4 Lessons for Cryptocurrency Investors from FTX’s Collapse
Bahamas-based crypto exchange FTX filed for bankruptcy in the United States on November 11, 2022, seeking court protection as it seeks a way to return money to users.
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After a difficult year for digital assets, many investors have been blindsided by the recent collapse of cryptocurrency exchange FTX, as customers await answers of around $1-2 billion in missing funds.
With the company’s future — and endangered asset investigations — in limbo as FTX enters bankruptcy protection, experts say there are key lessons for investors in crypto.
“The collapse of FTX is a stark reminder that there is no free lunch when trying to make a quick buck in a still relatively new and unregulated financial industry,” the Certified Financial Planner said. Jon Ulin, CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.
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You should invest “what you are 100% willing to lose, like in Vegas”, and “discretion and skepticism” should be exercised when evaluating assets and related products presented by “pro-athletes, celebrities and media personalities,” Ulin said.
Here are four more lessons for investors from the fall of FTX.
1. Know the risks of where you hold the cryptocurrency
Kevin Lum, CFP and founder of Foundry Financial in Los Angeles, works with young investors and said about 50% of his clients hold crypto in one form or another.
While he doesn’t necessarily think clients should reduce their exposure, he said they need to understand where digital currency is held and the possible risks of holding assets there.
“I think the collapse of FTX will end up being good for traditional financial companies like Fidelity entering the crypto space because they come with a certain level of trust,” Lum said.
Earlier this month, Fidelity Investments announced plans to launch a commission-free crypto product, allowing investors to buy and sell bitcoin and ether.
The collapse of FTX has also renewed interest in cold storage or taking digital currency offline, making it less vulnerable to hacks. However, this move makes the assets less liquid and harder to trade quickly.
2. Diversification is “always important”
Whether you invest in stocks, cryptocurrencies or other assets, experts say that a high percentage of a single holding can be risky.
“Diversification is always important,” said George Gagliardi, CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.
“For people who had a very high allocation to cryptocurrencies, whether in FTX or not, the crypto price drops this year have been a painful lesson in the importance of diversifying their investment classes,” he said. he declared.
The [FTX] The collapse should be a lesson that any individual business – whether a crypto exchange or a more traditional business – can fail in times of distress.
Vice President of Wealthspire Advisors
Since hitting an all-time high of $68,000 in November 2021, bitcoin’s price has fallen by more than three-quarters, dropping below $17,000 on November 17.
“The [FTX] the collapse should be a lesson that any individual business – whether it is a crypto exchange or a more traditional business – can fail in times of distress,” said Kevin Brady, CFP and vice-president. chairman of Wealthspire Advisors in New York.
When weighing portfolio allocations, he said, 5% of a single asset “starts to matter” and 10% is “very concentrated.” Of course, there may be extenuating circumstances for some investors.
“Even if a financial asset is speculative in nature, it can still play a role in a well-diversified portfolio, albeit in small amounts,” said Ulin of Ulin & Co.
3. Expect More Crypto Regulation
There has been an ongoing debate about how cryptocurrency should be classified and regulated and it has intensified amid the FTX fallout.
The senses. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, DN.Y., introduced a bill in June to create a regulatory structure for digital currency, defining the majority of assets as commodities, such as gold or oil, which are overseen by the Commodity Futures Trading Commission.
Experts say the collapse of FTX could accelerate those discussions and accelerate the timeline for future guidelines. “I think we’re going to see regulations,” said Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington. “And I think those bad business models will go away.”
House Financial Services Committee Chair Maxine Waters, D-California, and ranking Republican Rep. Patrick McHenry, North Carolina, announced plans Wednesday for a bipartisan hearing in December to investigate the collapse of FTX.
While Congress will ultimately decide how government agencies can regulate cryptocurrency, Securities and Exchange Commission Chairman Gary Gensler has pushed for tougher rules. “Investors need better protection in this space,” he told CNBC’s “Squawk Box” on Nov. 10.
4. Back up your crypto transaction records
Regardless of where you hold digital currency, experts suggest periodically uploading your transaction history.
Collecting filing documents is one of the hardest parts of crypto taxes, said Andrew Gordon, tax attorney, CPA and president of Gordon Law Group. And if a trade closes, you’ll still need documents to file your return, he said.
“Two weeks ago, very few people suspected that FTX would face this,” Gordon said.
Plus, you’ll get a better sense of your profit and loss by tracking throughout the year, he said, making it easier to lower your bill with strategies like tax loss harvesting. “It will put you in a much better position come tax time,” he said.