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Top 5 Crypto Fails of All Time

Author: Toon Pierre

Over the last decade, the overnight rise of cryptocurrencies promised decentralization, financial freedom, and exponential gains that took the world by storm. But like every other revolutionary industry in existence, even the crypto world has witnessed some highly publicized failures, which amount to being instructive cautionary tales to both investors and enthusiasts alike—from huge hacks down to poorly managed projects. In this article, we look at the top 5 crypto fails of all time, including two from among the most infamous: the FTX collapse and the Luna/UST crash.

1. FTX Collapse

Once one of the world's largest and most respected cryptocurrency exchanges, FTX filed for bankruptcy in November 2022. Founded by Sam Bankman-Fried, better known as SBF, FTX won widespread adoration; it pulled in high-profile endorsements and investments from institutions and celebrities alike.

FTX started crashing when reports surfaced that FTX had been using customer money to prop up its sister trading firm, Alameda Research. The balance sheet leak demonstrated a gigantic exposure of the assets of Alameda to the native token of FTX, namely FTT. The revelation kick-started fears of insolvency. It all culminated into a giant sell-off and liquidity crisis that FTX couldn’t withstand in the end.

When it did, the billions of funds belonging to billions of users got lost and the fallout damaged the whole crypto industry reputation. SBF afterward went on to get arrested for fraud in arguably the most dramatic downfall ever in finance history. What the collapse of FTX has done, if nothing else, is to shed great light on the risks with centralized exchanges and pointing out the importance of increased transparency and regulations in the crypto space.

2. Luna/UST Collapse

Another terrible incident was the collapse of Terra's Luna and its algorithmically pegged stablecoin, UST. The idea was that TerraUSD should keep a 1:1 peg with the US dollar via an allegedly sophisticated algorithmic mechanism with its sister token Luna back in early May 2022.

Everything was fine and dandy until UST peg fell into a maelstrom of market volatility and contrived attacks. In a last, desperate attempt to save UST, a really massive amount of Luna was issued. That hyperinflation of the token and basically made the token worthless. Days later, it rained. The two cryptocurrencies wiped off more than $40 billion in market value, while investors worldwide were left in ruins.

Its founder, Terra's Do Kwon, has equally received hard scrutiny in this direction, with some even finding legal jeopardy in the wake of the collapse. All these events drew underlined intrinsic vulnerabilities concerning the available mechanisms for securing algorithmic stablecoins during stormy markets.

3. Mt. Gox Hack

No discussion of crypto failures would be complete without the Mt. Gox hack. Founded in 2010 as one of the first Bitcoin exchanges, at one point it handled more than 70% of global Bitcoin transactions.

The trading on the exchange didn't stop until 2014 when the Mt. Gox hack got filed for bankruptcy. About 850,000 Bitcoins were stolen, valued at more than $450 million. Poor security practices were some of the reasons for the hacking apart from the internal mismanagement.

The Mt. Gox debacle was that rude wake-up call that the crypto community was in real need of, actually, to hold them to the necessity for secure infrastructure and self-custody. Although some of the victims were able to get partial compensation, this failure still serves as a sore memory of vulnerabilities from the distant past of crypto.

4. BitConnect Ponzi Scheme

BitConnect was a major cryptocurrency Ponzi scheme. It was launched in 2016 and promised to yield as high as 1% per day through its lending platform, which used a proprietary trading bot.

Things began to unravel in January 2018 when regulators made the initial moves toward an investigation of the project. BitConnect suddenly announced its lending and exchange platform, which led to plummeting of their native token, BCC. It lost 90% of its value overnight.

Investors lost billions, and the founders of BitConnect faced multiple class actions apart from the criminal charges. That was quite a serious lesson that investment into projects promising returns and lacking in transparency is dangerous.

5. QuadrigaCX Scandal

The implosion of Canadian cryptocurrency exchange QuadrigaCX was one of those weird stories that's almost impossible to believe. The founder of the exchange, Gerald Cotten, died suddenly while traveling in India in 2019. According to the exchange, he was the only person who knew the private keys securing over $190 million in customer funds.

The situation quickly devolved into chaos as investigators uncovered signs of fraudulent activity. They revealed that Cotten had been using customer funds to finance a lavish lifestyle and operate a Ponzi scheme. The doubts of many were the consequence of such an orchestrated cover-up.

In that direction, the case of QuadrigaCX had been another very real demonstration of just how fragile centralized custody can really be, while the necessity for transparency and accountability with crypto companies becomes self-evident.

Lessons Learned

These high-profile failures put into perspective just how volatile and unforgiving the cryptocurrency market can be. Key takeaways follow.

DYOR: Do your own research into projects and platforms before investing. The main red flags would be opacity of operations, the promise of unreal returns and heavy reliance on centralized control.
Prioritize Security: Utilize secure wallets and avoid parking large sums of funds on centralized exchanges. More often than not, self-custody is the safest option.
Beware of Hype: Most of the crypto fails listed herein were projects that had immense hype right from the very moment of their introduction. Stay sober and make sober judgments as far as investments go.
Demand Regulation: Although crypto is inherently decentralized, a variety of regulation needs to be there to dissuade fraudsters without choking innovation.

Conclusion

The crypto space has grown colossally since its inception, but the annals of its history are scarred with failures serving as cautionary tales—from the collapse of FTX, Luna/UST, and many others. These point to one important thing: the need for vigilance, transparency, and education. While the potential for high rewards exists, the risks are equally significant. The crypto community is bound to construct a stronger future through such mistakes.

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