Richard Rauser, expert in cryptocurrency, blockchain, web3, decentralisation, technology and the future explores…
With crypto markets troubling over the collapse of Sam Bank-Friedman’s FTX empire, it’s worth remembering that we have been here many times before. In the absence of clear regulation, fraud, theft and poor management practices have left a long chain of failed crypto projects and devastated investors in their wake, and so here’s one for the masochists amongst us, a recap of the top 5 crypto crises of all time.
5. The DAO Hack
Value lost: $70 million
The launch of Ethereum in 2015 ushered in a new era for crypto, one of smart contracts and executable code on blockchain. This allowed for a vast new world of possibilities for programmable money, possibly best exemplified by an early on-chain system called “The DAO”. Standing for decentralised autonomous organisation, The DAO acted as a sort of decentralised venture capital firm, collecting funds from investors and allowing them to vote on how these funds would be allocated to various projects submitted to the DAO. It represented an innovative new way to both raise money for business concepts and invest in them, all facilitated by blockchain technology.
The DAO was popular, and managed to raise $250 million prior to launching in June 2016. It all went wrong on launch day, however, as a hacker exploiting a coding flaw was able to drain nearly a third of the funds ($70 million) within the first few hours of operation.
To address this, the Ethereum community rolled back the stat
e of the blockchain to a point before the hack took place, and allocated The DAO’s funds to a safe smart contract from which investors could withdraw their funds. This effectively reverted the theft of the funds, but not without extreme controversy, as this conflicts with the features of permanence and immutability that blockchains are meant to possess. It is the only time in the history of Ethereum that this has happened, and the old, hacked chain still exists, now known as Ethereum Classic. To this date, the perpetrator of the hack has never been identified.
4. Mt. Gox Theft
Value lost: $400 million
With CEO Mark Karpeles at the helm at the beginning of 2014, Mt. Gox had reached the peak of its popularity. It was the world’s de facto crypto exchange of choice, handling more than 70% of all global crypto transactions running to 150,000 Bitcoin per day. Things were to quickly change, however, as it became clear that many users were experiencing significant delays in withdrawing funds from Mt. Gox early in the year. It all came to a head on February 7, 2014, when Bitcoin withdrawals from the exchange were halted. By Feb 27, the Mt. Gox website was serving only a blank page, and the company filed for bankruptcy in Japan the next day.
In the ensuing weeks, it became clear that Mt. Gox had been subject to a long running theft that went undetected for years. Hackers had gained access to Mt. Gox’s systems and since 2011, they had been able to withdraw Bitcoin directly from Mt. Gox’s hot wallet to addresses they controlled. During bankruptcy proceedings, Mt Gox cited the loss to hackers as the primary reason for the business folding. In 2019 CEO Mark Karpeles was sentenced to 30 months in prison for falsely inflating Mt. Gox’s holdings.
All was not lost, however, as Mt Gox later claimed it had found some of the lost bitcoin in disused digital wallets. In 2021 it was agreed that these would be distributed to the remaining creditors, however as of summer 2022 the Japanese trustee of the bankruptcy still holds 140,000 bitcoin.
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3. BitConnect Ponzi Scheme
Value lost: $2.4 Billion USD
BitConnect launched in 2016 as a high yield lending protocol that allowed token holders to deposit their tokens in BitConnect, which would then use its proprietary “Trading Bot” technology to generate returns. In a classic piece of social engineering, BitConnect organised webcasts and live events to tout its product, replete with BitConnect investors attesting to the vast profits they had made with religious-like zeal. BitConnect also depended on a multi-level-marketing structure, whereby participants were encouraged and financially incentivized to enlist new recruits to the investment system. In reality, new deposits were used to pay out earlier investors in a classic Ponzi scheme, and 15% of all deposits went directly into a slush fund controlled by BitConnect’s founder, Glen Arcaro.
As the last crypto market cycle peaked in late 2017 and began its downward trend into 2018, a wave of redemptions began and it quickly became clear that BitConnect might not be able to honour all deposits. By late January 2018, the die had been cast, and BitConnect folded under the weight of redemptions it could not honour. In 2021, Glen Arcaro was convicted of fraud and sentenced to 38 months imprisonment.
2. UST Peg Failure
Value destroyed: $17 billion USD
In 2021, Luna’s Terra blockchain was revered as a place to earn high yields on it
s UST stablecoin that was algorithmically pegged to the US dollar. Terra’s Anchor protocol promised a tantalising 20% APY return to holders of UST, advertising the product as a “crypto savings account.” Such attractive gains did not go unnoticed, and by 2022 10’s of billions of USD was deposited in Anchor protocol. In May 2022 as the broader crypto market entered a downturn, a cascade of redemptions led to the UST peg breaking and eventually dropping to just $0.10 USD. Anchor protocol appeared to have technical flaws that meant that it could not sustain a heavy demand for withdrawals without inducing widespread wealth destruction.
Terra’s founder, Do Kwon, is now subject to an Interpol red notice and wanted by South Korean police to answer to charges of market manipulation, though his whereabouts are currently unknown. The collapse of UST has had many highly damaging second order effects, with various centralised crypto hedge funds collapsing in its wake, such as Three Arrows Capital, Voyager, and Celsius.
1. FTX Implosion
Value destroyed: $32 Billion USD
What more can be said about FTX and Sam Bank-Friedman that hasn’t already?
November 2022 saw one of crypto’s most famed superstars make a spectacular fall from grace. The $32 billion USD FTX empire is in tatters, a victim of unconscionable and likely illegal business practices.
FTX had reportedly loaned an associated business of SBF’s, Alameda Research, half of its client funds while using billions of USD worth of FTT as collateral for this and other loans. When this came to the attention of SBF’s archrival and Binance owner, CZ, he publicly dumped hundreds of millions USD of FTT, causing the value of FTT to plunge. The ensuing cascade of margin calls and attempted client redemptions as the situation came to light left the once hallowed exchange in bankruptcy protection by the end of the week.
Given FTX’s deep ties to other crypto businesses, there were many knock-on effects of its collapse and some may have yet to manifest. There are certainly a number of other businesses that may suffer a similar fate to FTX. The poster child of crypto, SBF, once seen to be cosying with DC lobbyists as the acceptable face of legitimate crypto, has now had criminal charges levied against him by the US Justice Department and is certain to have countless civil lawsuits to contend with in the coming years.