After a month of dramatic scenes and revelations in the courtroom, FTX co-founder Sam Bankman-Fried has been found guilty on all seven counts of fraud, conspiracy, and money laundering. Formerly hailed as the Crypto King, Bankman-Fried pleaded not guilty to all the charges against him. He will be sentenced at the end of March.
FTX’s dramatic collapse almost a year ago caused the price of Bitcoin (BTC) to fall to under $16,000. Since then, crypto prices have started to recover, with Bitcoin now trading at over $34,000, according to CoinGecko data. That’s still significantly down from its high of over $67,000 in 2021, but it has still sparked hopes that the crypto winter may be over.
Can crypto put the FTX saga behind it?
Many people in the crypto world want to draw a line under the FTX disaster. They hope that Bankman-Fried’s conviction marks the end of what has been a sorry chapter for the industry. Their argument is that fraud can — and does — happen in many industries and that crypto itself is not to blame here. Unfortunately, it isn’t that simple.
Bankman-Fried clearly broke the law, whatever currency he used. And it’s true that plenty of fraud has also happened outside the world of crypto. But equally, the lack of crypto regulation made it easier for FTX to misuse billions of dollars of client funds. That same lack of regulation meant FTX customers had fewer protections when things went wrong. Unlike money in a bank, FDIC insurance does not protect crypto investors against platform failure.
If you’re thinking about buying crypto only because the storm has now passed, think again. Sure, prices have started to come back, but prices don’t tell us what’s going on behind the scenes. The crypto industry will only fully be able to put the FTX saga behind it when there are guardrails in place that stop something like this from happening again. There have been various proposals by lawmakers in Washington, but there’s no solid framework in place yet.
In the meantime, the SEC is pursuing cases against several key players. It argues that a number of popular cryptos, including Solana and Cardano, are unregistered securities that should come under the SEC’s remit. It also accuses crypto giant Binance of misleading consumers and engaging in “manipulative trading” practices. The outcome of the SEC’s cases could have serious implications for crypto investors, particularly in the U.S.
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How crypto investors can reduce risk
Cryptocurrency is a volatile and high-risk investment. Put simply, there’s a lot we don’t know about how it will unfold. Bitcoin might achieve its potential and become the digital currency of the future. But, putting the FTX trial to one side, crypto still has a lot of hurdles to overcome, including the SEC charges I touched on above.
Don’t assume that Bankman-Fried’s conviction makes it any safer to invest in crypto. That doesn’t mean you shouldn’t invest. I hold a number of cryptocurrencies in my portfolio. It’s just important to understand the risks and take steps to mitigate them.
1. Ensure crypto only makes up a small portion of your portfolio
Don’t go all-in on crypto. There are many other investments that carry less risk, such as stocks, bonds, property, and even commodities such as gold. Open a brokerage account and build a portfolio that contains a mix of assets with different levels of risk. You might for example, hold a small percentage of crypto, alongside a safer investment such as bonds.
2. Use a crypto wallet to store your crypto
If you keep your crypto on an exchange rather than a crypto wallet that you control, it could be at risk if that platform collapses. In the case of FTX, the new management has tried to recover a lot of the cash and there’s a proposal to return a percentage of it to the platform’s users.
Consider moving your crypto to a crypto wallet. There is a learning curve involved and wallets carry their own risks. For example, if you lose your security phrase, you could lose access to your assets completely. But if you take the time to understand how they work and are comfortable with the added responsibility, a wallet could protect you against exchange failure.
3. Use a reputable crypto exchange
I’ll put my hand up here and admit that I thought FTX was a reputable exchange. That’s one reason why I don’t think Bankman-Fried’s conviction solves all of crypto’s problems. It’s hard to recover from the loss of confidence caused by the repeated lies of a major player. That said, some cryptocurrency exchanges are certainly more reputable than others.
Look for firms that carry out third-party audits of their deposits and keep your assets offline in cold storage. I’m a big fan of New York’s BitLicense as the requirements are more rigorous than most, so check here to see if the platform is licensed in New York. Stock brokers that also sell crypto have more legitimacy, as they already follow SEC broker-dealer rules.
Key takeaway
The collapse of FTX highlighted one of several risks associated with crypto investing. But Sam Bankman-Fried’s conviction doesn’t actually solve the issues faced by the industry. These include investor confidence, limited protections and regulatory controls, and questions about whether digital currency will achieve its potential.
If you’re considering investing in crypto, don’t be distracted by the Bankman-Fried circus. Research the risks involved, consider how these assets might perform in the long term, and plan how you will store your cryptocurrency. Bear in mind that crypto is just one of many asset classes. As such, try to consider what role it will play in your portfolio and how it will help you reach your wider investment goals.
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