Image (CC BY 2.0) by Marco Verch via Flickr
The crypto market is one of temptation, among many other things. As the crypto exchange FTX collapses, a story you may or may not be familiar with, many are finding the usual temptation irresistible.
“The FTX collapse shows crypto is…” use your imagination and come up with your own metaphor for dumpster fire. While prices have indeed tanked, it isn’t by a particularly extreme margin so far, especially when you factor in past volatility. The downturn has even been a benefit for those with an eye on accumulating long-term digital asset holdings.
As has been the case over the past few days since FTX halted withdrawals and cited insolvency, you’re likely to encounter a lot of FUD. There might even be calls for regulation that will save us all. And there will undoubtedly be someone saying this damns crypto in some way. But how ridiculous is all this, really?
Understanding exchanges
In our section on cold storage, we explain how exchanges, if we’re going to be blunt, can’t be trusted. While we list hacks as an issue threatening crypto assets on the exchange, there doesn’t really need to be anything so exotic. As much as we like to pretend that exchanges are something to wholly place our faith in, the truth is that they are subject to the failures of any other company.
Importantly, these companies aren’t actually tied to the assets, unless they are issuing proprietary tokens. They might take your assets “hostage,” but that’s only if you have placed your faith in them.
As rough of a reality as it might be, anyone using an exchange must take scenarios such as these and base their risk management around them. An exchange is a third-party providing financial services. Nothing more, nothing less.
Does this make crypto exchanges untrustworthy of your assets? That depends. Do you find banks untrustworthy of your assets? Because…
The real reason we still have faith in banks after the 2008 financial crisis is that the government has bailed them out. That’s it. And that’s what, purportedly, prompted the creation of bitcoin. Granted, not all banks managed to avoid bad publicity to the same level. But 2008 was a year when banks, which really function similarly to exchanges, were exposed for malpractice.
Fortunately for them, a government bailout was there, something that neither the three-year-old FTX nor its more seasoned competitors can expect. After all, the foundational block of bitcoin criticizes government bailouts. “Why should we help our detractors?” and all that.
The BitIRA difference
What are the best practices and tips to minimize risk and maximize profits when investing in cryptocurrency? Diversification (within as well as without crypto), due diligence and maintaining a long-term time horizon.
Let’s apply this to our company as an example. Anyone doing due diligence on us knows we’re in it for the long haul and caution crypto investors about risks left and right. Crypto isn’t just about secure transactions: knowing how to store your assets so that they remain in your possession is just as important, if not more so. And we have a guide on that.
Getting into more details, we’ve chosen to work with Genesis, an institutional-grade crypto custody and trading firm. So by investing in crypto through us, you’ve secured your assets with a company whose first over-the-counter bitcoin transaction was recorded in 2013. If you knew about bitcoin back then, chances are you’re already wealthy. And as we’ve elaborated, they’re stored on an offline ledger. They won’t be turned into an exchange’s token without your knowledge, only for that exchange to claim insolvency later on.
FTX’s collapse is one of the reasons why institutional-grade custody is so important to big investors: they want their crypto assets secure. This only tells us that these investors have enough faith to place large sums in money into crypto. They are just skittish about the company.
More than anything else, however, it’s a beginner’s lesson about financial markets. Names come and go, assets stay. After all, you don’t hear Switzerland apologizing over issuing francs because Credit Suisse is undergoing an insolvency crisis, right?
