The FTX collapse has caused a turning point in the crypto sector. No blockchain company is spared the impact and the market will need to rebalance over the next few months. The current focus is therefore primarily on damage limitation and repositioning for the coming phase of reconstruction. The following five pieces of advice should help to secure your own portfolio and keep it on track.
1. Localization: Where are my bitcoin located?
Lots of coins and cheap fees. So far, these two criteria have been decisive for many small investors when choosing a crypto service provider, especially a stock exchange. As we can see from the FTX example, these selection criteria are now taking revenge. Crypto investors are therefore well advised to check where the legal seat of their custodians is.
Deregulated tax havens such as the Bahamas (FTX) tend to be avoided, while Europe and especially the DACH region are preferable. The control by supervisory authorities is on a completely different level in this country and creates trust. It may be advisable to withdraw the coins from less trustworthy crypto exchanges.
If you don’t want to trust any third party – which is also very understandable in this situation – you should deal with self-custody more than ever. Hardware wallets can be a good option for many retail investors.
2. DEX and Co.: Use decentralized offers
As convenient as corporate-provided crypto services may be, they carry the risk of a single point of failure. Anyone who does not want to trust individual CEOs and risk departments, but rather the code or protocol, can be well served with DeFi applications.
Crypto enthusiasts can therefore take the current crisis as an opportunity to deal more closely with decentralized protocols and to use them. The most obvious are decentralized exchanges (DEX) such as Uniswap or Curve. Since the coins are not stored there, there is no credit risk.
3. Weed out losers and identify winners
All players in the crypto sector are currently suffering from the crisis. Two questions in particular are therefore crucial in this phase: Who has sufficient liquid funds to survive the dry spell and who has a business case that meets the new market requirements and could even benefit from them in the long term. The topic of regulation, for example, will become even more important. Accordingly, it makes sense not only to look at the economic condition, but also to pay attention to the licenses, ESG criteria and seriousness of the management. Whether it’s a log, a crypto exchange, or a mining company’s stock.
Companies that perform well on both aspects are likely to gain market share in the rebuild phase. Investors should therefore screen their portfolios for possible candidates and sort out the “rotten eggs”. The prices of the latter are unlikely to be able to recover sustainably. In case of doubt, this can mean that crypto investors have to realize painful losses in the current phase.
4. Monitor interdependencies
The interdependence among crypto service providers brings shocking news to the surface day after day. As in the 2008 financial crisis, the “skeletons in the closet” are now becoming visible to everyone. The collapse of FTX shakes numerous other service providers who, for example, have claims against FTX or member companies or are otherwise dependent on the company.
A well-known example of many would be the Solana Foundation. The foundation behind the high-speed blockchain allegedly has to write off a whole 180 million US dollars. This had managed deposits via the crypto exchange and also held the exchange’s own token FTT, the price of which collapsed completely. The price of Solana, relative to other coins, has collapsed accordingly.
As exhausting and complicated as it may be, it can make sense to evaluate your individual positions in the portfolio according to dependencies. For example, the investment bank Morgan Stanley already has a list of companies released, who have exposure to FTX.
5. Crypto crisis: asking the right questions
As the old saying goes, the true face is revealed in a crisis. Applied to the crypto crisis, this means that one should take a close look at what measures are currently being taken by the individual players. Important questions to check are:
- Does the market participant ensure transparency? See screenshot of reserves at exchanges
- Is there a toxic atmosphere among employees that is becoming known via social media?
- Do you stick to planned milestones or do you abandon projects?
- In view of the current challenges, can the value proposition be achieved sustainably and in the short to medium term?
- How high is the user activity or has the transaction volume collapsed relative to the competition?
These questions, adapted to the situation, can help to make the right decisions. It can also be advisable to hide the prices of the coins. Their volatility and price history can distract you when making fundamental decisions.
For example, it is difficult to see from historical prices whether developer activity is high for protocols. The decisive factor is the future viability of the individual projects and not the extent to which excessive marketing budgets and reward programs, such as at Crypto.com, have led to high prices.
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