How to handle losses, the collapse of trust. The experts intervene.

The fall of cryptocurrency exchange FTX and its founder Sam Bankman-Fried (SBF) has been described as the “Lehman Brothers” moment of cryptocurrency. Its demise is impacting other cryptocurrency platforms as investors and customers scramble to get their money back.

Continuing our series, “What to Do in a Bear Market,” Yahoo Finance spoke to cryptocurrency industry experts to put what happened and how to handle losses from falling trades into perspective.

There are many retail investors who have been trading cryptocurrencies on various platforms over the past couple of years. And now they’re probably sitting on huge losses. What specifically needs to happen to restore investor confidence?

More initiatives from the industry are one of several ways to boost confidence, according to Oppenheimer executive director Owen Lau.

He cites cryptocurrency exchange Binance’s recently announced recovery fund to help cryptocurrency projects facing a liquidity crunch.

“Hopefully, these private market solutions can reduce the damage caused by FTX,” Lau told Yahoo Finance Live recently.

“Number two, I think it really takes time for the industry to show more transparency. For investors, that this sector could be stable and they can manage a sustainable model,” she added.

“Number three… I hope that when the industry can introduce more use cases to customers, hopefully the trust can come back,” Lau said.

What cryptocurrency figures still remain that investors can trust?

“Bitcoin cryptocurrency is still a 10-year product, a 12-year product. And it’s fair to say that it’s still a pretty fragmented market,” Lau said.

“I would say that after this event we will see the leader emerge. And notably a more regulated and more transparent platform will eventually emerge to be the leader. But we will see in the next 6 to 12 months how these things play out,” she added.

The problems that cryptocurrency holders have faced so far concern exchanges such as FTX, Celsius and Voyager. What is the difference between holding cryptocurrencies on an exchange versus an external wallet.

“The most important difference between holding your cryptocurrency on an exchange versus an external wallet is custody,” Heidi Chakos, YouTube host of Crypto Tips, told Yahoo Finance.

“For some people, the thought of having to find a wallet on their own is too overwhelming and that keeping coins in an exchange is easier,” Chakos said.

“However, what hundreds of thousands of people have sadly learned from experience, especially over the past 6 months, is that once you deposit or hold cryptocurrencies on an exchange (or any centralized custody platform) you are giving true ownership of those cryptocurrencies to whoever runs that exchange,” he added.

“A famous phrase in the cryptocurrency crowd is ‘be your own bank.’ You no longer need a bank or external entity to protect your wealth. It can be done easily using hardware wallets. There is so much free information now online and on YouTube showing step by step how to set up and use any type of wallet. They are also quickly becoming very easy to use,” said Chakos.

FTX’s bankruptcy is now in the hands of the courts. What will happen to the more than 1 million creditors who are at risk of losses?

Determining the value of assets and turning them into real dollars in bankruptcy court will be a major challenge.

“What is the value of the asset in case of bankruptcy. Trying to determine the liquidated value of FTX subject to distribution to creditors I think is going to be a pretty unique challenge,” Kenneth Feinberg, a former director of the 9/11 Victim Compensation Fund, told Yahoo Finance Live on Friday.

Identifying who is an eligible lender will be another challenge.

“How many of those creditors can prove a loss? They’ll really come forward, they’ll say their name, they’ll give their address, they’ll state the amount of the loss, they’ll demonstrate that loss in very, very opaque currency,” Feinberg said.

Given that so many cryptocurrency exchange investors and clients have been burned so far, what is the outlook for the future of digital assets?

“I don’t disagree that some investor confidence, some customer confidence, has been compromised. But that said, we are still optimistic about the long-term future of blockchain and digital assets,” Oppenheimer’s Lau said.

He believes the next phase of blockchain adoption will focus more on use cases for these technologies.

“We know talking a lot about the first utility is trading and speculating. But there are actually a lot of other utilities, use cases out there in the payments space… and in the lending space as well.”

UNITED STATES – MAY 12: From right, Terrence A. Duffy, CEO of Chicago Mercantile Exchange, Sam Bankman-Fried, CEO of FTX US Derivatives, Christopher Edmonds, chief development officer of Intercontinental Exchange, and Christopher Perkins, president of CoinFund, testify during the House Agriculture Committee hearing on Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models, at the Longworth Building on Thursday, May 12, 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Sam Bankman-Fried had met regularly with lawmakers to influence legislation related to digital assets. Some industry participants are now calling for regulation to protect investors and customers. What do you expect will happen on that front?

“We have legislation that was already in bill format in the House and Senate. I think a lot of the legislation favored by SBF and FTX probably won’t survive at this point,” Cathy Yoon, chief legal officer at MPCH Labs recently told Yahoo Finance Live.

“There are a lot of other bills and bills before Congress. I don’t think we’ll see them moving forward quickly right now. I think there is a demand for answers. There are many questions. People want answers. There may even be hearings before the end of the year,” she added.

“When it comes to just regulating space in general, I know a lot of people ask for it. They want immediate action. But I think at the heart of things, we really need to remember that this is indeed a fraud and not necessarily something that affects all of the crypto space in general,” Yoon added.

Ines is a business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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