Investors lose $32B overnight in FTX — how to save yourself next time

Lossless
5 min readNov 22, 2022

When FTX first emerged in the cryptocurrency world, it appeared to be a major success story. No one could have predicted that the FTX platform would crash, resulting in many investors losing their funds.

While the company has filed for Bankruptcy, the incident has made it clear that holding crypto in exchanges is risky and that investors should always be aware of the potential for losses in centralized exchanges.

Before we discuss how you can protect your crypto using cold wallets, let’s look at what led to the FTX crash and how it affected the entire crypto market.

What happened to FTX?

FTX is a crypto exchange founded by Sam Bankman-Fried, and FTX was heavily dependent on FTT, the token issued by FTX. Lack of liquidity and mismanagement of funds led to FTX’s crash, followed by a large volume of withdrawals from investors.

To understand how Bankruptcy came about, here is a rough timeline:

Nov 2: According to CoinDesk Report, Alameda Research — a sister company to FTX — has a balance sheet full of FTT, which is worth billions of dollars.

Nov 6: In a tweet, Binance CEO Changpeng Zhao, also known as CZ, announced that Binance would sell off its FTT stockpile due to “recent revelations,” referring to FTX and Alameda’s blurred funds reported by CoinDesk on Nov 2.

Following CZ’s announcement, FTT’s value rapidly declined over the next day as it became evident that FTX lacked sufficient liquidity to back transactions.

Nov 8: The Binance exchange has signed a non-binding LOI, intending to acquire FTX.com, essentially bailing out the failing exchange entirely.

Later that day, FTX stopped all non-fiat customer withdrawals. Bankman-Fried posted a series of apologies on Twitter, explaining FTX’s liquidity issues and promising future transparency.

Nov 9: Binance backs out of its plans to take over FTX. On Twitter, CZ announced that Binance had completed its “corporate due diligence” and would not acquire FTX.

Nov 10: On Nov 6, “the platform saw a withdrawal of $5 billion,” according to SBF’s tweet.

Nov 11: FTX has announced that it has filed for Chapter 11 bankruptcy, and Sam Bankman-Fried, CEO and founder of FTX, also resigns on the same day.

New reports indicate that FTX transferred $10 billion to Alameda, its sister company. This has caused many people to worry about what kind of access top leaders have to the company’s finances.

According to CoinDesk, on the evening of Nov 11, close to $600 million was hacked from FTX and FTX.US wallets.

Nov 14: FTX’s balance sheet showed $9 billion in liabilities and only $900 million in assets that could readily be sold, as published by the Financial Times on Nov 14. FTX, based in the Bahamas, is under criminal investigation.

How does this affect the entire crypto market?

The effects of FTX’s crash have already been felt throughout the crypto market. So far this year, bitcoin has fallen about 65% while ether is down 68%.

● On Nov 9, Bitcoin’s price fell below $16,000. In the past week alone, over $3 billion worth of Bitcoin has been withdrawn from exchanges, and Ethereum’s value dropped below $1,100.

● On Nov 9, following CoinDesk’s report on Alameda’s large Solana holding, its value plummeted below $13.

● On Nov 10, Tether Depegged by 3%.

The market capitalization of digital assets has fallen below $800 billion for the first time since early 2021. It has made investors wary of their crypto assets on exchanges after the FTX collapse.

How to protect your crypto investments?

After the FTX collapse, the focus shifted toward personal asset protection. So what can one do to ensure their crypto investments are safe?

The answer is diversification of storage and Cold & Hot wallets.

Diversification of storage

It’s not by chance that there’s a saying, “don’t put all of your eggs in one basket”. If possible, try to hold your crypto assets in multiple places. In case a hack happens, which we hope won’t, only a small portion of your holdings may be affected by the incident. This strategy also calls for a couple of more security steps:

Cold wallets

Cold storage refers to keeping a user’s private keys offline to add an extra layer of security from potential hacks. Although you don’t need a hardware wallet to put your crypto into cold storage, most people prefer a hardware solution like:

Ledger: This USB-like device is a convenient way to buy, exchange, and stake over 1,000 cryptocurrencies.

Trezor: This handy little plug-in device allows you to use over 1,000 different cryptocurrencies on your computer or mobile device.

You can buy hardware wallets from places like Walmart and BestBuy, which cost between $50 and $250. Although cold wallets aren’t accessible online, they need security measures to protect them from potential damage, loss, or theft.

Hot Wallets

Hot storage refers to desktop, browser-based or mobile software programs that are connected to the internet and allows you to hold, buy, and sell your cryptocurrencies. Most of these services are free of cost and can be accessed from any mobile device or computer.

While hot wallets provide more convenience, they also come with a heightened risk of being hacked.

Non-custodial hot wallets

When the wallet owner manages an online wallet, it’s free to use and easy to carry out transactions. Although, users are in charge of their keys. Many of these wallets provide additional services that come with fees, such as trading or staking.

Some popular hot wallets include MetaMask, TrustWallet, and Exodus — and all come with easily downloadable mobile apps.

If you’re looking for extra security, consider transferring your digital assets to a crypto wallet. Most exchanges offer the ability to move assets to these wallets, which can be either online (on a different platform) or offline (stored on a thumb drive with added security features).

About Lossless

Restoring trust in web3 security. Lossless incorporates a new layer of blockchain transaction security, protecting projects and their communities from malicious exploits and associated financial loss.

Lossless protocol implements an additional layer of blockchain transaction security for ERC-20 standard tokens, mitigating the financial impact of smart contract exploits and private key theft. Lossless protocol utilizes community-driven threat identification tools and a unique stake-based reporting system to identify suspicious transactions, providing real-time protection.

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Lossless

World’s first unrivalled exploit identification and mitigation tools, designed to foolproof web3 from malicious activity.