The Trading Bible Blog Opinion: What can we Learn from the FTX disaster?

Opinion: What can we Learn from the FTX disaster?

By Stefano Treviso, Updated on: Apr 07 2023.

In case you don't know, here's what happened with FTX:

Some kid named Sam Bankman-Fried got into crypto few years ago and started making money doing something called arbitrage (he bought bitcoin in one place cheaper and sold it for a higher price somewhere else)
He grew so much that he opened his own trading firm called Alameda Research and a crypto exchange called FTX
Recently and thanks to a public twitter fight, users got scared and started a massive withdrawal of funds from his exchange (FTX)
Turns out FTX didn't have the money because they were doing some funky stuff with Alameda Research (we're talking about $10 billion here)
Everyone's money is gone, FTX and Alameda filed for bankruptcy and everyone got screwed
Now we're all waiting for the Netflix documentary

Are there more details to this story?

Oh hell yes for sure, but.... Do we really care? Not really.

The only important things here are the lessons we can learn from this fiasco, so let's dive into some concepts that everyone seems to have forgotten.

So, where did it all go wrong?

Cryptocurrencies were born out of a desire for true financial freedom through decentralisation and anonymity. This means that true crypto OGs don't want to give control of the financial system to a single institution and they also want the opportunity to have privacy when they save or spend money.

To back up the above point and show you how important it is, think about the collapse of Lehman brothers, one of the largest investment banks in the US and the world. Without needing to go into too much detail, the bottom line of the story is that a bunch of fancy bankers wearing some nice suits had fun playing with the savings of people and drove the United States economy into doomsday in order to get some nice bonuses.

Does this story sound familiar?

If it does (which it should) then, why are we repeating the same mistakes over and over?

The main point of crypto is to decentralise finance. This means we don't want power to be in the hands of a single institution but rather spread it out across as many participants as possible. If this is the case, then why is everyone trusting all their money to a centralised cryptocurrency exchange?

Centralised cryptocurrency exchanges are the Crypto Lehman Brothers equivalent of your regular massive bank but with a twist: if they screw up, most likely you won't see your money ever again.

Crypto was meant for you to own and store by yourself! Not to trust it to an institution.

Whenever a person makes the decision to trust cryptocurrencies into the hands of an institution, the ideal is gone and nothing makes sense anymore. It's like if you were a privacy advocate and you decide to call the CIA, FBI, KGB and Mossad to give them access to your phone line for the rest of your life, willingly.

What's the real point of crypto?

Cryptocurrencies are the answer to some of the world's most difficult to solve problems:

Centralisation of power
Freedom and privacy
Trust

Nowadays were we see several hundred shitcoins floating around and a massive financial market built upon this, everyone is trying to treat them as one more financial derivative designed to speculate and create magical profits. While it is true that they are a great asset for trading and investing (assuming you're up to speed with the risks) that is not the real purpose for them.

To scare you and make you understand how deep the are problems we have in the world, let's take a look at some problematic real life scenarios:

Your aunt finally remembered you existed and decided to give you a Christmas present of €1,000. She stored the money all her life under her mattress and decided to walk into a bank and deposit it into your account. As soon as she does this, the bank randomly decides to block your account and investigate you for money laundering, tax fraud or whatever absurd claim they can come up with.
You're an immigrant moving to a new country (coming from a developing country) and you need access to banking services in order to get paid for your work, save money or any other normal reason. The moment you approach a bank to open an account, they start asking you for 10,000 different documents and some stuff you didn't even know existed in order to open your account.
You post a comment online saying that you disagree with some comment made by a minority movement (pick any of your choice, usually something related to race or gender). Your banks call you and cancel your accounts because you're racists and a danger to society.
You decide that you want to sell everything and change your country to start a new life. Your own country decided to set up a new rule where they will keep taxing you no matter where you go until you die and if you don't comply, you'll become a wanted man, banks will close you and take all your money.

Can you now see the real problems that cryptocurrencies were meant to solve?

No one can block access to your crypto accounts, you're the only one with control (assuming you don't give your cryptos to an exchange or institution)
Opening a crypto wallet address is a matter of a few clicks, no one can stop you or ask you for any documents. The only thing you need is an internet connection
Only you get to choose what happens with your money, your crypto wallet can't be touched as long as you control your private keys so in the end, no one can ban you because of how you think or tax you until you die

The only way to get to you is to tie you to a chair, torture you and force you to give up your private keys.

If you're into cryptocurrencies, then you need to be really part of the ideal and play the right game.

Cryptocurrencies were meant to be self-custodied and self-managed. They were never meant for you to give them to someone else. The moment you decide to store your cryptos on an exchange, the ideal is gone and you're at the mercy of an institution and if there is something that history has proven is that financial institutions most likely will screw their customers so it's not a matter of if but when.

What to do next?

Before trading or investing in something there needs to be a clear understanding of the asset in question. I believe that things in life need to have a purpose. You don't use carrots to power your car, right? You use fuel.

Since cryptocurrencies gained the world's attention, the game changed and turned into a fool's trap (like pretty much everything in the financial markets). Everyone started believing that cryptocurrencies are something that you simply buy and sell to get rich after after prices increase when in reality they were the answer to some of the world's most complicated financial problems.

While cryptocurrencies will still continue to be used as a financial instrument for speculation and literally no value creation (because this is what everyone likes doing), their purpose remains true for those wishing to acquire them and certain rules must always be respected:

Never give control of your cryptocurrencies to anyone else
Never trust financial institutions with cryptocurrencies
If you choose to use a centralised exchange, do it quickly and get your money out
Use cold wallets (eg: such as Ledger) or decentralised wallets (MetaMask) where only you have control

If you follow these rules, most likely you'll avoid some of the biggest problems that many people are facing nowadays. On the other hand, if you don't feel comfortable having control of your own money and you prefer to have institutions guarding it for you then cryptocurrencies are definitely not a good asset for you.