BENGALURU: Last week was one of the worst for the crypto industry, as crypto exchange FTX’s token FTT was crushed from its all-time high price of $84.18 in September 2021, to just $1.83 on 13 November 2022. This collapse is one of the biggest blows for the crypto market, which has remained under pressure for some months now.
Sam Bankman-Fried’s founded FTX was one of the successful crypto exchanges till it suffered from a liquidity crunch and filed for US bankruptcy protection. While Bitcoin, the largest cryptocurrency, fell to two-year low - below $16,000 last week - other crypto-linked stocks tumbled as the largest cryptocurrency exchange Binance abandoned FTX bailout, and this led to massive fall of FTT. Following this, FTT filed for bankruptcy.
Not just another crash
What does the collapse mean for the crypto industry and investors? The crash in the cryptocurrency market is not new. Long-term investors, who have been investing in cryptos for 5 years or more might have seen such crashes earlier as well. But experts feel this time it is different, and more structural.
Crypto investing app CoinSwitch CEO Ashish Singhal says this market-wide volatility could have been avoided had the exchange and trading firm involved done their fiduciary duties responsibly. “Don’t mishandle customer assets. Risk management is not meant to be exciting,” he adds. FTX had kept its own token as collateral.
“Do not use customer assets to borrow 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 rush to cash out, you’ll be in a tight spot,” Singhal says.
Exchanges should follow a ‘Proof Of reserve’ approach. After the recent debacle of FTX, the whole world of Crypto Exchanges (CEXs) will be implementing the proof of reserves, says Punit Agarwal, Founder and CEO, KoinX.
This is a procedure where a competent third party seeks to assure, audit, and attest that a CEX which is also the custodian of the user’s/depositors holds sufficient reserves to pay back the funds at any time when demanded by that user/depositor.
“It is advised to never use the exchange’s native token as collateral. Although it might seem tempting and lucrative, using reserves efficiently either by reinvesting them or lending them, can become a huge challenge during such crashes,” Agarwal says.
FTX announced that it is facing liquidity crunch and soon Binance said it will bailout, but it soon backed out saying “as a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.”
Given the uncertainty, volatility and the severity of the crash this time around, investors should be wary of taking new positions in cryptocurrencies. There are probably less expensive thrilling activities out there than to burn cash in an asset, whose utility in future is in question.
And if at all one wants to continue investing in cryptos, at least wait for governments across the world to come out with some regulations.
More Regulations, please
Experts say the industry has been regularly hit by crises. “You can never time any market, we don’t know when it will see its bull run but as of now when we look at the situation it’s definitely bad,” says Agarwal.
On crypto regulations and taxation, Agarwal says, “When retail investors lose money, the regulators intervene and form stricter regulations and guidelines. We can expect regulations around exchange licenses, that can include checkmarks for proof of reserves, minimum reserve percentages, etc., and a committee to monitor and control it. Similar to how SEBI does it for the Indian Stock Market.”
Since Indian tax regulations are currently levied only on the profits made on VDAs (virtual digital assets), a lot of retail investors who suffered a loss in the current market situation, will not be able to set them against the profits.
The crypto market is also undergoing a critical correction period as job openings in the Indian crypto start-ups space is also declining. Alankar Saxena, CTO and Co-founder, Mudrex, says the crypto market is undergoing a critical correction period known as the crypto winter.
“This kind of bear market is common across all financial markets. The hiring has decreased compared to the hiring cycle observed at the beginning of the year. It is an anticipated and expected drop. There was a flurry of new start-ups hiring for many new roles at the height of the bull run. However, companies focusing on building efficient products have continued to grow their sphere,” Saxena says.
Crypto markets in turmoil