Friday, the 13th and Crypto: Uncovering Valuable Lessons from Major Market Crashes

It’s the month of horror! And Friday the 13th is considered as its unluckiest day.

So, why not take the time to remember some very spooky and unlucky moments inside the cryptocurrency world?

The truth is that we’ve had many. We’ve survived them all, but that’s a different story for some companies and cryptocurrencies. After some very bad crypto crashes for different reasons, some brands and assets have disappeared for good.

Indeed, according to 99Bitcoins, there were at least 1,744 dead coins as of March 2023. According to Coinopsy, the number increased to 2,478 by October 2023, including failed Initial Coin Offerings (ICOs). If we’d count fake coins, failed companies, and scams, there’d be likely much more. Most of them were tiny projects that failed, but others were even titans in the industry. We’ll talk about those.

Sometimes, millions of people put their faith and investments in the wrong assets or companies. Let’s explore how this happened in the crypto industry with five cases, considered the biggest crypto crashes so far (until 2023).

Content Overview

• Case 1: Mt. Gox Crash
• Case 2: BitConnect
• Case 3: Terra (LUNA) and UST
• Case 4: Three Arrows Capital (3AC)
• Case 5: FTX and FTT Token
• What can we learn from crypto crashes?

Case 1: Mt. Gox Crash

Mt. Gox probably rings a bell. This was the most popular crypto exchange worldwide between 2011 and 2014, even handling around 70% of all Bitcoin transactions by that year. It suffered a tragic demise in 2014, after the revelation of a series of hacks that stole 744.408 BTC (around $473 million at the time). But the first big crypto crash happened before that demise.

In June 2011, Mt. Gox experienced a series of devastating events. Initially, 478 accounts were breached, resulting in the theft of 25,000 BTC valued at $400,000. On June 19th, suspicious trading activity caused the exchange rate to plummet from $17 to $0.01 per BTC after someone placed massive sell orders. This dramatic crash impacted a substantial portion of the Bitcoin in circulation.

Later, it was discovered that an attacker had compromised an administrative account used for auditing. In response, Mt. Gox shut down its site. The situation escalated when a list containing usernames, email addresses, and password hashes was published on an Internet forum, exposing over 61,000 accounts with a total value exceeding $8.75 million.

The exchange reopened later with improved security measures, but the incident left a lasting impact on the Bitcoin market. Indeed, BTC lost over 93% of its value between June and November that year, something that didn’t happen even in 2014, when Mt. Gox closed for good. It hasn’t happened again either, fortunately for us.

Case 2: BitConnect

We have to say it: this one became a classic meme in crypto. The exclamation “Hey, hey, hey! Bitconeeeeect!” is a widely used running joke — a simple greeting or to imply that something is a scam. The reason is that BitConnect was, in fact, one of the biggest crypto scams ever pulled off. And it had its own platform and a native asset.

The brand operated a supposed lending platform between 2016 and 2018. It promised investors high returns through a lending program and its own cryptocurrency, BitConnect Coin (BCC). Users were encouraged to exchange Bitcoin for BCC and then lend it to the platform in exchange for substantial interest rates —up to 40% monthly.

The platform attracted a large user base and reached a peak market capitalization of over $2.6 billion, with thousands of users participating. BitConnect used a referral system to incentivize users to bring in more investors, creating a pyramid-like structure. The platform's business model was unsustainable and relied on new investments to pay returns to earlier investors, making it a classic Ponzi scheme.

BitConnect's fraudulent nature became increasingly apparent, and in January 2018, it abruptly shut down its lending and exchange platform after an “Emergency Cease and Desist Order” by the Texas State Securities Board. The value of BitConnect Coin (BCC) plummeted from over $400 to virtually zero, resulting in substantial financial losses for many investors.

According to the U.S. Securities and Exchange Commission (SEC), BitConnect defrauded investors worldwide at least $2 billion in assets. This entity sued BitConnect in 2021, and its founder, Indian Satish Kumbhani, has been on the run since 2022. Glenn Arcaro, BitConnect American promoter, is now in jail. All that is left is the Bitconnect meme, initiated from the enthusiastic speech by Carlos Matos, a lesser BitConnect promoter. He later declared himself a victim who has lost over $100,000 in several scams, including BCC.

Case 3: Terra (LUNA) and UST

Here, we explore the start of an eventful 2022. Terra is a blockchain protocol that still exists (somehow), along with its native currency, LUNA —now Terra Classic (LUNC). What disappeared, besides all the involved money and user trust, was their native stablecoin, Terra USD (UST). This was an algorithmic asset that kept its 1 USD value by issuing and burning LUNA coins.

Trouble began when UST lost its $1 peg on May 8, leading to a panic in the market. Whales conducted a massive sell-off, causing UST's value to drop even more. Anchor Protocol, a major DeFi platform on Terra, experienced withdrawals of over $2 billion in just 24 hours.

UST's price plummeted to $0.1 (90% less than its peg), dragging LUNA down with it. This token had a value of $119 in April 2022, while its replacement (LUNC) is now at $0.000058 [CMC]. Despite efforts by the Luna Foundation, UST's peg could not be restored, and the Terra protocol faced a collapse of over $40 billion. Investors suffered severe losses, prompting some to file lawsuits against Terraform Labs and its co-founder Do Kwon.

