The Crypto Crisis Explained & How To Invest Successfully!
Learn how to invest successfully while Crypto is going through this challenging growth phase.
Crypto has endured a rollercoaster full of challenges in recent months!
In 2022, we saw Crypto prices crash dramatically after a series of unexpected scandals from FTX to LUNA.
The volatility in Crypto is best exemplified with the graph below. At the start of 2022, Bitcoin was priced at $46,000 but, by November 2022, the price had crashed to $16,500.
That’s a whopping price decrease of 64%!
(Image Source: CoinMarketCap)
So you can make excellent Crypto investing decisions, it’s best to understand why and how this happened. Read on and I will explain to all to you…
In this article, you will learn about the 4 Crypto Crises listed below:
(1) FTX - This exchange collapsed swiftly and lost over $1bn of their client's money.
(2) LUNA - Over one short week, this cryptocurrency totally collapsed and lost over $40bn of investor funds.
(3) NFT - After short-term hype with explosive price increases, many NFT Art projects saw prices drop over 80%.
(4) Celsius - This Crypto lending platform with over $14bn assets under management collapsed in the Summer of 2022, and its clients lost millions of dollars in Bitcoin and Ethereum.
Ready? Let’s dive in…
Quick Links - jump to any specific section here:
Crypto Crisis 1: The FTX Fallout
The story starts with a shady character called Sam Bankman-Fried ("SBF"). He is a 30 year old with a net worth exceeding $10bn. While Mainstream Media journalists often call Sam a “genius”, I have instead given him this nickname: “Suspicious Sam”.
I find it suspicious that this 30 year old appeared on the Crypto scene, seemingly out of nowhere, with a $10bn net worth. And, as we will see below, my suspicions were proven correct…
Sam Bankman-Fried (“SBF”) is the CEO of FTX, a $30bn crypto exchange, and the Co-founder of Alameda Research, a crypto trading firm. Both FTX and Alameda heavily depended on $FTT, a cryptocurrency created by Sam to be used on FTX.
However, over the last few months, Sam lost his credibility when Alameda shut down and clients lost over $1bn of their crypto holdings on the FTX exchange.
The downfall of Sam & the FTX crypto exchange occurred in two quick stages:
Leaks of sensitive financial information.
Large investors selling their investments in the FTX exchange and $FTT.
First, leaks about the FTX exchange led to a loss of investor confidence. These leaks showed Alameda Research owned over 60% of all the $FTT in the market. This large holding shows that $FTT was a centralized currency with very little support across the broader cryptocurrency industry.
Second, FTX completely lost investor confidence when Binance, an early investor in FTX, sold their $2bn stake in this exchange. When Binance relinquished their investment in the FTX exchange, this showed it was not a respectable exchange to use. Next, the Binance CEO sold over $500mn of $FTT in the open market.
Within a few days, many other $FTT investors also sold their holdings of this cryptocurrency. The price of $FTT dropped a staggering 90% because of the sheer number of investors selling the $FTT cryptocurrency.
(Image Source: Twitter)
After these two events, many investors attempted to withdraw their crypto holdings from the FTX Exchange promptly.
FTX responded by halting withdrawals. Unfortunately, clients could not extract their cryptocurrency funds from this exchange. Many clients realised they had lost their funds on this insolvent exchange.
SBF attempted to pursue a short-lived “rescue plan” for $FTT that was unsuccessful. He used FTX cash reserves to buy more $FTT to increase its value, which was too late.
By then, both the FTX Exchange and Alameda Research firm were in complete chaos. The CEO of Alameda Research resigned, and when financial regulators began investigating FTX, senior corporate management at FTX stepped down.
💵Investor Wisdom from the FTX Fallout
To become better Crypto Investors after the FTX Fallout, you can learn from these two lessons:
(A) Identify Red Flags Before Investing
When assessing a potential crypto investment, you likely research the technical aspects, but you must remember to trust your instincts, which will usually reveal any unusual red flags.
For example, SBF presented himself as a philanthropist, not a genuine businessman or CEO of a legitimate exchange. This self-righteous posturing appeared strange to me. It seemed like he was playing a fake persona to appeal to liberal millennials. When someone presents themselves as a "do-gooder" who wants to "save the world," - it's rarely authentic.
