The FTX collapse has caused a turning point in the crypto sector. No blockchain company will be spared from the impact and the market will have to rebalance over the next few months. The current focus is therefore primarily on damage limitation and repositioning for the upcoming phase of reconstruction. The following five pieces of advice should help secure your own portfolio and keep it on course.
1. Location: Where is my bitcoin located?
Lots of coins and cheap fees. Until now, these two criteria have been decisive for many small investors when choosing a crypto service provider, especially an exchange. As we can see from the FTX example, these selection criteria are now taking revenge. Crypto investors are therefore advised to check where the legal seat of their custodians is.
Deregulated tax havens such as the Bahamas (FTX) tend to be avoided, while Europe and especially the DACH region are preferred. The supervisory authorities’ control is on a completely different level in this country and creates confidence. It may be advisable to withdraw the coins from less trustworthy crypto exchanges.
If you do not want to rely on any third party – which is also very understandable in this situation – you should engage in self-care more than ever. Hardware wallets can be a good option for many retail investors.
2. DEX and Co.: Use decentralized offers
As convenient as enterprise-provided crypto services can be, they carry the risk of a single point of failure. Anyone who does not want to rely on individual CEOs and risk departments, but rather the code or protocol, can be well served by DeFi applications.
Crypto enthusiasts can therefore take the current crisis as an opportunity to handle decentralized protocols more closely and use them. The most obvious are decentralized exchanges (DEX) such as Uniswap or Curve. Since the coins are not stored there, there is no credit risk.
3. Weed out losers and find winners
All players in the crypto sector are currently suffering from the crisis. Two questions in particular are therefore crucial in this phase: Who has sufficient liquid funds to survive the dry period, and who has a business case that meets the new market requirements and could even benefit from them in the long term. The topic of regulation, for example, will become even more important. Therefore, it makes sense not only to look at the financial condition, but also to pay attention to licenses, ESG criteria and the seriousness of the management. Whether it’s a log, a crypto exchange, or a mining company’s stock.
Companies that do well on both aspects are likely to gain market share in the rebuilding phase. Investors should therefore screen their portfolios for possible candidates and sort out the “rotten eggs”. It is unlikely that the prices of the latter will be able to sustainably recover. In case of doubt, it could mean that crypto investors have to realize painful losses in the current phase.
4. Monitor interdependencies
The interdependence of crypto service providers brings shocking news to the surface day after day. As in the financial crisis of 2008, the “skeletons in the closet” are now becoming visible to all. The collapse of FTX shakes several other service providers who, for example, have claims against FTX or member companies or are otherwise dependent on the company.
A well-known example of many would be the Solana Foundation. The fund behind the high-speed blockchain will reportedly write off a whopping 180 million US dollars. This one had managed deposits via the crypto exchange and also had the exchange’s own token FTT, whose price collapsed completely. The price of Solana, relative to other coins, has collapsed accordingly.
As exhausting and complicated as it can be, it can make sense to evaluate your individual positions in the portfolio by dependencies. For example, the investment bank Morgan Stanley has already published a list of companies that have exposure to FTX.
5. Crypto crisis: asking the right questions
As the old saying goes, the true face is revealed in a crisis. Applied to the crypto crisis, this means that you should take a closer look at what measures are currently being taken by the individual actors. Important questions to check are:
- Does the market participant ensure transparency? See screenshot of reserves on exchanges
- Is there a toxic atmosphere among employees that is becoming known via social media?
- Do you stick to planned milestones or abandon projects?
- In light of the current challenges, can the value proposition be achieved sustainably and in the short to medium term?
- How high is user activity or has transaction volume collapsed compared to competitors?
These questions, adapted to the situation, can help make the right decisions. It is also recommended to hide the prices of the coins. Their volatility and price history can distract you when making fundamental decisions.
For example, it is difficult to tell from historical prices whether developer activity is high for protocols. What is decisive is the future viability of the individual projects and not the extent to which excessive marketing budgets and reward programs, such as at Crypto.com, have led to high prices.
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