Lessons from the collapse of FTX and why self custody is of utmost importance

What happened recently in the crypto space felt like the timeline of a year of events. In less than a week, Sam Bankman-Fried (SBF) has become the talk of the town. FTX, valued over USD 32 billion, has filed for bankruptcy.

How did it all begin?

Alameda Research started in 2018, as a small hedge fund. They were raising debt from investors, promising “high returns with no risk”. FTX concluded its seed round by raising USD 8 million and launched in Q3 2019. There was no denying that Alameda contributed heavily to FTX’s volume in its early days. As FTX continued to grow at an exponential pace, they capitalised on the DeFi hype by creating Serum, a decentralised exchange on Solana.

Alameda’s job as a market maker was to boost liquidity in the market and maintain delta-neutral strategies. However, realising that their edge slowly eroded, Alameda began to assume highly degenerative leveraged directional bets in crypto.

FTX, Alameda and the multi-billion dollar hole

As the tokens were all traded at thin circulations, it was an easy feat for Alameda to manipulate the price higher on FTX to beef up their balance sheet. Alameda created the illusion of a sizable balance sheet which they leveraged as collateral to heavily borrow and fund directional bets.

As the market plummeted this year, Alameda could not repay the borrowed money as their collateral was illiquid leading to margin calls. This led to the theft of FTX users’ funds to attempt to put out the fire.

Coindesk released an article two weeks ago regarding Alameda’s balance sheet - citing that a huge part of their USD 14.6 billion assets is issued by the FTX team itself. In light of revelations regarding Alameda’s balance sheet, CZ announced that Binance will liquidate their entire $FTT holding which equates to more than USD 580 million at that point in time. As of 7 November 2022, approximately USD 450 million worth of stablecoins left the exchange in the past 7 days. Herd mentality participated in fear mongering inducing a bank run and the bankruptcy of FTX soon after.

Security and Custody

As the saying goes “not your keys, not your coins”. Security is important. However, there is an apparent lack of security awareness among investors today.

We have identified 3 key factors to consider when securing your coins:

1. Ensure they are offline

We have all heard about hackers, viruses, social engineering and more. A simple way to prevent others from stealing your coins is to take them entirely offline and store them in a cold wallet. This way, your device will never be connected to the internet and you will never download any malicious files to that device. By connecting your computer to the Internet, you allow yourself to be vulnerable to any form of hacks that could come your way.

2. Keep your device safe

Any device that you use to store your coins can be lost or damaged. It is important to have backups. A fuss free example is writing down your seed phrase on a piece of paper. However, that piece of paper could be burnt during a house fire, misplaced, or read by others.

3. Bequeathing - Pass them to your loved ones

Estate planning is needed should something happen to you unexpectedly. Many exchanges or banks will not allow the transfer or sale of your crypto holdings, and will withhold them until ownership is proven. Proving ownership legally (including the source of wealth and source of funds) is difficult given the uncertainty of probate in different jurisdictions.

Key lessons

There have been a myriad of catastrophic events in 2022 alone and the recent one has proven to be the most unsuspecting yet arduous challenge. Security and self-custody are no stranger to anyone in this space by now. We have seen time and time again how centralised entities halt withdrawals to cope with a potential bank run. Users’ funds that are on the platform are now stuck and plausibly gone forever. Some of them had a majority of their net worth on these platforms.

By working with a licensed fund manager in a major financial jurisdiction, one eliminates most of the regulatory and security risks when investing in Bitcoin.

Fintonia Group is a Singapore-based fund manager regulated by the Monetary Authority of Singapore with a provisional license in Virtual Assets Regulatory Authority in Dubai. We comply with strict standards and regulations regarding client funds and with proper due diligence conducted on the management team to ensure adequate experience and qualifications in terms of risk management. Fintonia works with insured and licensed third- party custodians with state-of-the-art security measures where Bitcoins are stored in cold wallets. Client’s funds are segregated and not co-mingled with Fintonia funds, as required by

regulations.

Fintonia’s institutional grade funds were created for professional investors looking for direct exposure to Bitcoin, allowing them to gain exposure to Bitcoin and store them into segregated cold storage vaults.