FTX’s Sam Bankman-Fried warns that some exchanges are secretly insolvent.
- Prominent crypto billionaire, Sam Bankman-Fried claims that some third-tier exchanges are already secretly insolvent.
- FTX has offered a $750 million line of credit to BlockFi and Voyager.
- Now is a good time to consider moving assets to a crypto wallet that you control.
The collapse of Terra’s LUNA ecosystem has been a catalyst for all sorts of decentralized financial (DeFi) disasters. Several DeFi lenders have frozen withdrawals, and it’s unclear whether Celsius will be able to avoid bankruptcy. More recently, crypto hedge fund Three Arrows Capital announced that it would go into liquidation. What is even more worrying is that a crypto executive claims that this is just the tip of the iceberg.
Secretly Insolvent Crypto Exchanges
Sam Bankman-Fried, a crypto entrepreneur and founder of FTX and Alameda Research, told Forbes that a number of crypto exchanges are struggling and could fail. “Some third-tier exchanges are already secretly insolvent,” he said.
FTX has already stepped in to help two struggling crypto lenders. He offered a $750 million line of credit to BlockFi and Voyager to help them survive the Three Arrows crash. Three Arrows had borrowed money from both platforms. Earlier this week, Voyager said the fund defaulted on its loan of 15,250 BTC and $350 million USDC.
Bailouts are good news, especially if they stop some of the contagion sweeping the industry. However, Bankman-Fried said some companies have moved beyond savings. “There are companies that are fundamentally too far behind and it is impractical to support them for reasons such as a substantial hole in the balance sheet, regulatory issues or that there is not much business left to salvage” , he explained.
What this means for investors
The main takeaway for investors hoping to end the price pain is that prices could go down further. If more crypto lenders and exchanges fail, which Bankman-Fried thinks they will, it will have a negative impact on prices. It could also lead to the fall of additional decentralized financial dominoes, as there are many interconnections in the market.
In addition to potential price drops, investors need to understand what happens if the specific platforms they use crash. For example, Coinbase has previously warned that customer funds could be at risk in the event of bankruptcy. If you have money on a DeFi platform or crypto exchange, be aware that you could lose it if that platform fails.
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Now might be a good time to consider the following:
1. Move assets to a non-custodial wallet you control
During good times, it was probably fine for many new investors to leave their assets in a safekeeping wallet on the platform where they purchased them. Now that times aren’t so good, it’s worth thinking about transferring your funds to a private crypto wallet that you control. A wallet is basically a way to manage the keys to your crypto. It is very easy to set up your own crypto wallet. You can either opt for an internet-connected hot wallet or a cold wallet that stays offline.
The biggest downside of using a crypto wallet is that you are responsible for everything. For example, if you lose the password, you could lose access to your crypto. But this is compensated by the fact that your funds are protected against exchange failures. If your crypto platform goes down, your funds will not be part of bankruptcy proceedings or used to pay other creditors.
2. Withdraw all funds from crypto lending platforms
Crypto lending platforms have lured investors with promises of high APYs and the ability to earn passive income on their assets. However, it is now becoming clear that some of these platforms took huge risks with investors’ money in order to generate these returns.
If you withdraw your funds from these platforms today, you may lose some opportunities to earn interest. However, given the high risk of platform failure, it may be worth it. Once the storm has passed, you can re-evaluate this decision. In the meantime, it is better to lose a little interest than to risk losing all of your stake.
At the end of the line
The ripple effect following Terra’s collapse is far from over, and now is the time for investors to be extremely cautious. This not only applies to how you invest, but also how you store your crypto assets.
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