The collapse of FTX goes to show the importance of personally controlling your crypto. What was once the second-largest crypto exchange has now become insolvent, with many of its user's funds lost forever. Amid the news of FTX's bankruptcy, there have been rumors of mismanagement of customer funds. There has even been news of a recent hack, with the attacker allegedly using a service owned by Alameda Research (a trading firm owned by FTX's founder) to launder the stolen crypto.
Additional platforms like Genesis and BlockFi have also seen rumors of bankruptcy circulate because they use FTX to hold large amounts of their users funds. These recent events highlight how important it is for users to hold their crypto holdings within personal wallets that let them control the private keys.
Failure of FTX
FTX was founded by Sam Bankman-Fried (SBF). As FTX grew in users and revenue, so did SBF's popularity. SBF had a good public image of being a modest yet hard-working startup founder. However, his reputation is tarnished by the news surrounding the fall of this crypto exchange.
The crypto market has seen multiple exchanges collapse, with Mt. Gox being the largest and most impactful until 2022. In addition, we recently saw the fall of Celsius and Voyager (FTX even bought some of Voyager's assets in September). Having three platform collapses in one year really brings in the question of whether crypto investors should trust these platforms with most of their holdings.
How should investors manage their crypto holdings?
The best practice for any crypto investor is to only keep the funds they plan on trading on an exchange. Any funds that are being held for the long term are best kept in self-custodial wallets. The reason for this is that investors can always recover funds from self-custody wallets as long as they have kept the private key or wallet seed safe. So, if a user was to lose their device, for example, they can simply import their wallet seed into another wallet app and recover their holdings.
Exchanges, on the other hand, are known to limit withdrawals when they are experiencing problems. One of the reasons exchanges does this is to prevent a bank run. Bank runs are situations where many users try to remove their funds from a platform, drastically reducing the liquidity and rendering the platform unusable.
Some exchanges have personal reserves as a fail-safe against this, but too many exchanges have either limited withdrawals at critical periods or lost user funds completely.
Another issue that users should consider is that the crypto industry is largely unregulated, so there is no real need for platforms to ensure that user funds are protected. For example, most banks will ensure your holdings up to a certain amount in case the funds are lost or stolen. However, most crypto exchanges don't provide this protection, so it's important to keep the majority of your funds in your own wallet, with the wallet seed or private seed stored offline and in a safe place.
Always remember the popular phrase, "Not your keys, not your crypto,". If you don't control the private keys, you are at the mercy of the custodian since the private keys allow users to spend (transfer out) crypto from the wallet. If an exchange is compromised and they limit withdrawals, sadly, there is nothing you can do.