Since its inception, there’s no denying that crypto has come a long way with ups and downs. The crypto world is all about extremes—sentiment can shift from extreme euphoria to extreme fear in days. Ultimately, in a way, it’s now where it is because of all the bad things that happened.
Throughout all the market phases, investors make mistakes and learn. And specifically, bear markets are essential for crypto to purge from reckless money and heal, because as the sentiment worsens and liquidity evaporates, these conditions make it much harder for fraudulent activity and scams to continue. Effectively, multiple bankruptcies happen, either because of bad management or suspicious activities. Which of these historical events that marked the pathway on which crypto is right now were the largest implosions? Hear this great story and draw your own conclusions.
2022 was the year of negative news with Terra Luna, Celsius and FTX imploding.
Mt. Gox exchange collapse
At its peak, Mt. Gox handled around 70% of all global Bitcoin transactions. However, it all came to a slow and painful end when, in February 2014, the exchange suddenly halted withdrawals. Later it was revealed that 850,000 Bitcoins went missing—at that time they were valued at $460 million, but now are worth billions.
An investigation was carried out, and severe security issues and mismanagement on an unprecedented scale were found. Hackers exploited the said vulnerabilities and were systematically draining their Bitcoin reserves. This led to Mt. Gox filing for bankruptcy, causing legal battles and a lack of trust in centralized exchanges.
Bitconnect Ponzi scheme
BitConnect aggressively marketed itself as a global cryptocurrency investment platform, promising impossibly high returns of up to 40% monthly. The euphoria caused by social media influencers advertising the product and multiple conferences happening sparked the interest of thousands of unsuspecting investors. Eventually, the truth prevailed, and the unsustainable promises were met with regulatory scrutiny from the US government.
In January 2018, authorities issued cease-and-desist orders, uncovering a massive Ponzi scheme. The implosion of BitConnect was spectacular, erasing over $2.6 billion in investor funds overnight. This atrocity resulted in criminal charges against the founders and promoters, as BitConnect can be rightly named “the Madoff of crypto”. Vigilance and caution against unrealistic investment claims can’t be stressed enough.
TerraUSD and Luna crash
The Terra blockchain and its algorithmic stablecoin UST represented an innovative yet risky attempt to completely decentralize stablecoins. The value of TerraUSD was algorithmically pegged to the US dollar through its relationship with Luna, a major flaw as proven.
In May 2022, the bear market had already started, and after another sharp decline, UST lost its peg. This event triggered a cycle of panic selling, causing the token to fall off a cliff. Nearly $40 billion in market capitalization vanished within days. This catastrophic event damaged investor confidence in algorithmic stablecoins and boosted overall skepticism regarding the crypto industry in general. The event was even brought up as a topic of discussion in the US Congress.
Each crypto failure meant losses for investors, but to what extent?
Celsius Network bankruptcy
Back in the day, Celsius Network was an incredibly popular custodial crypto lending platform, promising high yields and managing billions in user assets. Still, its aggressive investment strategies and risk exposure to volatile assets were dramatic in consequences as the crypto market declined sharply in 2022.
In June 2022, Celsius faced liquidity issues and immediately halted customer withdrawals, locking billions of dollars in assets. Just after that, the company filed for bankruptcy under Chapter 11, exposing significant mismanagement, lack of risk assessment, and an unsustainable business model. This collapse only added to the already shaken trust in centralized entities but also prompted intense regulatory scrutiny from regulators.
FTX exchange downfall
FTX was once the second-largest crypto exchange globally and praised so much for its rapid growth under the leadership of founder Sam Bankman-Fried. By late 2022, FTX was valued at approximately $32 billion. However, in November 2022, a sequence of events started that eventually led to the exchange’s downfall. It all started with a post from CZ (Changpeng Zhao), announcing Binance’s sale of FTT tokens. An investigation was carried out by the curious, and as it turned out, FTX had questionable and alarming ties with Bankman’s trading firm, Alameda Research.
Due to all the accusations of fraudulent misuse of customer funds and as users rushed to withdraw their funds, the FTX exchange faced a liquidity crisis. Shortly after, the exchange declared bankruptcy, leading to pressing multiple criminal charges against Bankman-Fried and his colleagues. This turmoil greatly contributed to a wide selloff in the market, leading to a capitulation phase and Bitcoin nearly hitting the $15k mark.
Lessons to be learned
While these crypto failures left some people literally empty-handed, there are always lessons to be learned. As painful and financially devastating as they can be, there is hope for the better. Here’s a breakdown of the most important conclusions.
Due diligence
Before investing your cash, don’t just fall for empty promises. Take as much time as you can and don’t let FOMO drive you crazy. Since costly mistakes are often the result of impulsive decisions, don’t invest in what you do not understand—simple. Had you dug a little deeper, your chances of losing money in those events would have dropped by a large margin.
Need for transparency
After a bearish year of 2022, many custodial platforms started doing independent audits and publishing their crypto reserves in hopes of bringing back what was left of the already shaken investor's trust. While more transparency is desirable, to this day it’s still not clear which custodial platforms are honest. Also, it’s important to take into account that crypto holdings are one thing and debt to creditors is another.
More decentralization
As crypto users, we should seek to restore the principles of crypto and go back to its roots. Using decentralized platforms over their centralized counterparts is that first step. While one may argue that DeFi hacks happen, it’s essential to have control over your funds and be responsible for your own decisions and, most importantly, own up to the mistakes you’ve made along the way.
From euphoria to fear - all it takes is one event trigger.
How to protect from scams
Scams. They are literally the plague of crypto. Unfortunately, in this amazing but unregulated crypto space, scams happen all the time. The good news is that there is a way to protect and fight them. Here’s how.
Education
The cryptocurrency space is constantly evolving, so methods of exploiting that used to work don’t. Scammers have to constantly adapt, but so do users. To avoid having your funds drained, you need to be aware of phishing, social engineering, address poisoning, pump and dump schemes, and Ponzi schemes—these are just a few examples. Remember that even allocating your funds on legitimately looking platforms can lose you money because of their mismanagement and internal problems, so keep your eye out. Expand your horizons—one day, you will be glad you did.
Self-custody
Governing your wealth and keeping it secure in a non-custodial wallet is basic, yet effective. If you trust yourself enough and are aware of the risk and responsibility, it’s the ultimate way of holding crypto. Just write down the seed phrase on a piece of paper and keep it in a secure place. Not your keys, not your coins.
Diversification
Holding all the eggs in one basket has never worked out well. Diversification is key in this space. Think about it—how hard would it be to financially recover if you lost everything compared to just losing funds on one wallet? Fate doesn't offer second chances to rethink your choices.
What’s ahead of us?
The stories of Mt. Gox, Bitconnect, Luna, Celsius, and FTX aren’t just financial losses but shattered dreams and broken trust. For many, these crashes weren’t just numbers on a screen; they were years of hard work, savings, and hope. These events shall serve as important reminders of greed and delusions—what we should avoid and never forget. However, the mistakes of the past shouldn’t define crypto’s future; they should inspire a more skeptical approach towards unrealistic promises. As disastrous as these events were, they demonstrated the resilience of crypto.
Resources
If you're interested in diving deeper and expanding your knowledge of the largest crypto failures to this day, here are some suggestions:
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