Unprotected CEX
If you're not aware, FTX (one of the largest centralized crypto exchanges) is falling apart right now. Withdrawals were blocked, the company's holdings started tanking, they're filing for bankruptcy, and now the result is rippling to impact other projects. So, what happened?
There's a lot of detail to this story that I won't get into here. Suffice it to say that they took on too much debt to buy crypto that they couldn't sell quickly. When that information became public, an effective run on the bank sent FTX spiraling down the drain.
Regardless of how it happened, the impact is felt most acutely by regular people. Large investors are hit the most on paper, but generally speaking they're also more likely to be properly diversified to other asset classes and hold crypto across multiple platforms. A lot of small investors bought in after seeing Larry David in a Superbowl ad for FTX. Since that time, BTC is down roughly 50% and now the money they put in may never come out.
It's a bad situation that will financially ruin a lot of people, hurt public opinion of crypto further, and invite greater scrutiny and unfavorable regulation. Crypto needs regulatory clarity, but I fear this may be fuel enough to regulate a lot of potential innovation out of existence.
Too soon to tell how it will all shake out, but there are two main takeaways that we can all use:
- Don't take on debt to buy highly volatile, semi-illiquid assets. Sure, if you're right, you could get rich really fast, but if you're wrong, you could get poor really fast. Manage the downside.
- Don't trust anyone else to hold your crypto for you.
Situations like this really highlight to me why decentralization shouldn't be about buying tokens. Everyone should be able to benefit from blockchain without having to put money in.
-Luke
P.S. If you currently have any deposits in BurnKoin, you're trusting Kui and I to hold it for you. We're not leveraging your deposits, but we do have centralized control until December 5th. At that point, we won't be able to misuse your funds even if we wanted to.