Over time, there were other red flags, such as FTX operating without a board of directors and hiring senior lawyers that previously worked on Enron's bankruptcy, which had significant accounting fraud issues.
The critical lesson to learn here is that if there are a lot of red flags, trust your instincts and don't invest.
(B) Compare Crypto Exchanges
There are better Crypto Exchanges to use instead of FTX.
Let’s compare the suspect FTX exchange with Coinbase. Coinbase is a legitimate, respected exchange. Coinbase is not perfect, but it is a better exchange than FTX.
FTX faced bankruptcy. However, it’s unlikely that Coinbase will face the same predicament. Based on audited public disclosures by Coinbase, this exchange holds client assets in safe reserves. Coinbase has cryptocurrency holdings valued at over $90bn and over $6bn in USD.
By comparing Crypto Exchanges, you can see it is a sensible decision to choose an exchange with a long-standing strong reputation, such as Coinbase, instead of using FTX.
Crypto Crisis 2: LUNA Chaos
Before I give you a walkthrough of the LUNA Chaos - first, please check out these essential points, which will make it easier for you to understand:
Do Kwon is the CEO of Terraform Labs. He led the Terra Team, which created LUNA and the financial infrastructure around it.
Terra is the smart contract platform, which activates automated processes when required.
LUNA is the main cryptocurrency in the Terra infrastructure.
UST is a stablecoin, which means these are worth $1 each. UST can also be exchanged to pay for LUNA.
DeFi refers to Decentralised Finance platforms where crypto investors can lend and borrow their funds at various interest rates.
At the start of May 2022, UST began to lose investor confidence. There were large sell-offs of UST across various crypto platforms used for trading or lending such as Curve & the Anchor Protocol.
As the value of UST declined, so did the value of LUNA.
Many investors sold their UST to purchase LUNA, which they then quickly sold on the market for other cryptocurrencies as they began to lose trust in the entire Terra framework.
It was a vicious cycle of investors abandoning LUNA, which resulted in this cryptocurrency crashing in price.
Put simply, it was a quick process of investors selling UST → LUNA → Other Cryptocurrencies.
The demand for LUNA decreased while the supply of LUNA increased, which resulted in a further price decrease for this cryptocurrency. As the trend of selling UST and LUNA continued, these cryptocurrencies lost their value very quickly.
Meanwhile, Do Kwon (CEO of Terraform Labs) proposed a plan on Twitter to help improve the LUNA infrastructure, which involved devaluing LUNA to ensure UST could maintain its peg to USD.
This plan was not helpful to the LUNA investors, and he inevitably lost what little credibility he had left.
(Image Source: Twitter)
When Terra and LUNA collapsed, the total loss was over $40bn in a week. It was a quick and brutal end to a promising project due to a loss in investor confidence and low-quality leadership by the CEO.
Following the collapse of LUNA, there was an attempt to reboot the cryptocurrency with a LUNA 2.0 re-brand. However, this was nothing but a short-lived hype. LUNA’s value crashed even further from $17 to under $2, effectively wiping out any hope that crypto investors had for a revival of LUNA.
(Image Source: Twitter)
The chaos with LUNA had multiple impacts far beyond simply a failed cryptocurrency. The knock-on effects were felt across: crypto exchanges, other stablecoins, and DeFi platforms.
Crypto exchanges such as Binance had to suspend LUNA trading. The Binance CEO stated LUNA’s inadequate infrastructure could not process crypto transfers. Next, the Binance CEO scrutinized the Terra Team. He stated they were neglecting their duty to help LUNA investors.
This public criticism from the well-respected CEO of a Crypto Exchange led to further decreases in the price of LUNA.
(Image Source: Twitter)
Other stablecoins are now facing increased regulatory focus because of the dramatic collapse of LUNA, as outlined in the example below.
A company called Circle issues the stablecoin USDC, which is pegged to the dollar. Because of government regulatory investigations, Circle had to freeze over $100k of this cryptocurrency and show they have sufficient reserves to back the stablecoin.
