College students aren’t exactly known for the best financial decisions, but this year may be harder than most. This is in part because Investopedia reports in 2023, the cryptocurrency market has been performing poorly all year.
Cryptocurrency, or crypto, is “a digital currency, which is an alternative form of payment created using encryption algorithms” as defined by the State University of New York. Many people use cryptocurrencies as an investment to make money — in fact, in 2020, the New York Post found that as many as one in five college students had used their student loans to invest in cryptocurrency.
As of April of this year, Pew Research found that 40% of men from ages 18 to 29 have used cryptocurrency. Last year’s major crypto exchange FTX Exchange collapse has led many to see the dangers of investing in cryptocurrency. The FTX collapse, and founder Sam Bankman-Fried’s arrest, bode poorly for the future of cryptocurrency.
FTX, founded in 2019, was a crypto exchange, which as the Corporate Finance Institute explains, are platforms that “facilitate the trading of cryptocurrencies for other assets, including digital and fiat currencies.” They function similarly to stock exchanges. By 2022, FTX had become the second largest crypto exchange in the world, worth $32 billion.
With this success, FTX would go on to spend $1.1 billion dollars on celebrity endorsements and sponsorships, according to CNBC, including spending millions on a sporting arena in Miami as well as endorsements from big names like basketball star Stephen Curry, “Shark Tank” reality TV mogul Kevin O’Leary, and comedic actor Larry David.
At the top of the FTX crypto empire was Sam Bankman-Fried, who Forbes reports was once one of the richest people in crypto. Much of the wealth was thought to be generated by broker’s fees from FTX and profits from the related trading firm Alameda Research. However, his success was short-lived.
According to Investopedia, “FTX’s collapse took place over a 10-day period” in Nov. 2022. In the simplest terms, FTX customers discovered, due to an investigation by crypto news site CoinDesk, that a majority of the assets held by Alameda Research were in FTT tokens. FTT is the cryptocurrency created by FTX. What’s worse, Alameda had taken as much as $10 billion from FTX customer funds to repay its own loans, according to Reuters. This means much of FTX’s value was illiquid, meaning it could not be returned if customers asked for their money back.
On Nov. 6, Forbes writes, rival crypto exchange Binance sold 23 million FTT tokens, leading to a drastic reduction in the value of the token, and prompting panicked customers to begin withdrawing their money from FTX in what’s known as a bank run. Within the week, FTX filed for bankruptcy, and days later Bankman-Fried was arrested.
Early this November, Reuters reported Bankman-Fried was convicted of two counts of fraud and five counts of conspiracy for stealing an estimated $8 billion from FTX customers. Under these charges, the former billionaire could serve up to 100 years in prison, though the New York Times estimates that twenty to fifty years is more likely. U.S. Attorney Damian Williams called the FTX fraud “one of the biggest financial frauds in American history.”
The FTX collapse rippled across the entire crypto market. The New York Times stated, “The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy.” This problem of trust is only exacerbated by the FTX collapse. Not only did it eliminate a core pillar of the crypto environment, it also increased skepticism around crypto, harming efforts to normalize the use of cryptocurrencies.
The FTX collapse is a chilling reminder of the dangers of investing in unregulated financial assets. It leaves a stain that will not be easily forgotten. Hopefully, after the saga, students will think twice before using their student loans on such risky ventures.