Ultimately, Terra's collapse left a trail of financial devastation, leading to delistings on multiple crypto exchanges, more crypto regulations worldwide, and legal actions against those involved in the project. Do Kwon, Terra's co-founder, was arrested in March 2023 while traveling in Montenegro using falsified documents.

Case 4: Three Arrows Capital (3AC)

This crash is likely intertwined with the previous one. Founded in 2012 by Su Zhu and Kyle Davies in Singapore, 3AC once managed up to $10 billion in assets and investments, including cryptocurrencies. However, it’s now liquidated, owing approximately $3.5 billion to more than 32 companies globally.

The trouble began because 3AC held significant investments in Terra (LUNA) tokens, which lost their value following Terra's collapse. They also invested in other tokens that performed poorly between 2021 and 2022. With investments, partnerships, and loans worth billions of dollars with various crypto companies, 3AC's financial troubles had a ripple effect in the industry.

Their bankruptcy filing in June 2022 revealed substantial debts and an absence of answers from the founders about the funds and the project’s issues. The impact extended to institutional creditors, with crypto protocols like Genesis Trading, Voyager, and Celsius suffering significant losses (each one over $1 billion) due to unpaid loans. Ordinary users of Voyager and Celsius platforms also faced financial losses, since they halted withdrawals and filed for bankruptcy. Genesis Trading would do the same in 2023 for this and other reasons.

The crash of 3AC also affected some platforms and equities within their portfolio, like DeFi protocol Ardana, and some crypto exchanges, like BitMEX and FTX. Despite only dealing with businesses, the fall of 3AC was devastating for retail crypto investors too. Numerous people claimed to have lost their life savings to Voyager and Celsius, for instance. Meanwhile, Kyle Davies is on the run, and Su Zhu was arrested in September 2023 when he was trying to leave Singapore.

Case 5: FTX and FTT Token

FTX was, likely, the last “big domino” to fall in 2022 after the ripple effect caused by Terra. At its peak in July 2021, FTX was the third-largest cryptocurrency exchange globally, with over one million users. They even sponsored several sports teams and organizations in the US. And its fall has already been linked to Terra's collapse as well.

Their crisis began in November 2022, when CoinDesk revealed that FTX's partner firm, Alameda Research, held a significant portion of its assets in FTX's native token (FTT). Following this revelation, rival exchange Binance announced its intention to sell its FTT holdings, leading to a spike in customer withdrawals from FTX.

However, FTX couldn't meet the demand for these withdrawals. Binance initially signed a letter of intent to acquire FTX, but it withdrew the offer the next day due to concerns about mishandled customer funds and U.S. agency investigations. Without more options, FTX filed for bankruptcy.

In December 2022, FTX's founder, Sam Bankman-Fried (SBF), was arrested by Bahamian authorities at the request of the U.S. government for financial offenses. The company's assets were frozen, while the bankruptcy proceedings revealed massive debts (of around $3 billion), misuse of customer funds, and a lack of financial controls within FTX.

The collapse of FTX had a significant impact on the cryptocurrency market, causing declines in various cryptocurrencies' values and raising concerns about investor protection and regulatory oversight. Several institutional investors, including Sequoia Capital, CoinShares, BlockFi, and Genesis Trading faced losses due to their stakes in FTX.

The latter two companies filed for bankruptcy in 2023, indeed. Their losses are estimated at $2.8 billion (Genesis) and over $1 billion (BlockFi). These events, again, caused the loss of life savings for a lot of people. SBF is currently on trial in the US.

What can we learn from crypto crashes?

Avoiding cryptocurrency crashes and minimizing risks as a retail crypto investor requires careful consideration and a disciplined approach. While it's impossible to eliminate all risks, here are some strategies to help you navigate the volatile cryptocurrency market and reduce the chances of experiencing significant losses:

• Diversify Your Portfolio: Don't put all your funds into a single project. Diversifying across different assets can help spread risk. Invest in well-established cryptocurrencies like Bitcoin and Obyte, alongside smaller, promising projects.
  
• Keep custody of your funds: don’t store your funds long-term with centralized entities like online wallets (exchanges) or even financial platforms that you may think are “decentralized” just because they work with cryptocurrencies, but don’t provide you with private keys (e.g. Celsius and Voyager). If they have issues, your funds will have issues, and withdrawals will be halted indefinitely.

• Store your capital in assets issued on truly decentralized platforms like Obyte. Obyte is an excellent store of value as it provides unmatched resistance to censorship due to absence of any powerful actors such as miners.

• Research Thoroughly: Before investing in any cryptocurrency, conduct extensive research. Understand the technology, use case, team, funding methods, and community behind the project. Make informed decisions based on solid information rather than hype. If it looks too good to be true, it’s likely not true.

  
  

• Use Risk Management Tools: Consider using risk management tools like stop-loss orders, which automatically sell your assets if they reach a certain price level. This can help limit potential losses.

• Set Realistic Goals: Define clear investment goals and timeframes. Are you looking for short-term gains, or are you in it for the long haul? Set realistic expectations and avoid chasing quick profits.

  
  

• Stay Informed: Keep up with cryptocurrency news and market trends. Be aware of any regulatory changes or major developments that could impact the market.

  
  

Remember that the cryptocurrency market is inherently speculative and volatile. While there are opportunities for substantial gains, there are also risks involved. By maintaining a cautious approach, you can reduce the likelihood of experiencing major losses during potential crypto market crashes. Even on this unlucky day!