If it sounds too good to be true, it may still be true…except for cryptocurrency exchanges.
By now you’re somewhat familiar with the name FTX and have heard of their recent insolvency. All due to highly speculative transactions created from thin air, that everyone fell in love with as quickly as FTX fell apart.
What is FTX?
FTX is (was) an exchange where investors can trade cryptocurrencies and crypto derivatives. It is somewhat similar to the New York Stock Exchange (NYSE), the biggest difference is what it trades. In the NYSE and other regulated exchanges, investors trade stake in companies in the form of stock. But cryptocurrencies do not represent ownership in a company- or anything, really.
Cryptocurrency, while widely asserted as a coin, is a token of perceived value. Remember when you used to go to the arcade, and exchanged dollars for tokens that you could use on the different machines? Well, while a very simplistic analogy, that’s basically what cryptocurrencies are.
Crypto is NOT money, as people mistakenly want to believe. To be considered money or a currency it has to meet 3 functions: must be a medium of exchange (✔), has to function as a unit of account – meaning it is a monetary unit of measurement- (✔) and is a good store of value (✖). This is where the problem starts. If you had not noticed yet, then FTX’s insolvency must have made it reasonably clear to you, that the value of cryptocurrencies fluctuates as much as the weather in Florida. Most currencies have long term relative stability of their value – a $1 bill is expected to be worth $1 in 20 years’ time, for example. The price volatility of cryptocurrencies moves in sporadic and random form, constantly. This creates speculatory pressures that aim to take advantage of price volatility (and investors). FTX knew that.
When Satoshi Nakamoto released the ‘Bitcoin Whitepaper’, he aimed to develop a future decentralized digital currency that could function as money, without intending to replace fiat currencies necessarily. The keyword here is decentralized, which means no intermediaries and no centralized administration. Exactly the opposite of what exchanges do.
FTX took advantage of speculators and unsophisticated investors and lured them into placing transactions that defeat the primary purpose of what Satoshi set out to do in the first place, with the peer-2-peer network. The price of Bitcoin along with Ethereum and other cryptocurrencies have been free falling, and other crypto related companies, such as BlockFi and Bitfront, are shutting down.
It’s a shame how easy it can be for fraudsters to deceive the public. Now more than ever, let this be a warning on the importance of financial literacy and seeking sound financial advice.