stub Top 10 Crypto Fails of All Time - Securities.io
Connect with us

The Best Of...

Top 10 Crypto Fails of All Time

mm

Published

 on

Securities.io is committed to rigorous editorial standards. We may receive compensation when you click on links to products we review. Please view our affiliate disclosure. Trading involves risk which may result in the loss of capital.

Understanding the top 10 crypto fails of all time is a smart way to gain a better understanding of the capabilities and evolution of the digital asset market. The last 15 years have been exciting as the crypto industry has grown from a single coin to thousands of projects. Each new blockchain platform adds to the capabilities of these advanced digital assets. As such, they are crucial to the large-scale adoption of cryptocurrencies.

Of course, this evolution didn’t come without growing pains. There have been many crypto failures that led to greater developments and improved security. As such, these failures could be seen as necessary evils because they improved the market procedures as a whole. Here are the top 10 crypto fails of all time (in no particular order).

1. FTX Exchange Failure

The collapse of the FTX exchange sent ripples through the market and resulted in numerous other high-level platforms failing. This massive failure can be attributed to several factors. According to court documentation, the exchange had no risk management strategy in place.

This lack of risk mitigation led to the exchange reinvesting customers' funding into other platforms. As these platforms began to fail, the exchange's executives quickly realized they were facing a major financial meltdown. Billions in customer funds simply disappeared due to bad investments and other questionable spending habits.

Source - Business Insider - FTX CEO Sam Bankman-Fried - Crypto Fails

Source: Business Insider – FTX CEO Sam Bankman-Fried

Charges

US prosecutors stepped in and charged the exchange's CEO, Sam Bankman-Fried, with a myriad of charges related to the collapse. In the court filings, it was revealed that the exchange had minimal financial records. It was also revealed that the group had funneled billions from the exchange's reserves into their hedge fund, which took major losses.

Compounding matters was the fact that the exchange's executives had been donating millions to government officials in multiple nations. The reports showed that the group donated $8M to federal campaigns alone. Additionally, another $13M went to campaigns on both sides of the aisle. The news resulted in numerous politicians coming under fire.

It's been nearly a year since the collapse of FTX, and the effects can still be felt in the market. The closure left a major stain on the industry, with thousands losing funding in the fiasco. Additionally, it's yet to be seen what regulatory effects this collapse will incur. However, many feel as if it will result in further scrutiny of CEXs (Centralized Exchanges) globally.

2. LUNA StableCoin Crash

LUNA launched in 2018 as a promising new stablecoin venture. Do Kwon and Daniel Shin put forth the project. They had envisioned stablecoins as the main currency for a major e-commerce project to support web3 development in Asia.

In May 2022, the Terra ecosystem collapsed due to a variety of issues that highlighted the difficulties surrounding keeping algorithmic stablecoin afloat. The TerraUSD stable coin was a popular project that leveraged LUNA as its reserve currency. The system was designed to automatically adjust its reserves to ensure stability during market volatility.

At its peak, TerraUSD had $18B in market capital and was seen as one of the promising projects in the stablecoin sector. All of this would change in a matter of hours and result in one of the most spectacular crypto fails ever. The fall dropped the price of LUNA from around $80 to pennies in under 28 hours.

Revelations

Notably, the same year that the project was introduced, Cyrus Younessi, head of risk management at MakerDAO, made a public statement claiming it was not viable. However, his warnings were not heard, and the project operated for 2 years before crashing horribly.

In May 2022, TerraUST began to show signs of instability. These problems began with the token dropping to $0.98 due to various large dumps. These actions led some to question the project on social media. At the time, Do Kwon even joked that it was a possibility the token could become uncoupled.

A few days later, the token failed to retrace its lost value. At the same time, it became public knowledge that Do Kwon had been the architect of a variety of other failed stablecoins in the past, including Basis Cash. This news sent the project into a tailspin, to which it still hasn't recovered.

3. China Banning Exchanges

In 2017, China made the horrible decision to ban crypto exchanges from its shores. This maneuver sent the market into a panic because, at the time, China was the largest supporter of cryptocurrencies and mining activity. The decision to ban local exchanges came during a massive rally that helped to drive crypto adoption to new heights.

The sudden introduction of ERC-20 tokens led to an ICO (Initial Coin Offering) boom. This boom left Chinese officials bewildered. They didn’t know how to deal with the new technology. Feeling threatened by the new currencies, they moved to make it much harder for citizens to access these digital assets.

What made this maneuver peculiar was that China was the leading Bitcoin miner in the world. Additionally, the Chinese government has long been involved in the crypto market. This involvement became evident last year when the PBoC People's Bank of China began testing and launching its CBDC (Central Bank Decentralized Currency).

China undoubtedly lost billions in crypto capital as most platforms and traders left the country searching for friendlier destinations. Hong Kong, Japan, and South Korea all saw immediate boosts in their blockchain markets as a direct result of the Chinese government's error.

4. Three Arrows Capital (3AC)

Three Arrows Capital (3AC) caused a ruckus when it announced that it had fallen into liquidation. This massive crypto fund was the largest in the market at the time of its failure. The failure was caused by several issues, including a steady decline in crypto prices during the bear market.

Three Arrows Capital was among the best-known hedge funds in the industry. It operated since 2012. This Singapore-based project was seen by many as the flagship hedge fund for the market. The fund's founders, Kyle Davies and Su Zhu, were highly respected in the sector for their experience and track record.

