Many investors were taken aback by the recent collapse of the cryptocurrency exchange FTX. This left customers waiting for answers about an equivalent of $1 to $2 billion in missing money. FTX is currently in bankruptcy protection. Experts believe there are important lessons for cryptocurrency investors as the company’s future — and probes into the vanishing assets — remain in doubt.
Ethereum co-founder Vitalik Buterin shared his thoughts and a few bright lessons from one of crypto’s biggest black swan events. Buterin noted the FTX demise has implications for the entire crypto ecosystem in a November 20 Bloomberg interview. He acknowledged that the technology underpinning the crypto asset economy had not been questioned, despite the underlying stability of distributed ledger. The issue has been people, not technology, in this situation. The FTX collapse, according to Buterin, is a “major tragedy” that will eventually lead to centralization.
He said using “cryptographic proofs” for exchange platforms can be a way out. This is an approach proving that the funds that the exchanges hold on-chain are adequate to cover the debts of the users. Depending solely on government authorizations, auditors, corporate governance, and individual background checks of people managing exchanges are insufficient.
Lessons we can learn
Know the Hazards Involved in Storing Cryptocurrency
Kevin Lum is a CFP founder of Foundry Financial in Los Angeles. According to him, half of his clients hold crypto in some form. He suggests consumers should understand where their digital currency is kept. They should also forecast the potential hazards of retaining money there. Cold or offline digital currency storage resurged after the FTX crash. This change, on the other hand, makes assets less liquid and costlier to trade.
It’s essential to Diversify as Much as Possible.
According to experts, a big portion of a single holding may be dangerous whether you’re investing in stocks, cryptocurrency, or alternative assets. The price of bitcoin has fallen by more than three-quarters since peaking at $68,000 in November 2021, and it currently stands at $17,000 on November 17.
Crypto Regulations Loading
Following the FTX crisis, there has been an ongoing debate about how to classify and regulate cryptocurrencies. In June, senators and legislators introduced a bill to establish a regulatory framework for digital currency. Adding up to this, they insisted the Commodity Futures Trading Commission define digital currencies. Experts believe the FTX crisis may hasten the pace at which future standards are written. It will also prompt greater action.
Say Yes to Backing up Your Crypto Transaction Records
Experts recommend downloading your transaction history regularly. One of the most difficult aspects of crypto taxes is gathering reporting materials. You’ll need documents to file your return even if an exchange closes. In addition, by monitoring your earnings and losses throughout the year, you’ll better understand your funds. This may help you reduce your bill using tax-loss harvesting techniques.
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