What We Should Learn From the FTX Collapse

Your financial goals are personal to you. The information in this article is for educational purposes only. Retirement Living does not offer advisory or brokerage services, nor does it provide advice or recommendations on particular stocks, securities or other investments.

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When a $32 billion dollar company collapses in a matter of days, people are sure to have questions. Most recently, FTX, once the second-largest crypto exchange by volume, filed for bankruptcy. It is under investigation after alleged misuse of funds and deceitful trading practices that left investors scrambling to find their money.

The sudden plummet of FTX forces us to ask hard questions: Should the cryptocurrency market be regulated? How safe is the market? How can investors make more educated decisions about future investments?

For insight into these concerns, we spoke with Nick Rotola, Web3 expert and CEO of Web3 Gallery, the number one Web3 store in the world. His downtown Manhattan flagship store provides a unique, immersive experience for people interested in Web3 and NFTs. Rotola’s take on the chaos? In new, rapidly-forming industries, drama is almost guaranteed. But tragic events often have a positive underbelly. In times of extreme fear, there’s an opportunity for learning and growth.

“Now, investors have high expectations for exchanges,” Rotola explains. “There are only a few U.S. exchanges that are U.S. regulated. As much as [the FTX collapse] is a horrible thing, and a lot of people lost money, it can also be seen as a very good thing. People are going to expect much more from their exchanges. I think the government will wake up and clear up the confusion surrounding regulation. I think [we’ll see] some restrictions on advertising, as well, if exchanges don’t follow regulations.”

Chaos aside, there are several lessons we can learn from the FTX collapse. Here are three key takeaways you should consider, whether you’re a beginner investor exploring your options or a seasoned shareholder hoping to continue your crypto journey safely.

1. Regulations Have Not Caught Up With Crypto Growth…Yet

U.S. regulation around cryptocurrency is complicated and confusing. Our government is also slow to craft clear regulation, which makes it almost impossible for companies to follow a standard.

If a bank fails, the FDIC or Federal Reserve might bail it out. However, crypto is largely unregulated—storage companies can’t thwart hacks, investors can’t locate misplaced funds, and governments aren’t likely to bail out failing exchanges.

There are few regulations that protect consumers who invest in cryptocurrency or that monitor the companies who manage those investments. Because FTX operated offshore, they were free to do what they wanted without repercussions.

As Rotola explains, “Offshore regulations are currently non-existent for cryptocurrency. FTX was an offshore exchange that was still advertising very heavily. It’s a bad combination when companies are allowed to advertise heavily without regulation.”

FTX is hardly the model to which we should compare all crypto exchanges. Still, there’s no denying that the industry as a whole is riskier than others. Investors have few protections in the industry’s current state, but that’s likely (hopefully) to change as the world watches the US government’s response to crypto misconduct.

2. Embrace the Risk, But Only a Little Bit

Historically, people pounce when the market is down or experiencing volatility. If you’ve considered investing in crypto or NFTs, you might think now is your chance. NFTs, unique cryptographic tokens that exist on a blockchain, are a unique and possibly profitable investment, but they’re not for everyone. If you’re not technology-inclined or if you prefer stable, low-volatility investments, NFTs may not suit you.

Still, many crypto investments have a real shot at growing in value…by a lot. But understand that cryptocurrency is meant for the growth part of your portfolio. The NFT industry experienced a 250-times growth rate from 2020 to 2021, the fastest growth rate of any industry ever. While this might seem like a sure bet, cryptocurrency should never make up the largest portion of your portfolio. If you’re looking for a safer bet—meaning, modest, consistent gains incurred over time—maybe look beyond crypto.

“It’s generally recommended that you allocate less than 5% of your portfolio to crypto. What you hope could multiply 10, 20, 50, or even 100 times in value could also go to zero,” Rotola warns. “Unfortunately, that’s just the nature of high-growth, early investments. If you want safe investments, go to the S&P 500. When people buy cryptocurrencies, they should not have S&P 500 expectations.”

Consider investing in NFTs only if you understand the risks, feel comfortable maintaining a digital asset wallet, and can afford to potentially lose your investments. If we’ve learned anything about digital currencies, it’s that you should expect volatility. For this reason, it’s safest to roll the dice with only a small portion of your portfolio.

3. The Industry Could Benefit From More Consumer Education

While you wait for government regulations to catch up, it’s up to you to learn how to safely invest in crypto and NFTs. Without proper guidance from blockchain experts, new investors may struggle to invest wisely. The best way to learn how to invest in cryptocurrency is to immerse yourself in the process—buying digital assets doesn’t have to be a fully digital process. Shop in a physical store (you remember those, right?), experiment with the technology, and experience the transfer process in person. Making informed investments can help to protect you.

“We want people to get involved and really learn. The best way to do that is to learn and buy in person with super passionate, knowledgeable employees,” Rotola says. “Go ask questions so you can purchase things safely.”

In addition to education, look for companies that provide high levels of security for your crypto investments. One of the best ways to protect your assets is to store your crypto in a hardware wallet like Arculus or Ledger. Storing crypto in wallets is like storing gold in a safety deposit box at your house that only you can unlock. You can access an offline wallet at any time, unlike an exchange, which could limit access without notice.

The crypto market is undoubtedly risky, and for some, it remains a fringe niche. But for others, it has enticingly high growth potential. Despite a rocky start, many still consider cryptocurrency and the blockchain the future.

As Rotola told us before heading off to work, “There’s a great quote: ‘We tend to overestimate how much our life will change in the next two years, and we almost always underestimate the next ten years.’ I think we’re all going to underestimate how much our life is going to change from blockchain over the next 10 years.”