'Get your money off exchanges', warns Bitboy Crypto after FTX scandal
Watch: Get your money off exchanges' warns Bitboy Crypto after FTX scandal | The Crypto Mile
After the collapse of the FTX cryptocurrency exchange, an industry commentator has warned investors that now is the time to "get your money off exchanges".
The Crypto Mile checked in with Ben Armstrong, aka BitBoy Crypto, who had drawn attention to smoke rising from FTX weeks before the current chaos, drawing ridicule from sections of the crypto-media.
But, after Coindesk journalist Ian Allison blew the lid on the irregularities in Alameda Research's balance sheet, the smoke became an inferno.
The balance sheet revealed that the $14.6bn (£12bn) of assets held by Alameda Research was heavily stacked with a large proportion of FTX's own FTT token (FTT-USD).
With outstanding liabilities of an estimated $5.1bn at Alameda Research, holders of FTT experienced rising panic that margin calls on those loans might decimate the value of FTT.
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A bank-run ensued, inflamed by warning tweets from Binance CEO Changpeng 'CZ' Zhao.
With feelings of distrust towards centralised exchanges at an all time high, Yahoo Finance UK asked Armstrong what he thinks investors should do to ensure their digital assets are safe.
He advised: "Get your money off exchanges, there's no question about that. Anyone who is just being lazy saying they'll get to it in the future, you are the people who will lose the money.
"I opened up a Trust Wallet account and moved all my Cardano (ADA-USD) over to it, and I've a Coinbase Wallet that I've sent funds to also."
A Trust Wallet and Coinbase Wallet are examples self-custody crypto storage devices, or cold-storage wallets, that place control of crypto, keys, and data in the hands of the owner, not a centralised exchange.
Renewed interest in cold-storage wallets has been reflected in Trust Wallet's token price (TWT-USD) appreciating in recent weeks, whilst the majority of the rest of the market has tanked. The cryptocurrency has increased by 6.4% in the past week to $2.12 per coin, according to Coingecko.
The problem with centralised crypto exchanges (CEXs)
Centralised exchanges have acted as a substitute for banks in the largely unregulated and experimental crypto-sector.
Since the FTX collapse, these banks look more like casinos, with FTX playing against unwitting customers using the customers' own cash.
Throughout the crypto bull-market that reached a high-water mark in Novemeber 2021, both retail and institutional investors left their money with centralised entities that promise funds are always backed-up and insured, but promises have been broken again and again.
Read more: How to safely transfer your crypto to a cold storage wallet
Since the collapse of Terra's UST/Luna stablecoin (LUNA1-USD) and the crypto crash in May, the industry has witnessed big names laid low — Three Arrows Capital, Voyager (VYGVQ), and now FTX.
Investor frustration and disbelief is met with the same "sorry, due to unprecedented market conditions, your money is gone" response. But where is the hole in the system that keeps draining away supposedly secure assets?
A month before the FTX collapse, Armstrong released a video on YoutUbe to alert his listeners.
He said: "Why did Sam Bankman Fried get involved in crypto? For money and to push political narratives that is why he got into crypto. That is what he cares about and now we've got a guy who's on the Forbes list of billionaires. I think he's in the top 100 billionaires, and this is a guy that does not have the best interest of crypto at heart."
Armstrong told The Crypto Mile: "A lot of people have seen over the last few weeks as all this played out, that what started as a philosophical difference between myself and Sam, became a battle royale and ended in his exchange becoming insolvent.
Read more: FTX bankruptcy sees 80,000 UK crypto investors lose funds
"We were going after the fact that he was trying to push this Federal Bill License, and to destroy decentralisation in America. Now people can see that this is exactly what he was doing.
"When people found out that we blew the whistle on that and that we were correct all of a sudden his enemies started emailing me saying that there is a lot more to it than this, its not just the political stuff, there are problems with the company.
"So a week before 'ZC' tweeted that he was going to dump FTT, we were tweeting people saying, get your money off FTX, but trying to do it in a way that wouldn't crash the market."
Renewed appreciation for DeFi and decentralised exchanges after FTX implosion
According to Jason Choi of venture capital firm Tangent, FTX was allegedly started as an easy way to access capital for Alameda Research.
On Twitter, Choi claimed that every major decision FTX made was related to acquiring more leverage "via deceptive fundraises, financial engineering, and ultimately, outright fraud".
