By Kaoutar Nasser | Staff Writer
Everyone is now familiar with the words cryptocurrency, NFTs, and blockchain. You probably heard or looked up the meaning of each, or you’re simply still confused about how this whole world of crypto-trading works. It is alright if, after many searches, you still don’t know the difference between a token and cryptocurrency or how the FTX crashed all of a sudden because we will be covering all these points.
First, let’s get down to the basics and understand the big words in crypto.
Cryptocurrency, Blockchain, Crypto Wallet?
Cryptocurrency is basically a digital currency used as an alternative form of payment that functions both as a currency and a virtual accounting system. Instead of relying on banks to verify transactions, the system allows anyone anywhere to send and receive payments and uses encryption to verify them.
But where do we keep these digital currencies? Well, that’s where the blockchain’s role arrives. It’s technically a public ledger that records all transactions and stores data in “blocks.” The coins exist on this digital ledger while the actual transactions are carried in what’s called a “crypto wallet.” To understand this wallet more, you must know that it could be either a software program as a mobile app or a physical device like a USB stick. The wallet does not hold actual cryptocurrency, but it has two important keys that carry out your crypto transactions. First, we have the public keys that work like your bank account number. It is used to be shared with third parties for transactions. Then, we have the private keys, which, as their name indicates, should stay private – it gives you access to your cryptocurrency in blockchain and it’s used as the key for a safe deposit box.
Now that you understand what cryptocurrency is, where it’s stored, and how the transactions happen, it’s important to know that there is a centralized and decentralized exchange. Centralized involves a third party to ensure the safety of transactions whilst decentralized is without intermediaries thus, traders rely on self-custody wallets for exchange.
Tokens or cryptocurrencies?
As you search for crypto, you will discover the term “token,” which is a tradable asset or utility that resides on a blockchain and is useful in both economic and investment settings, just as legal tender. On the other hand, crypto tokens operate on top of a blockchain that acts as a medium for the creation and execution of decentralized apps and smart contracts. The tokens are used to facilitate transactions. The difference between cryptocurrency and tokens is that Crypto coins allow individuals to make payments using their digital currency. People can use tokens, though, for many more reasons. They can use them for trading, to hold as a store of value, and of course, to use as a form of currency.
What is FTX, and why did it crash?
FTX is a digital currency and centralized exchange that allows people to buy and sell crypto without needing to set up a crypto wallet. It became one of the biggest platforms for cryptocurrency exchanges, however, it followed certain risky trading options that are illegal in the US, which is the case for many countries as well.
Founded and run by the MIT scholar Mr. Bankman-Fried, the Bahamas-based exchange did not last for long as it filed for bankruptcy on November 11th, 2022.
The great depression of FTX, how did it start?
Just like the great depression, there was a boom before the collapse. In 2021, the price of bitcoin peaked at 64,000$, thus leading to a flood of venture capital money and clients that want to invest. Then, it began to decline dramatically. However, the huge red flag came from a balance sheet that an affiliated investing crypto firm “Alameda,” also run by Mr. Bankman-Fried, released that shows a huge amount of FFT (digital token created by FTX to encourage people to use their services and works like a stock) was held by this firm.
This led to Binance revealing that they will lose their FFTs due to recent announcements, which caused a huge decline in FFTs price, and eventually, FTX got outnumbered by the requests of withdrawals which seemed to be a “liquidity crunch.”
Data analyzed by “CryptoSlate” showed that, in the past year, over 90% of tokens from wallets associated with Alameda ended up at FTX. Around 9% of all outflows from Alameda ended up at Binance.
Further investigation into Alameda’s and FTX’s transactions is needed to understand the full scope of the crisis they caused. However, the data analyzed so far shows an undeniable bond between Alameda and FTX. The two deepened their ties through Binance, which they might have used as an unsuspecting middleman in their year-long escapade.
On November 8th, Binance announced that it would bail out FTX with the discretion to pull from the deal at any time (Zhao, 2022). This effectively happened the next day due to some regulatory investigations, and FTX went bankrupt whilst Alameda resumed its investing activities, as announced by Mr. Bankman-Fried.
How does this affect the crypto market?
It has always been hard to convince customers, investors, and regulators to build a trustworthy relationship with cryptocurrency since the crypto market has always been seen as a high-risk, high-reward type of investment , a fact that now everyone will be sure of. Thus, following the crash of FTX, bitcoin prices went down by 19% and the price of Ether by 24%.
References:
https://n26.com/en-eu/blog/what-is-a-crypto-wallet
https://www.investopedia.com/ftx-exchange-5200842
https://www.nerdwallet.com/article/investing/ftx-crash
https://www.openware.com/news/articles/decentralized-versus-centralized-crypto-exchange
- Translated by Content Engine LLC. Sam Bankman-Fried used his FTX clients’ money to bail out his other firm Alameda Research. CE Noticias FinancierasNov 10 , 2022. . https://www.proquest.com/wire-feeds/sam-bankman-fried-used-his-ftx-clients-money-bail/docview/2735502008/se-2