FTX Collapse Case: Is your money really your money?
- 6 Nov, 2023
When FTX went under and millions of customers lost their assets leaving scars till today. Since this occurrence, traders have been faced with the question, Is your money, really your money?
The guide aims to explain the fallout of FTX, the impact of this on the crypto community, and provide you with better alternatives to protect your crypto assets.
Let us dive into the FTX mystery.
FTX Collapse: What happened?
FTX was one of the leading crypto companies, but it lost billions of dollars in a matter of days.
FTT is the native token of FTX exchange. Think of FTT tokens like a special currency that works within the FTX system, offering various benefits to those who use them, including discount on fees. They were designed to make trading on FTX more attractive and efficient for users. Also, users can use FTT tokens as a form of collateral.
This means that when you want to do advanced trading, like trading with borrowed money (known as margin trading), users can use FTT tokens to back up your trades. Furthermore, FTX had a unique system where they would regularly buy back FTT tokens from the market and then get rid of them.
This process, known as "token burning," can sometimes make the remaining FTT tokens more valuable, because there are fewer of them available. This was part of FTX's strategy to make FTT tokens more attractive to own and use.
In summary, FTT tokens were an integral part of the FTX exchange, offering users benefits like fee discounts and being usable as trading collateral, while also having a unique mechanism to potentially increase their value over time.
In early November 2022, the company, led by Sam Bankman-Fried, started facing a lot of challenges, which affected the company’s financial health and led to lots of withdrawals from customers.
FTX Halts Withdrawal
On November 8, FTX removed the online option that allowed users to withdraw funds from the site, preventing a large number of users from accessing their financial assets.
The company was reported to have been involved in risky bets with customer funds through its sister hedge fund, Alameda Research.
The mass withdrawal affected the company's ability to sustain a payout. Thus, with the option to freeze withdrawals, Sam Bankman-Fried in his defense, said he hoped to protect client assets and ensure liquidity.
The inability to cover the $8 billion shortfall led to FTX's filing for liquidation. On November 11 of the same year, the company declared bankruptcy.
The downfall of the company, once valued at $32 billion, shows the hidden dangers associated with centralized platforms. Unlike decentralized exchanges, FTX held customer funds in accounts it had control over.
Many investors have learned the hard way from this development. Many learned the hard way that their money is not theirs, especially when dealing with centralized exchange accounts.
It is safe to say that many have begun to look into true ownership via self-custody. The FTX showdown makes it clear that relying on third-party exchanges defiles the idea of decentralization.
Storing Your Crypto Assets in Self-Custody Wallets
A self-custody wallet, often referred to as a non-custodian wallet, is a class of hardware, software, or application that lets users control and safeguard their crypto-currency on their own devices without entrusting their private keys to a third party.
There are three major types of these wallets, and they include:
- Software Wallet: These wallets come in the form of software that can run on desktop, or mobile devices or be accessed through internet browsers.
- Hardware Wallet: Unlike typical software wallets, these wallets are offline, and private keys are stored in secure isolated memory, on an OS design to do one thing, secure private keys.
- Paper Wallet: Another offline wallet is this paper wallet. This time users print off their private keys, typically in the form of QR codes, on a single sheet of paper rather than storing them on a thumb drive.
Benefits of Self-Custody Wallets
Now that you know what self-custody wallets are, here are the benefits of these wallets to you as an investor or a newbie:
- The fact that you are the primary authority to make the decisions on where you money is located, how it is moved is the primary benefit of self-custody wallets.
- You have more privacy when handling your digital assets using self-custody wallets.
- Self-custody wallets are international by nature. You can transfer and get your bitcoins using a self-custody wallet from anywhere worldwide.
Ronyn Vault: the best self-custody platform
The Ronyn Vault is a great option for users looking for a self-custody solution. It is a hardware wallet combining secure elements with smart cryptography to create the most secure environment for storing digital assets. To find out more click here.