2022 has been a disastrous year for the Crypto market. One after the other, mishaps in the crypto space shooked the crypto community to its core. Though the Crypto industry has always been so happening, the goofy incidents this year have broken many volatility and liquidity records.
While these disasters were painful for those who lost money in a jiffy, they also gave some precious lessons to the crypto community.
The below blog will discuss the top 5 Crypto disasters of 2022 and the lessons to take from them in the next year.
Terra LUNA Collapse
The nose-diving Terra LUNA crash was the precursor of the whole series of mishaps that happened this year in crypto space so far.
As you know, LUNA and TerraUSD (UST) were two algorithmic stablecoins of Terra Network. It means that users could exchange 1 TerraUSD with LUNA worth $1. They could burn LUNA to convert them to TerraUSD and vice versa.
An Anchor protocol existed for Terra Network. This protocol allowed users to earn a fixed 20% interest on their TerraUSD (UST) holdings. When the Anchor protocol introduced variable interest rates, the investors got unsatisfied with the reduced interest rates. At the same time, the price of TerraUSD fell below $1, causing its investors to convert it to LUNA coins. Investors withdrew their TerraUSD from Anchor and started converting it to LUNA coins. Due to this massive conversion from TerraUSD to LUNA, the algorithmic balance mechanism between them collapsed. Thus, both famous cryptocurrencies plummeted.
The interest rate of almost 20% on Terra coin offered by Anchor was too high compared to other reliable platforms. Moreover, it also offered rewards to borrowers of Terra coins to attract more users. Due to such over-the-top interest rates and rewards, the Anchor protocol could not sustain for longer, causing the disbalance in supply and demand of Terra coins.
Celsius network was a known crypto lender before its bankruptcy. On April 12, 2022, its U.S. platform announced it would hold the assets of some investors and prohibited them from adding new assets and earning lending rewards. In the next month, when the Terra ecosystem collapsed and damaged the investors' trust. It led to bulk withdrawals by Celsius users. Within a few months, Celsius went into a liquidity crisis and halted withdrawals, swaps, transfers, and many other services with no deadline mentioned. This action spurred the rumour that Celsius is facing severe financial distress. After a series of accusations and trials, Celsius filed for bankruptcy on July 13, 2022. The lending platform owes $2.5 Billion worth of funds to its investors.
If anyone had dug deeper into the Celsius platform, they would have found out about the flawed profit model of this platform. In crypto, where transparency is the key highlight, the opaque profit model of Celsius was a big and obvious red flag for its users. Moreover, the Celsius network was not a completely decentralized platform. Hence, offering even higher returns than entirely Decentralized platforms with lower maintenance costs was also questionable. Another enormous wake-up call that most Celsius users should have addressed is not moving off assets from Voyager digital, which was managing some assets for Celsius even when the writing was on the wall.
Hence, always be aware of red flags in your investments and never avoid them, no matter how good the reward looks.
Insolvency of Three Arrows Capital
Three Arrows Capital is a classic example of how poor risk management can bury you under a pile of loans. This once-popular crypto hedge fund platform borrowed hundreds of millions of dollars from various crypto lending platforms like Voyager, Celsius, and many others. The terrible Terra LUNA collapse in May and the poor risk management caused a series of spiral investment collapses for Three Arrow Capital. The suspicious deletion of Tweets by its CEO and his no known whereabouts spurred the rumour that the platform was struggling financially. After trying various strategies to attract new investors and failing, 3 AC finally filed for bankruptcy on June 1. 3AC was one of the biggest holders of Terra (LUNA), Solana, and other cryptos, nearly 90% down from their ATH at the time of its insolvency.
The Collapse of 3 Arrows Capital tells something important about the risk involved in the interconnected things in crypto. The downfall of Terra created a chain reaction causing troubles for all the associated projects. It first affected the lending platform, Celsius, and then 3 AC followed the same trajectory. Hence, always research the crypto you invest in and the platforms you use. Know about the investments, collaborations, and all the interlinking associations of the project. So, you will have a backup plan and strategies for adverse conditions.
FTX collapse is the biggest implosion in the Crypto world this year. This Bahamas-based crypto exchange portrayed itself as the 'saviour' for falling crypto platforms like BlockFi & Voyager until a few months before it collapsed. On November 2, 2022, a crypto news website revealed a leaked balance sheet of a crypto lending firm (Almeda Research ) directly associated with FTX. The balance sheet showed that Almeda Research depends hugely on the FTT token, which is the native token of the FTX platform. After a few days of this revelation, a crypto firm liquidated all its FTT holdings causing panic among the FTX investors. Since Almeda Research borrowed a huge amount of customer funds from FTX to execute risky trades, it caused a shortage of in-hand funds in FTX. Therefore, when the panicked investors came to withdraw their funds in bulk, FTX could not match the need and halted its withdrawals. The shaking confidence in the FTX also caused a fall of 92% in its native token, FTT, in a week. In the end, FTX filed for bankruptcy on November 11, 2022.
FTX was the third biggest Cryptocurrency Exchange, with a customer base of 1.2 million. No significant person or community in the crypto industry thought FTX collapse would happen. Due to the positive reputation of the CEO, investors did not bother to question the financial transfers of the Exchange. Sam Bankmann Fried, the CEO of FTX, illegally used customer funds to perform risky trades. Even when Crypto Twitter started questioning the integrity of FTX, Sam tweeted that customer funds were safe with him. The collapse could have been avoided if any officials or experts had peaked at the account transfers of FTX instead of considering it too big to fail.
The last mishap that took place this year was the downfall of the Crypto lending platform, BlockFi. Like its competitor lending platforms, BlockFi struggled to avoid a liquidity crunch in the crypto winter. A few months back, when crypto had an extra volatile week post-Terra collapse, BlockFi was also facing difficulties maintaining liquidity. To stabilize itself, it underwent a deal with FTX in June in which FTX agreed to provide a credit of $400 million to BlockFi. This deal also gave FTX the right to buy BlockFi. This financial interlinking proved fatal for BlockFi after FTX declared bankruptcy in November. As a result, it filed for bankruptcy on November 28.
BlockFi had been putting all the risk on one venture. In a hurry to avoid collapse, it took up the deal of FTX without much research and discussion. The deal made the survival of BlockFi almost entirely dependent on the reputation of FTX. As a result, soon after FTX got bankrupt, the lending platform tumbled and declared bankruptcy. Its story tells an important lesson to not depend entirely on one institution. Always choose to diversify. Be it the investment portfolio or the business ventures.
This year has been quite eventful for the crypto industry. With so many collapses and mishaps occurring one after the other, this year's memory lane has given us immense opportunities to learn and improve our crypto game. The upcoming time will bring an improved ecosystem for crypto.