When you invest in gold or buy silver coins you are choosing to invest in an asset that has no counterparty risk.
Sadly, those who have been holding their bitcoin on the crypto exchange FTX, have not experienced the same level of reassurance and service from the exchange’s management. This event is all part of a much wider lesson about which assets really are safe havens. Also, how to reduce the level of counterparty risk your investment portfolio is exposed to.
This time last year, cryptocurrency enthusiasts were still touting “Crypto as the new gold”– crypto touted as having the same ‘safe’ attributes as gold. The main attribute is that it is a currency that government doesn’t control. Also, it is without counterparty risk. The latest debacle has once more proved this is not always the case for cryptocurrencies.
The news that the crypto exchange FTX was filing for bankruptcy on November 5 sent Bitcoin plunging down a further 25%. This is on top of the more than 60% Bitcoin has already declined since its November 2021 peak. This brings the total decline to more than 75%.
The extent of the collapse and its fallout is still unfolding as more details are uncovered. The main risk goes back to one we have discussed many times before counterparty risk.
What Happens to your Bitcoin as FTX Collapses
The FTX collapse has brought to light that the CEO, Sam Bankman-Fried, had authorized billions of dollars’ worth of customer assets to be lent to its affiliated trading firm Alameda Research to fund risky bets. According to news reports Alameda Research owes FTX upwards of US$10 billion. This is more than half of its US$16 billion in customer assets!
The bankruptcy case is likely to take years to unravel. There could be more than one million creditors, and more than 100 other related corporate entities involved. Everyone who thought they owned Bitcoin held by FTX became an unsecured bankruptcy creditor. These are the ones who must now rely upon some Court to confirm just how much, or any Bitcoin they will receive.
FTX is not the first crypto exchange to collapse – Mt. Gox, which accounted for over 75% of all Bitcoin transactions until it filed for bankruptcy in 2014 after being hacked. Hundreds of thousands of bitcoins were lost (removed from the network).
Some of these coins later recovered but withdrawals from the exchange were already stopped. It wasn’t until seven and a half years later, in November 2021, creditors and the court reached an agreement.
The FTX web of deceit and ‘poor judgment’ in Mr. Bankman-Fried’s words, goes much deeper and is far more convoluted than the Mt. Gox bankruptcy.
Article courtesy from GoldCore
