Hoowee, what a year. It’s safe to say that most of us in cryptoland will be happy to see 2022 come to close. It was a year of crypto failures, broken promises, industry-wide mega-implosions and seemingly bi-monthly scandals of some kind, many of which rocked the space to its foundations.
However, over the past 362 days we’ve been witness to some pretty incredible rebrands from some of the biggest names in the industry: SBF went from crypto’s vegan Jesus to the most hated man in crypto within seven days. Do Kwon became the more apt ‘Not-so-Stablekwon’ while Celsius Network pivoted to become Celsius ‘Notwork’. With all of this in mind, let’s dig into the biggest crypto failures of 2022.
1. Sam Bankman-Fried’s epic fail
Surprise surprise, taking out the number one spot for the biggest crypto failure of 2022 is Forbes’ favourite crypto exchange: FTX.
The sudden and monumental breakdown of what was once the world’s fourth-largest exchange wasn’t just a financial disaster for the crypto industry, it was an existential one too.
For many, FTX’s now-infamous founder Sam Bankman-Fried (SBF) was a shining light on the hill for what crypto personalities should look like. He created a carefully manicured image of himself as a caring, ethical and ‘altruistic’ leader in the wild, oftentimes ruthless world of cryptocurrency.
So, when it was revealed that the supposed “poster-child” of crypto had been funnelling billions of dollars of client funds to prop up failing pillars of his own private hedge fund, Alameda Research, all while purchasing expensive real estate for his employees and family; the illusion was shattered. The fallout reached far beyond the staggering US$10 billion hole in the books at FTX and stomped the morale of crypto enthusiasts into the dirt.
The financial domino effect was wide-reaching and even now, shockwaves are still reverberating throughout the industry, with hundreds of major industry players revealing all levels of exposure to the smouldering wreckage of FTX.
The Winklevoss-owned exchange Gemini is still struggling to resuscitate its ‘Earn’ product. Digital Currency Group — one of the largest corporations in crypto today — has managed to keep its head above water, but concerns about the wellbeing of its offspring companies: asset manager Grayscale, lending company Genesis Global, and news website Coindesk are still firmly entrenched in the minds of active crypto investors.
Some companies just didn’t make it. BlockFi revealed it had US$400 million worth of exposure to FTX and some days later the crypto lender filed for bankruptcy. Other notable FTX-related battlers include the Australian-based crypto exchanges Digital Surge and Swyftx.
The FTX debacle is still far from over, with Bankman-Fried only just being released on a US$250 million bond package as he awaits trial where he faces up to 115 years in prison. Despite trying to clear his name on a recent ‘apology tour’, things don’t look good for the former-wunderkind, with Caroline Ellison, the ex-CEO of Alameda Research implicating SBF directly in the financial misdeeds of FTX.
2. Do Kwon went subterranean with unstable Terra
Easily claiming the number two spot on this list is the brutal downfall of Do Kwon’s Terra money ecosystem, which destroyed tens of billions in value almost instantly. Kwon’s spectacular combination of arrogance and failure, triggered a domino effect of collapses throughout the crypto sector, forcing a number of notable firms such as Three Arrows Capital (3AC), Celsius and Voyager Digital to file for bankruptcy.
Funnily enough, Do Kwon still goes by the Twitter handle @stablekwon, despite the fact that his USD-dollar pegged ‘stable’-coin UST is currently worth just 3 cents.
Before Terra’s stunning meltdown, most cryptocurrency investors never thought they’d have to ask which asset — TerraUSD (UST) or LUNA — would fall below US$1 first.
However, in the early hours of Wednesday May 11, this predicament became the focal point of the crypto space as Do Kwon’s Terra Money ecosystem collapsed to zero, wiping nearly US$60 billion from the face of the earth.
Within the space of 24 hours, Terra’s algorithmic USD-pegged stablecoin, UST, lost its dollar peg and crashed to a new low of US$0.32 while its sister token LUNA plummeted over 98% to reach US$0.84. For context, a single LUNA token was changing hands for nearly US$120 just one month before the crash.
While most other USD-pegged stablecoins like Tether (USDT) and USD Coin (USDC) are backed by reserves of physical cash and cash-like instruments — TerraUSD was an algorithmic stablecoin. This meant that when the value of TerraUSD dipped below US$1, it could be swapped for LUNA tokens at a small profit by using smart contracts.
Unfortunately for Terra investors, a very sophisticated entity (most likely a group of traders) caused these smart contracts to stuff up, creating a death-loop where UST lost its peg so rapidly that investors rushed to sell their LUNA rather than try to stabilise the value of UST— tanking the price of both assets simultaneously.
As of today, a little more than 6 months on from the catastrophe, the original LUNA token has been renamed Luna Classic (LUNC) and Terraform Labs co-founder, Do Kwon has launched a new blockchain, called Terra 2.0, in the hope of rectifying some of the egregious errors that were uncovered in the original fallout.
Kwon, who is now wanted by South Korean authorities and has an INTERPOL red notice to his name, has since appeared on crypto journalist Laura Shin’s Unchained Podcast where he was given an opportunity to tell ‘his side’ of the story.
