Why Is Crypto Crashing Right Now? And Are Your Investments Safe? | The Motley Fool (2024)

Crypto prices have been on a downhill slide all year, but this week has been particularly brutal. After the implosion of crypto exchange FTX, prices have plummeted in mere days.

If you're feeling nervous about the outlook for crypto right now, you're not alone. But what's going on behind this sudden crash? And how safe are your investments? Here's everything you need to know.

How FTX shook the crypto world overnight

While there are plenty of factors affecting crypto's overall volatility, the main source of this sudden crash is the downfall of FTX, one of the most prominent crypto exchanges.

According to a report from the Wall Street Journal, FTX lent billions of dollars in customer assets to crypto trading firm Alameda Research, in which FTX CEO Sam Bankman-Fried is the majority owner. Alameda then reportedly used that money to fund high-risk trades.

Last week, CoinDesk also reported that Alameda's balance sheet consisted largely of FTX Token (FTT), the crypto exchange's native token. Considering Bankman-Fried is a majority owner of both Alameda and FTX, that raised major red flags that Alameda is built on a cryptocurrency that its sister company created. After this report was released, investors promptly started withdrawing their money from FTX.

However, because FTX had lent so much money to Alameda, it didn't have enough funds for investors to withdraw. As a result, it faced a shortfall of roughly $8 billion, according to the Wall Street Journal.The exchange has now filed for Chapter 11 bankruptcy, and Bankman-Fried has resigned.

How will this affect the crypto industry?

The collapse of FTX sent shockwaves through the crypto world, and it has affected more than just the exchange itself.

Binance, another crypto exchange, announced that it would liquidate its investment in FTX. Coinbase Global (COIN 4.23%) also saw its stock price drop by more than 20% in a matter of days, despite its CEO reassuring investors that the company is financially sound and has no material exposure to FTX.

Cryptocurrencies themselves are also taking a hit. FTX reportedly held roughly $1.2 billion in Solana (SOL 3.15%) tokens, which has made that crypto particularly vulnerable to FTX's implosion. This situation has also made investors warier of crypto in general, and there's a chance prices could continue to drop across the board if investor concern grows.

This incident has also affected companies outside of the crypto world. For example, Silvergate Capital (SI 8.00%), one of the banks most closely linked to crypto, has seen its share price drop by more than 33% in less than a week.

Should you worry about your investments?

Many investors are worried about the impact on their crypto holdings, so if you're feeling nervous right now, you're not alone.

FTX's downfall is an important example of why it's not only a matter of which cryptocurrencies you buy, but where you keep them. To protect your investments as much as possible, it may be wise to store your crypto holdings in a wallet rather than on an exchange. This will help you avoid losing money if the exchange itself faces problems.

To play it safer, it may also be wise to stick to better-known cryptocurrencies rather than small, riskier investments. The crypto sector is still the Wild West in many senses, and until it faces stricter regulation, there's always a chance that events like these could happen.

While major cryptocurrencies like Bitcoin (BTC 1.20%) and Ethereum (ETH 3.36%) are not immune to these downfalls (both of these cryptocurrencies have seen their prices plummet in part due to FTX's problems), they do have better chances of pulling through periods of significant volatility.

Ultimately, if there's a lesson in this situation, it's that crypto is still an inherently risky investment. While that doesn't necessarily mean you shouldn't buy, it is an important reminder to only invest money you can afford to lose.

The silver lining, however, could be increased regulation in the crypto space. Lawmakers have long encouraged more crypto regulation, and the FTX downfall could be the push they need. The Securities and Exchange Commission and the Justice Department are already investigating this incident, and it could potentially lead to more policies to prevent future meltdowns like this.

It's not an easy time to be a crypto investor, but a long-term outlook is key right now. Nobody knows for certain what will happen over the coming weeks or months, but increased regulation could make crypto safer for everyone.