FTX Fallout Gets Nastier by the Day But There’s Still Winning Trades to be Made!

December 14, 2022

Cryptocurrencies: Weekly Update

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It has been a month since the collapse of FTX and the revelation of large-scale fraud by Sam Bankman-Fried and other FTX executives including the misappropriation of users' funds. The collapse of the FTX exchange has brought to light the urgent need for regulations in the cryptocurrency industry to prevent future instances of fraud at the institutional level. You would have thought that there would be a swift and serious response by US authorities given the scale of FTX’s collapse, however, it wasn’t until last night that the SEC finally charged Sam Bankman-Fried and began the process of extraditing him from the Bahamas which was quickly followed by charges from other US regulatory institutions. 

SBF’s charges include 2 counts of civil securities fraud by the SEC, 2 counts of violating the antifraud provisions of the Commodity Exchange Act, and then another 8 charges from the Justice Department including wire fraud, commodities fraud, securities fraud, conspiracy to commit money laundering, and even conspiracy to defraud the United States campaign finance law.

Anyone that tuned in to the House Financial Services Committee hearing today will recognize that the cryptocurrency industry is about to undergo more scrutiny (at least in the US) than it ever has before. However, it is important to remember that this isn’t necessarily a case of cryptocurrencies or blockchain technology failing, but rather a traditional case of institutional fraud that has happened plenty of times before in several other industries. Whether you want to compare the FTX situation to Enron or Bernie Madoff it doesn’t really matter, at the end of the day this is the type of fraudulent behavior that the world has seen before, and it is absolutely not something specific to the cryptocurrency realm.

With that being said, the future is very foggy in regard to coming regulations in the crypto industry, but it seems that the worst of the FTX collapse is behind us. The coming months will absolutely bring more charges against more bad actors involved at FTX and Alameda, but this is not the end of crypto.

In the meantime, the absence of a guiding voice from any governmental body or financial regulator in the US in regard to what exchanges are safe has left users around the world with only a handful of options:

  1. Liquidate all of your cryptocurrency holdings and cash out any balances that are held on exchanges.
  2. Continue trading cryptocurrencies as usual and wait for new regulatory clarity to help guide your future decisions regarding cryptocurrency trading, however, it could be months before we get anything concrete from the SEC, CFTC, or anybody else.
  3. Self-Custody the cryptocurrency assets that you wish to continue holding so that you are no longer at risk of your chosen platform misappropriating your funds like what happened with FTX.

The first option is the epitome of capitulation but it wouldn’t be too surprising to see some traders exit the crypto space with no expectation of returning, especially after watching the cryptocurrency market drop 60% of its value from the beginning of 2022 to now.

The second option is also understandable as one could look at what has transpired with FTX as not that different from several of the previous institutional collapses from 2022 such as Celsius, and if the market survived Celsius then why wouldn’t it survive FTX? Just look at all of the hacks and collapses the industry has weathered in 2022 alone:

Obviously, all of these hacks and collapses aren’t a positive feature of the crypto space, but it is something that comes with a growing and still relatively underregulated industry.

The 3rd option has been a consistent sentiment by crypto traders since long before any of the FTX fiasco went down, which is if you don’t self-custody your coins in a non-exchange wallet, then you aren’t technically in possession of your coins (Not your Keys, Not your Coins). The halt on FTX user accounts and the freezing of their funds seems to have finally cemented the importance of self-custody in everyone's minds. Here’s proof:

Roughly 200,000 BTC / over $3 billion was moved off of exchanges in the wake of the FTX collapse, the quickest and largest exodus of Bitcoin from exchanges that has ever occurred. This is attributable to both the increase in individuals keeping custody of their funds off of exchanges and a likely uptick in decentralized exchange usage due to distrust in centralized platforms like FTX.

In the immediate aftermath of FTX’s collapse, decentralized exchange volumes tripled. Unfortunately, decentralized exchanges like UniSwap (UNI) don’t offer the same on-ramps that centralized exchanges do, but if you want to trade crypto without going through the inherent risks of holding funds on an exchange then this is the ideal option.

For better or for worse we’re very likely to see regulators do whatever is possible to maintain a degree of control over the crypto space and that means targeting not just bad-actor centralized platforms like FTX, but also decentralized finance platforms that allow traders to remain mostly anonymous in their trading activities. Expect the debate between Cefi and Defi to be a consistent theme throughout 2023.

The hardest part of this entire situation has been how to navigate crypto markets as a trader amidst the mayhem that is FTX as well as the constant threat of one Federal Reserve meeting derailing risk-asset prices once again. However, the same approach to the crypto market that MarketGauge has taken since day 1 will continue to be the best approach possible, and that is to approach the asset class conservatively and to block out all of the unnecessary noise like what we’re living through right now.

You don’t have to just take our word for it, our most recent trade as well as our CryptoPulse Quant’s 2022 performance both show the benefit of removing emotions from trading crypto:

Within a week of the FTX collapse when the entire market seemed to be selling off, our CPQ strategy instructed us to purchase Litecoin (LTC). Anyone who has been around crypto for a while will know what LTC is, but also recognize that it was essentially left behind during the bull market while everyone was focused on the hottest new coins. Even to our analysts at MarketGauge, it was slightly shocking to see our system generate an entry signal into LTC that had fallen into obscurity throughout 2022. 

However, our Trend Strength indicator (TSI) showed that LTC was the only coin in the top 10 by market cap that was worth trading. LTC then went on to outperform every other large-cap coin on our list and has consistently been a top performer on a rolling 1-month basis since FTX imploded.

Our system is specifically designed to only trade the top 10 coins by market cap, excluding meme-coins (DOGE and SHIB), exchange tokens (BNB), and obviously stablecoins (USDT, USDC, BUSD, and DAI). That list of 10 coins is reranked at the end of each quarter or a total of 4 times per year, and it is our way of filtering out all of the nonsense tokens that exist in the crypto markets.

This approach has allowed us to outperform the crypto market in our first full calendar year with the CryptoPulse Quant service being live, as we are currently sitting around -10% from the beginning of the year as opposed to being down more than -60% if you were to have just bought and held the Bitcoin benchmark. The CPQ system has even outperformed all of the major stock indices despite it trading in the far more volatile cryptocurrency market.

We implore you to remember that applying proper risk management and focusing on divergences in macro trends has allowed us and our CPQ followers to outperform not just crypto markets, but risk assets across the board in 2022. Even with the mess that is FTX and all of the unpredictable fallout that is sure to impact crypto markets far into 2023, a consistent and responsible approach to the crypto market will continue to outperform in bear markets the same way it does in bull markets.

All of this having been said, the main conclusion to draw from FTX is that although it may have been one of the biggest cases of fraud the US has seen in quite a while, it will likely be the catalyst needed for US lawmakers to finally start taking cryptocurrencies more seriously. 

If you think that the cryptocurrency and blockchain industry is going to get regulated into oblivion then you haven’t been paying attention, because what 2022 has shown us is that crypto is still going through growing pains, but there will be a light at the end of the tunnel in which retail traders and Web3 users will be protected and the industry can finally grow in a regulatory environment that will provide actual clarity to its participants.

At the end of the day, the technological innovations that have created this entire virtual financial ecosystem will continue to improve and that is the true driver of growth in crypto.

If you’d like more information about our CryptoPulse Quant trading model that tells you exactly when to enter and exit swing trades in the large capitalization cryptocurrencies, click here to review the special Black Friday offer we’re re-opened for this week only

If you’d like to talk to our Chief Strategy Conultant, Rob Quinn, you can reach him several ways here.