvergate and Signature.

Although these events may cause market volatility in the short term, they could increase prudence among other banks in the long run. Additionally, regulators may take advantage of the situation to provide more precise guidelines regarding the crypto sector's regulations to prevent similar incidents going forward.

How Would Recent Events Impact Investors?

FTX, now under new management, is cooperating with federal agencies to recover any funds that may be returned to its users. Despite these efforts, whether users will receive their funds or how long it will take is uncertain. 

This uncertainty could create anxiety among traders and investors, causing them to become more cautious when choosing trading or investing platforms due to trust issues. As a result, even a minor sign of a market crash may prompt investors and traders to panic and initiate sell-offs, potentially leading to increased market volatility.

How Can Investors And Traders Stay Safe?

A Do-Your-Own-Research (DYOR) approach is crucial before investing in any asset or platform. Conducting thorough research is paramount in avoiding unfavourable outcomes. This involves evaluating the platform's fundamentals, risks, regulatory changes, and potential returns. Staying abreast of the latest developments, including a company's financials, news articles, and expert opinions, is essential to remain informed about significant events that can aid investors and traders in making informed decisions.

Diversifying asset investments can be a risk management strategy by safeguarding against potential losses in a particular asset or industry. Investors and traders must establish their investment objectives and risk tolerance levels, allowing them to choose assets that align with their goals and risk tolerance. By doing so, they can make informed investment decisions.

(The author is the CEO and co-founder of Mudrex, a global crypto investing company)

Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.