4 lessons for cryptocurrency investors from the FTX collapse

Bahamas-based crypto exchange FTX filed for bankruptcy in the U.S. on Nov. 11, 2022, seeking court protection as it looks for a way to return money to users.

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After a difficult year for digital assets, many investors were blindsided by the recent collapse of cryptocurrency exchange FTX, as customers wait for answers about an estimated $1 billion to $2 billion of missing funds.

While the future of the company — and investigations into the vanishing assets — are in limbo as FTX enters bankruptcy protection, experts say there are key lessons for crypto investors.

“The FTX collapse provides harsh reminders that ‘there is no such thing as a free lunch’ when trying to make a quick buck in a still fairly new, unregulated financial industry,” said certified financial planner Jon Ulin, CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.

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You should invest “what you are willing to lose 100%, like in Vegas,” and “discretion and skepticism” should be exercised when weighing assets and related products pitched by “pro-athletes, celebrities and media personalities,” Ulin said.

Here are four other lessons for investors from FTX’s downfall.

1. Know the risks of where you’re holding cryptocurrency

2. Diversification is ‘always important’

Whether you’re investing in stocks, cryptocurrency or other assets, experts say a large percentage of a single holding can be risky.

“Diversification is always important,” said George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.  

“For individuals who had a very high allocation to cryptocurrencies, whether in FTX or not, the crypto price crashes this year were a painful lesson in the importance of diversifying one’s investment classes,” he said.

The [FTX] collapse should be a lesson that any individual company — be it a crypto exchange or more traditional business — can go bankrupt in times of distress.

Kevin Brady

Vice president of Wealthspire Advisors

3. Expect more crypto regulation

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House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and the ranking Republican, Rep. Patrick McHenry, of North Carolina, on Wednesday announced plans for a bipartisan hearing in December to investigate FTX’s collapse. 

While Congress will ultimately decide how government agencies may regulate cryptocurrency, Securities and Exchange Commission Chair Gary Gensler has been pushing for tighter rules. “Investors need better protection in this space,” he told CNBC’s “Squawk Box” on Nov. 10.

4. Back up your crypto transaction records

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