Unfortunately, his conversation with Shin did very little to clear his name, as he spent most of the 90-minute episode dodging questions and going on long-winded tangents about unrelated subjects. At one point, Laura Shin had to remind him to apologise for the effects that the collapse of the Terra money ecosystem which saw many investors lose their life savings and some even commit suicide.
All of this makes it all-too-easy to see why Do Kwon makes the cut for number two on the biggest crypto failures of 2022.
3. Machinsky’s Celsius kinda made banks great again
Landing at number three on this year’s most epic crypto failures is the now-defunct digital asset lender Celsius.
At its height, Celsius had a whopping US$12 billion in assets under management and nearly 2 million daily active users on its platform. This all changed when the sudden implosion of Do Kwon’s Terra money ecosystem caused a cascade of liquidity issues for major companies that were what you could call “overexposed” to the Terra project.
What made this story even more ironic was that the platform’s CEO Alex Mashinsky built his reputation on criticising banks for being unstable, marketing Celsius as “the safest place” for people sceptical of traditional banking to store their funds. After Celsius began halting withdrawals in June, it then filed for Chapter 11 bankruptcy in July. Mashinsky went as far as donning a shirt that read; “banks are not your friends”, which he sported at the majority of the crypto and finance conferences he attended.
Alex Mashinsky’s infamous fashion choice via Getty Images
Questionable fashion choices aside, things only got worse for Mashinsky as the firm limped through its bankruptcy proceedings, where it was revealed that Celsius was US$5 billion in debt and just couldn’t account for nearly US$1.2 billion in missing funds. It was then brought to light that Machinsky withdrew roughly US$10 million from the Celsius platform a few weeks before the platform began freezing customer funds and eventually declaring bankruptcy.
Despite a spokesperson claiming the withdrawal was to “pay taxes”, it raised a lot of suspicion concerning Machinsky’s knowledge of the platform’s financial health in the weeks leading to the crypto lender going belly-up.
Making matters much, much worse, on October 7, Gizmodo leaked a 14,000 page document published by Celsius that included every user’s full name linked to exact time stamps of on-chain transaction data, causing an enormous outcry over the nature of data on centralised exchanges.
4. Three Arrows Capital empties its quiver
Three Arrows Capital claims the fourth spot on this list for obvious reasons. Three Arrows Capital was a hedge-fund with the largest exposure to Do Kwon’s Terra Money ecosystem. 3AC borrowed billions of dollars to fund its Terra-related trading activities, and according to bankruptcy filings from July this year, it currently stares down more than US$3.5 billion in creditors’ claims.
The fund which once managed more than US$10 billion. Now it appears to have lost in excess of US$3 billion across 2021 and 2022, cementing it in the history books as one of the largest hedge-fund losses of all time. Making the story even more interesting, its founders Su Zhu and Kyle Davis went on the run, forcing courts to serve them with their respective subpoenas via Twitter. While the official location of the disgraced 3AC founders remain unknown, the duo are reportedly residing in Dubai, where they can’t be forcibly extradited by Singaporean authorities, who have taken the lead on their arrest.
Most notably, liquidators have been trying (and failing) to get in touch with the founders, but have managed to secure US$30 million cash and have filed a request to sell the pair’s superyacht, dubbed in classic crypto fashion: “Much Wow”.
In a stunning turn of events, it now looks like the boys are back in town. Strangely, the seemingly ‘more significant’ downfall of FTX seemed to awaken the founders of Three Arrows Capital from a long, shame-induced period of online inactivity.
Both Su Zhu and Kyle Davis popped back up on Twitter to provide their own, entirely-unsolicited takes on what SBF could have done better and have since returned to posting crypto-related content like they don’t owe thousands of investors billions of dollars…
5. Voyager Digital voyages into bankruptcy
Sliding into fail number five is crypto firm Voyager Digital, which following some gnarly exposure to the aforementioned 3AC, went on a voyage of its own: directly into bankruptcy.
Voyager’s CEO Steve Ehrlich seemed incapable of understanding that 2017 and 2021 were very different market environments, optimistically stating back in 2021: “I think the market looks completely different today from what it looked like in 2017. We all remember 2017.”
Unfortunately for Elrich, the markets revealed themselves to be far more similar than he’d hoped with both 2021 and 2017 yielding swift and catastrophic industry-wide downturns.
On July 1, Voyager halted withdrawals and froze customer funds on the platform, and six days later on July 7, Voyager filed for bankruptcy. In a statement supplied alongside the Chapter 11 filing, Ehlrich maintained his naïve optimism claiming that Voyager still had a bright future.
Voyager’s problem was simple. It was good at bringing in customer deposits, but wasn’t great at lending them out, with a “significant” exposure of 15,250 Bitcoin and US$350 million worth of USDC to 3AC.
Overall, Voyager Digital really didn’t execute the ‘lending’ part of their business model well at all and according to bankruptcy filings, it currently has a whopping 100,000 creditors and total outlying debts of anywhere between US$1 to US$10 billion.