Cryptocurrency has become the focus of investors’ undivided attention after the stunning crash of crypto exchange FTX last week, which propelled a wave of fear and panic across the digital assets landscape around the world.
The crypto mammoth’s inflated market repute propped on a shaky business model fizzled out after a revelation about its high-risk handling of user funds sent shock waves across the world of digital assets. It took only a leaked balance sheet to upend FTX’s crypto cauldron, causing its murky contents laced with malpractice to spill over and expose the fragile foundations of the multi-billion-dollar firm. On Thursday, Sam Bankman-Fried, the founder and former CEO of FTX, issued an apology to his investors and customers before resigning the next day, as the company he founded in 2019 – and which had established a credible footing in the largely unregulated world of digital currency – declared bankruptcy, confirming the panicked investors’ worst fears.
Cryptocurrency, especially Bitcoin, has long lured investors around the world, but there has always been a risky bet to this asset due to its volatile nature and, more importantly, lack of regulation. Since the FTX collapse, the value of Bitcoin has dropped from $20,000 to below $16,000, with many critics and industry experts saying the crash was imminent, and that its effects will be felt across other digital markets.
Bankman-Fried, who turned a multibillionaire in five years with the rapid success of his crypto titan, was left scrambling for funds as the dramatic downfall of FTX wiped billions of dollars from his once sprawling empire. The platform was trading $10 billion to $15 billion a day in 2021, but all that evaporated as the business caved under the weight of risk-prone funds management last week. Now the firm, which was once the world’s second-largest cryptocurrency exchange, is being investigated by both the Justice Department and Securities and Exchange Commission (SEC).
But as the FTX’s vertiginous crash casts shadows on the potential of digital currencies, is the chaos surrounding it worthy of worry or is it merely a routine response to risks that monetary investments are inherently saddled with?
For Pakistani investors, there seems to be equal parts disappointment and anticipation. Disappointment, of course, over immediate losses and anticipation over potential profits that usually come along post similar crashes. The recent FTX crash may have hit those a bit harder who are vague on the fundamentals of cryptocurrency or have fallen prey to scams that run rampant in these murky terrains of the digital world, but investors who have been wading the crypto waters for a while now and are inured to the lows that are the concomitants of digital assets like Bitcoin may be biding their time, optimistic about the chances of greater profits.
Digital Rights Monitor (DRM) reached out to a few local investors to find out how they have been faring in the wake of cryptocurrency’s faltering value and the cloud of uncertainty that is hovering threateningly above the trillion-dollar industry.
Athar Ali Khan, a content marketing specialist from Karachi with nearly a decade of experience in the crypto space, told DRM that the FTX collapse may have affected early investors’ profits, but it would be amiss to say the crisis has inflicted heavy losses on them.
“When you invest early on, crashes like these don’t affect you very much because the market has grown so fast over the years,” said Athar. “For instance, when I entered the market, Bitcoin was worth $400. Last year, it went up to $60,000. So even if it drops to $16,000, for someone who bought the coin for $400, it is still a lot of profit.”
He said experienced investors who know how the market works wait for such crashes as it is the time to invest more instead of running away.
“This is how I work. But yes, I know people personally who invested in 2020 when the market peaked; those people suffered losses to the point of losing 99 per cent of their investment.”
Mustajab Mughal, a creative visualiser based in Karachi, began investing in digital currencies with his friends during the lockdowns in 2020. He started with Rs5,000 in various coins (including Ethereum and Solana), but found Bitcoin to be most stable. Within a year, Mustajab’s paltry investment in the banned coins swelled to nearly Rs50,000, encouraging him to explore more of the crypto sphere. He added, however, that reports of a crash looming ahead had started to circulate within the inner circles in September, prompting many of his friends to secure their funds. Since Mustajab had seen people pouring millions into cryptocurrency, his relatively small investment didn’t concern him much unless, of course, it plunged into a loss.
“I have lost almost all of it,” said Mustajab. “The market will take at least a year or so to bounce back. Until then, we have no option than to wait.”
But the stories of losses on small investments such as Mustajab’s stand embarrassed in front of that of Zeeshan (not his real name), who, following the FTX debacle, realised that lack of experience coupled with liberal investments in the crypto realm can wipe the funds from one’s wallet irretrievably. Zeeshan is among the many who witnessed their lofty investments go up in smoke in the past week. His losses amount to Rs3 million, which he invested between 2020 and 2021 and involved borrowing loans from his close relatives. He chose not to divulge more.
As for the historic crypto plummet, it was triggered by a report published by the cryptocurrency news outlet, CoinDesk. The report revealed that FTX’s cryptocurrency FTT, worth billions of dollars, was held by its sister company Alameda. Because Alameda had been utilising the funds as collateral in further loans, any drop in FTT’s value could demonstrate serious impacts on both businesses. The report jolted FTX’s position in the market and the crisis deepened when FTX’s rival Binance announced the sell-off of its FTT holdings worth $500 million, citing the “recent revelations that came to light”.
Following the announcement, FTT’s value nosedived and FTX customers rushed to withdraw their funds (amounting to nearly $6 billion) in crypto tokens from the platform over the next three days. FTX’s future was left uncertain after Binance CEO Changpeng Zhao, who had agreed to buy the company, walked away from the deal, saying, “The issues are beyond our control or ability to help.” The crash has since wiped more than $200 billion from the combined price of Bitcoin, Ethereum and other digital currencies.
According to US Senator Sherrod Brown, the chairman of the Senate Banking Committee, the FTX crash is “a loud warning bell that cryptocurrencies can fail”. The crisis has also renewed calls for strict regulations for the digital assets sector, including from Binance CEO Zhao.
“We’re in a new industry, we’ve seen in the past week, things go crazy in the industry,” Zhao said while addressing a gathering of G20 leaders at the summit in Bali. “We do need some regulations, we do need to do this properly, we do need to do this in a stable way.”