The 3AC failure became public knowledge in June 2022 after the hedge fund failed to meet its $350M loan obligations to Voyager. This failure set off alarm bells in the market which resulted in margin calls on their other loans. The fund was unable to meet these calls and collapsed, leaving many users with losses.

When the smoke cleared, it was revealed that the hedge fund owed +$3.5B in loans. These obligations would not be met which resulted in a catastrophic failure of the fund. Additionally, the ripple effect resulted in a waterfall of failures following closely after.

5. Celsius Lending

In June 2022, Celsius Lending shocked the market with its closure. At the time, it was among the largest DeFi P2P lending protocols in operation. The network-enabled users to lend out their digital assets to others via large lending pools. In exchange for their deposits, users receive interest payments.

Celsius entered the market in 2018 and was touted as a better way for users to access funding and secure passive income. This advanced DeFi protocol lent over $8B to users and showed +12B in assets before its collapse. These states helped to build confidence in the platform over its operations.

Celsius dropped the ball when they decided to take their users' funds and reinvest them in other yield-generating DeFi options. This maneuver seemed to make sense on paper as it appeared to be a low-risk way to improve returns on held customers' funds.  However, the decision resulted in massive losses for users and the collapse of the entire platform.

In the end, it was revealed that a poor risk management model and subpar accounting were the main culprits. The Celsius business model saw a low retail loan-to-deposit rate of just 10%. Additionally, the firm had $1B in unsecured loans when it paused all withdrawals.

6. Ethereum DAO Hack

The Ethereum DAO hack remains one of the most publicized failures in crypto history. In June 2016, Ethereum pioneered the concept of DAO (decentralized autonomous organizations). The goal of DAOs is to eliminate personnel and create a fully decentralized method of running a project.

In a DAO, users stake their tokens to gain voting and proposal rights. This method ensures that the community leads the project and helps to provide cohesion in the network. Additionally, it increases transparency and makes projects more democratic. However, all of these benefits didn’t come without some early growing pains.

The first DAO failed gloriously as a hacker was able to trick the protocol by creating a duplicate smart contract with his deposit address. After accomplishing this maneuver, the hacker began to siphon $3.6M in Ethereum to their wallet. This move raised alarm bells in the Ethereum community which quickly attempted to stop the hacker from withdrawing the funds.,

In the end, this failure was compounded as the Ethereum team decided to roll back their blockchain before the hack. They then created a new version of ETH that retained the original name and the old Ethereum asset became Ethereum classic. The repercussions of this maneuver are felt today as turning back the clock on a blockchain is one of the biggest no-nos in the industry.

7. Twitter Hack

In 2020, Twitter users reported seeing some questionable donation requests from prominent users. The request asked their followers to send funding. In one incident, Bill Gates's account posted, “Everyone is asking me to give back. You send $1,000, I send you back $2,000.” These requests were quickly debunked, but not before people sent millions in Bitcoin.

Source TwitterX - Crypto Fails
Source TwitterX – Crypto Fails

Later review showed that the coordinated attack began when attackers managed to gain access to the Twitter God-mode feature. This access was the result of months of phishing attacks to garner the data needed to pull the highest off.

The hack became national news, and the chair of the Senate Commerce Committee even contacted the firm to prevent future issues. In July 2020, three people were charged with the scam. These charges highlighted the growing capabilities of blockchain forensic firms and authorities to unmask Bitcoin wallet holders' identities.

8. Silk Road

The Silk Road is one of the biggest crypto fails for many reasons. For one, the Silk Road left a bad reputation that still lingers today regarding the use of cryptocurrencies to commit crimes. The Silk Road was an online market that offered uncensored products. As such, it quickly became a haven for illegal activities.

Authorities arrested the Silk Road's founder in a daring raid in 2013. In court, it was revealed that Robert Ulbricht facilitated $1.2B in sales on the Silk Road. These sales netted him +$80M in profits. However, he will probably never get to spend those funds as Ulbricht was sentenced to life in prison with no chance of parole.

9. Mt.Gox

No crypto failure list could be complete without a mention of the Mt.Gox exchange. This massive hack occurred a decade ago and still has left many in the market reeling from losses to this day. Mt. Gox closed its doors in February 2014 following massive hacks.

At the time, Mt.Gox was responsible for 70% of all Bitcoin transactions. What makes this a major failure, aside from the massive losses, was how long the hack went on before it was noticed. Over weeks, hackers stole 850,000 Bitcoin, resulting in a 2-year crypto winter. Sadly, most traders have never received any compensation for these losses to this day.

10. Ronin Network Hack

The Ethereum sidechain, the Ronin Network, lost $620M in March 2022 after a hacker acquired five validator keys from employee phishing attacks. The hacker then approved two massive withdrawals of 173,6000 ETH and 25.5M in USDC. To this day, the hack remains one of the largest DeFi fails in history and a glaring example of how effective phishing attacks have become.

Crypto Fails are Growing Pains

It's impossible to improve a technology without some failures. In normal scenarios, these failures can result in delays in product deployment or other inconveniences. However, when dealing with cryptocurrencies, they can result in massive losses. To avoid these issues, be sure to leverage non-custodial options and stick to reputable platforms.

You can learn more about exciting blockchain projects here.

David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com