With user funds resting in the hands of centralised exchanges many investors see decentralised exchanges as the way forward for crypto trading.
Decentralised exchanges (DEXs) are a type of cryptocurrency exchange which allow for direct peer-to-peer crypto-transactions from one digital wallet to another, without the need for an intermediary, and with user funds staying in the wallet owned by that user.
Examples of decentralised exchanges are Uniswap on the Ethereum blockchain and PancakeSwap on the Binance smart chain.
Read more: Crypto exchange war: Binance questions Coinbase reserves
DJ Qian, CEO of Chainge Finance, told Yahoo Finance UK: "I believe that decentralisation represents the future of crypto exchanges. This direction is pretty clear at this point as some of the centralised exchanges that remain standing have slowly started taking steps towards exploring decentralisation. For example, CZ the founder of the largest crypto exchange Binance has also come out in support of DeFi saying it's the way to go.
"The main reason why centralised exchanges are now seeing this general lack of trust is that people give up custody of their assets by using these platforms. Similar to traditional banks: if a bank goes bankrupt, your money simply vanishes. You have no actual control over your own assets.
"The Celsius and FTX incidents are simply wake-up calls for the market to realise that entrusting an entity with your wealth poses a threat. Because essentially you’re trusting a group of people to manage your assets. Whether they do it well or not, you don’t really know."
"Even if centralised exchanges are now going above and beyond to prove they have a 100% reserve of the assets, users still have no real control."
Large centralised exchanges are currently being pressured by industry analysts into showing proof that they have the reserves to meet user redemptions on the assets that they hold.
1/ We are working with exchanges to display proof-of-reserves on @nansenportfolio for everyone to track their token holdings and transactions.
Here's the current list of exchange portfolios and we will live update this thread with more, so make sure you are following! 🧵
— Nansen 🧭 (@nansen_ai) November 11, 2022
However, CEO of Chainge Finance argued that this is another smoke screen providing a fake sense of security to users, while keeping the status quo where the user still relies on that same group of people to make good choices for them.
He said: "Decentralised exchanges are not only a way to protect the users’ assets. They also represent an innovative way of trading. Because, as we all know, each centralised exchange stands as a 'silo island', while decentralised exchanges have the ability to connect all markets together."
Ethereum founder proposes solution
In a recent blog post, Ethereum founder Vitalik Buterin proposed that centralised crypto exchanges could build a system where the exchange can't withdraw a depositor's funds at all without their consent.
He said: "The simplest way to prove deposits is to simply publish a list of (username, balance) pairs. Each user can check that their balance is included in the list, and anyone can check the full list to see that (i) every balance is non-negative, and (ii) the total sum is the claimed amount."
In order to preserve the highest levels of privacy, Buterin advised considering "the next invention: the Merkle tree technique".
"The easiest backwards-compatible way to improve the safety of custodial exchanges is to add proof of reserve. This consists of a combination of proof of assets and proof of liabilities," he said.
Buterin said he hopes that the industry moves closer to all exchanges being non-custodial.
Countdown to crypto armageddon
The recent crypto chaos took hold after Binance CEO Zhao inflamed a bank run on the FTX exchange with a tweet stating that Binance would liquidate its holdings in FTX's native FTT token.
FTX was backed by FTT which was sold at low prices to Alameda Research and the trading arm of the exchange was heavily stacked with FTX's token, to the tune of $3.66bn (£3.05bn) “unlocked FTT” and $2.16bn “FTT collateral” as assets.
When FTX artificially inflated the value of FTT, Alameda was able to use FTT as collateral for trading on the FTX exchange.
Before the implosion of FTX and Alameda Research, Cory Klippsten, CEO of investment platform Swan Bitcoin, said: “It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token".
Read more: FTX implosion sees $5bn crypto withdrawn from exchanges
Binance held a substantial amount of FTT, acquired through a past FTX buy-out deal.
Zhao tweeted: "Liquidating our FTT is just post-exit risk management, learning from LUNA.
"We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards."
Zhao's announcement that he planned to sell the billions of FTT held by Binance sent the value of the cryptocurrency into an unrecoverable tailspin.
FTT reached an all-time high of $85 in September 2021, but after the dramatic collapse of the FTX exchange, it is now struggling to breathe at $1.33.