Lessons from the FTX collapse and why self-custody is paramount

What happened recently in the crypto space felt like the timeline of a year full of events. In less than a week, Sam Bankman-Fried (SBF) has become the talk of the town. Over $32 billion worth of FTX has filed for bankruptcy.

How did it all start?

Alameda Research started in 2018 as a small hedge fund. They took on debt from investors, promising “high return without risk”. FTX completed its seed round raising $8 million and launched in Q3 2019.

There was no denying that Alameda was a major contributor to FTX volume in its early days. As FTX continued to grow exponentially, they capitalized on the DeFi hype by launching Serum, a decentralized exchange on Solana.

Alameda’s role as market maker was to increase liquidity in the market and maintain delta neutral strategies. However, as Alameda realized her advantage was slowly eroding, she began to take highly degenerative leveraged directional bets in crypto.

FTX, Alameda and the Multi-Billion Dollar Hole

Since the tokens were all traded in small quantities, it was easy for Alameda to manipulate FTX’s price higher in order to buff its balance sheet. Alameda created the illusion of a sizeable balance sheet, which they used as collateral to borrow heavily and fund directional bets.

When the market slumped that year, Alameda couldn’t repay the money it borrowed because its collateral was illiquid, leading to margin calls. This led to the theft of funds from FTX users to try to put out the fire.

Also Read: “From a Cybersecurity Perspective, the Asian Market Still Uses Legacy Tools”

Coindesk published an article on Alameda’s balance sheet two weeks ago, stating that a large portion of the $14.6 billion in wealth is spent by the FTX team itself. In light of the revelations about Alameda’s balance sheet, CZ announced that Binance would liquidate its entire $FTT holding, which is more than $580 million at the time.

On November 7, 2022, approximately $450 million worth of stablecoins delisted over the past seven days. The herd mentality participated in the fear mongering that prompted a bank run and the bankruptcy of FTX soon after.

Security and Custody

As the saying goes, security is “not your keys, not your coins” important. However, investors today seem to lack security awareness.

We have identified three key factors to consider when securing your coins:

Make sure they are offline

We’ve all heard about hackers, viruses, social engineering and more. An easy way to prevent others from stealing your coins is to take them completely offline and store them in a cold wallet.

This way your device will never be connected to the internet and you will never download malicious files on this device. By connecting your computer to the internet, you make yourself vulnerable to any form of hacks that might come your way.

Protect your device

Any device you use to store your coins can be lost or damaged. It is important to have backups. A straightforward example is writing down your seed phrase on a piece of paper.

However, this piece of paper could be burned in a house fire, misplaced, or read by others.

Inheritance – Pass it on to your loved ones

If something unexpected happens to you, estate planning is required. Many exchanges or banks will not allow the transfer or sale of your crypto holdings and will hold them until ownership is proven.

Also read: Strengthening cybersecurity measures in the face of Web 3.0

Legal proof of ownership (including source of wealth and funds) is difficult given the uncertainty of the estate in various jurisdictions.

Important Lessons

2022 alone has seen countless catastrophic events, and the most recent has proven to be the most clueless yet arduous challenge. Security and self-custody are now no strangers to anyone in this field.

We have seen time and time again how centralized entities halt withdrawals to deal with a possible bank run. The funds of the users that are on the platform are now stuck and plausibly gone forever. Some of them had a majority of their net worth on these platforms.

Working with a licensed fund manager in a major financial jurisdiction eliminates most of the regulatory and security risks of investing in Bitcoin.

Fintonia Group is a Singapore-based fund manager, regulated by the Monetary Authority of Singapore and provisionally licensed by the Virtual Assets Regulatory Authority in Dubai.

We adhere to strict standards and regulations in relation to client funds and carry out due diligence on the management team to ensure appropriate risk management experience and qualifications.

Fintonia Group works with insured and licensed third-party custodians with state-of-the-art security measures, where bitcoins are kept in cold wallets. Client funds are segregated and not mixed with Fintonia funds as required by regulations.

Fintonia Group’s institutional funds have been created for professional investors looking for direct exposure to Bitcoin, allowing them to gain exposure to Bitcoin and keep them in segregated cold storage vaults.

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