Opportunity Amid the FTX Collapse
Many investors want to rid themselves of crypto investments following the FTX collapse. The macroeconomic conditions have proven discouraging as well. However, there is opportunity in the chaos. The FTX failure was not a failure of crypto, rather, it was a Ponzi scheme that could have happened in traditional finance all the same. All of the blockchain applications are functioning as they are supposed to, the investors who hold their own private keys are unharmed, and the on-chain data will aid in bringing those involved in the FTX scam to justice.
DeFi
The most immediate benefactors from the FTX collapse will be decentralized finance (DeFi). To clarify, decentralized finance refers to financial applications built on blockchain technology. Both the applications and blockchains typically have an accompanying cryptocurrency. This cryptocurrency helps to govern, secure, and pay for transactions on the blockchain and application. They also prove important to bootstrap a new protocol and help provide funds for development teams.
While the cryptocurrencies have caught selling pressure in the tailwind of the FTX collapse, the actual applications see a big win due to their decentralized security versus the centralized failure of FTX.
Non-Custodial Wallets
It is important to reiterate that centralized exchanges hold users' crypto, and ultimately act similarly to a bank. The irony here is the invention of Bitcoin was intended to separate governments and banks from individuals' money. The way for users to hold their own crypto is through non-custodial wallets. The use of a non-custodial wallet puts money in individuals' possession and control. It also opens up a whole new world of decentralized applications (like the ones mentioned above).
The top non-custodial wallet today is MetaMask. It is an Ethereum-based wallet, often used as a browser extension. MetaMask lets users surf the web and interact with decentralized applications by using a digital signature. MetaMask was created by Consensys, a company that specializes in development on Ethereum. Another interesting company for non-custodial wallets is Ledger, which makes hardware wallets like the Ledger Nano S. by sending users’ assets from MetaMask to a Ledger. There is an extra layer of security added since the Ledger has never accessed the internet. Hardware wallets, Ledger specifically, have continued to improve in design – picture a flash drive upgrading into a smartphone.
On-Chain Data
One of the great benefits of blockchains like Ethereum is the data is open for all to see. This evens the playing field and rids this new marketplace of information asymmetry. An important tool for tracking wallets, transactions, tokens, gas, and more is Etherscan. The site gives a bare-bones layout of real-time data on Ethereum and has all of the data since the inception of the blockchain.
An emerging theme in crypto is taking this publicly available data and making it useful for users. Examples include Dune Analytics and Nansen. Similar to a Bloomberg terminal in crypto, these tools also track centralized exchange wallets. They are a key reason that many got out of FTX prior to its collapse, and will likely continue to be pivotal in the development of DeFi.
Centralized Exchanges
Despite most of this writing highlighting the shortcomings of centralized exchanges, there could be some interesting investment opportunities here. FTX was the second-largest crypto exchange in the world, and yet, competitors like Coinbase and Binance have been crushed in recent months. Still, they just lost their largest competitor. Eventually, users will get back into crypto, and it is unlikely all users will get into non-custodial wallets. The next bull run will revolve around centralized exchanges again, and this time it will be without FTX in the mix.
Source: TradingView
With no direct exposure to FTX and $5 billion in cash on its balance sheet, the $COIN crash does not appear to be correlated with poor financials. The picture becomes clearer when considering that the crypto market capitulated by 60% and lost $1.2 trillion in total value. If the only real negative news is in market conditions, companies like Coinbase could be poised to rebound aggressively following a turn in the markets.
How to Proceed
For the average investor, it may be best to stay risk-averse over the coming months as there is a lot of uncertainty in the markets. Risk-on investments like crypto can be difficult to stomach as the FTX collapse and macro pains work their way through markets. For those looking to invest, a long-term approach is best.
Crypto as an industry is not going away, but many exchanges and protocols will die. The situation is similar to the dot com bubble in 2000; Crypto underwent mania trading due to excitement around new technology, and a crash followed wiping out much of the excess. There will be continued consolidation into real value. Investors looking to benefit from this upside will need to identify the best technology, go through a number of price swings, and do their own due diligence on how to safely store their assets.