If you have read the news lately, you may have come across a headline about the cryptocurrency exchange FTX going bankrupt — a far cry from headlines of the previous two years, heralding a new age of digital currency. In the heat of this Crypto frenzy, I wrote an article detailing the risks of cryptocurrency, and the recent demise of FTX has only enforced my position. While cryptocurrency may boom in the future, it is too new to provide an investment opportunity.
To understand my qualms with this technology, we first need to look at the FTX situation. FTX is a cryptocurrency exchange platform founded in 2019 by Sam Bankman-Fried and was once the third-largest exchange. While it looked like it was on the track to success, inking deals with famous athletes and even a 19-year, $135 million agreement for the naming rights at the home of the NBA’s Miami Heat, it was being mismanaged.
FTX was pushing its own FTT token, which made up most of its assets, raising manipulation concerns and causing some investors to withdraw their holdings. That resulted in a run on the bank — customers tried to withdraw more than the company could afford, resulting in a crash in FTT value. Another crypto company, Binance, was set to buy FTX but withdrew from the deal a day after it was announced, citing mismanagement of customer funds.
The company was forced to file for Chapter 11 bankruptcy Nov. 11, the same day Bankman-Fried stepped down as CEO. Another concern raised amid this filing was that the company did not possess an accurate record of the number of users. Some employees even claimed the company had such poor records that its profits and losses were unclear.
Days after FTX filed for bankruptcy, another crypto company, BlockFi Inc., followed suit. Like the FTX situation, the bankruptcy of BlockFi came as a shock to many. The company began to falter over the summer during a downturn in the crypto market.
In addition, an FTX-affiliated trading firm, Alameda Research, defaulted on the $680 million it owed to BlockFi, leading to the company's collapse.
Before their falls, these two companies seemed to be at the forefront of the crypto frenzy, poised to become the crypto leaders of the future. With all the mismanagement surrounding FTX, disaster was bound to strike, and it swallowed other companies such as BlockFi. Not only does this situation expose the importance of proper management in companies, but it also exposes the downsides of cryptocurrency.
While many investors still fear they will never see their hard-earned money again, some relief did come when Bankman-Fried was arrested in the Bahamas and extradited to the U.S. He is currently out on a $250 million bail, soon to be on trial to answer for his company.
Because cryptocurrency is so new, the currency is not regulated like others. This is what allowed FTX to push its own coin on its platform and essentially manipulate prices.
With the U.S. dollar, the federal government backs up the currency, giving it value. Cryptocurrency, however, has no real backing and is worth only what people say it is worth. While some consider any investing to be a sort of gambling, it really is with cryptocurrency.
There is no way to accurately predict the future price of crypto. Without any backing or regulation, the currency is pushed and invested in upon the idea that it may eventually have value. Whereas investing in stocks carries equity, in cryptocurrency, one owns a virtual coin that is only accepted as currency in certain places and changes value rapidly.
In the past, new crypto coins have emerged only to crash in a matter of months. One coin, Dogecoin, fluctuated wildly following tweets from Elon Musk. As an investor, it is not wise to own something with a price that can crash based on a single tweet.
Amid all the bad surrounding currency, there is a piece of good news for investors, though it is only speculative. Many make the argument that it will be the currency of the future because the digital age has arrived and will take over all aspects of life. I agree that crypto will be used in the future, but it is still years away.
Cryptocurrency is not a good investment now, as more regulation is needed. Once issues surrounding rapid price shifts and fraud protections are put in place, crypto cannot be taken seriously as a currency. While some governments have already recognized cryptocurrency as a legal tender, the U.S. has not, but when that comes, an investment in crypto will be worth another look.
My position on cryptocurrency has not changed in the past year, and I still believe now is not the right time to buy. However, if you are still looking to invest, you can check out bonds, which are a great investment now because of their high rates.