The LUNA Chaos also affected DeFi platforms.
Many crypto investors removed their funds from other platforms where there was a perceived risk, including Decentralised Finance. For example, DeFi platforms such as Blizz Finance experienced considerable losses and shut down.
(Image Source: Medium)
💵Investor Wisdom from the LUNA Chaos
Now you know the details regarding the collapse of LUNA, let's go over lessons you can learn to improve the performance of your future investing strategy:
(A) Only Invest What You Can Afford To Lose.
Personally, this was the only Crypto Crisis that affected me in 2022. It was discouraging because even though I conducted a lot of research into LUNA and concluded the project was a good investment, it appears that this was not the case.
Thankfully, I only invested what I could afford to lose. I will recover my losses through my other investments and salary. However, I will be even more cautious before making crypto investments.
(B) Good Marketing Does Not Equal Good Management.
The Terra team that developed LUNA had excellent marketing. Do Kwon would conduct several interviews explaining the LUNA ecosystem and fail-safe mechanisms to prevent catastrophes. But we know now that there were significant flaws that millions of investors with millions of dollars failed to identify before investing.
For future investments, you must ensure you have the technical knowledge and can research for any flaws in a cryptocurrency project before investing. Technical research is not easy, but it is worth it. The more you plan to invest, the more research you should complete up-front.
(C) Stablecoins are subject to regulatory scrutiny.
Governments are less concerned with the 1000s of different cryptocurrencies out there. Conversely, governments are worried about stablecoins replacing their sovereign fiat currency. For example, USDT, USDC, and BUSD are all stablecoins intended to maintain a value of one dollar.
If there were a sudden switch in daily transactions across America from USD to a stablecoin that could not be tracked or taxed, then this would result in the American government potentially banning a stablecoin as it threatens their power over the currency used in their country.
If you hold any stablecoins be conscious that you are more likely to have these funds reviewed or investigated by the US government if they suddenly decide to focus on regulating cryptocurrencies. You could convert these funds to Bitcoin or a privacy coin that is harder to track, such as Monero.
Crypto Crisis 3: NFT Price Crash
In recent months, NFTs have been hitting headlines on mainstream media across the world for their eye-catching artwork and high prices.
NFT stands for Non-Fungible Token. An NFT is simply a unique token showing ownership of a specific item. Currently, NFTs are most frequently used to show ownership of digital art.
The most popular marketplaces where you can buy, sell and browse NFT Artwork are OpenSea and Rarible. For example, here are some of the top NFT Art projects on Rarible.
(Image Source: Rarible)
Many of these NFT projects hit the headlines in mainstream media due to their exorbitant prices. For example, one of the most expensive NFTs was the $6mn "Crosswords", which was simply a 10 second animated video clip.
In 2021, NFT Artwork was sold for high prices and generated significant profit. However, over the long-term, its value can be highly volatile, which is off-putting to most investors.
During 2022, NFT sales volume fell by 70%, and the number of unique buyers fell by 65%. This decrease in sales and buyers is enormous (see graph below).
(Image Source: CryptoSlam)
Often, people think that when the stock markets are down and inflation is high, there is a shift away from traditional financial investments towards rare assets that hold their value, such as art.
However, NFTs are not stable "art investments" that maintain their original weight while the rest of the economy is in a downturn.
NFTs are subject to even more price volatility than most cryptocurrencies.
You would be better off simply holding your money in cash or one of the leading cryptocurrencies (e.g., BTC or ETH) rather than investing in any NFTs over the last year.
For example, the NFT Artwork of a "Bored Ape" might be extremely valuable for a few months, but after that short-term hype, will you see a massive drop in your investment value?
As of 28th November 2022, the average sale value over the last 90 days of the Bored Ape Yacht Club NFTs is down by over 20%, according to NFT Price Floor.
Could you tolerate seeing one of your investments decrease in value by 25% over three months?
If not, stay away from NFTs, which have a very volatile price.
(Image Source: NFT Price Floor)
To summarise, Cryptocurrencies are a relatively recent innovation, and NFTs are an even more advanced industry phenomenon.
The price volatility in NFTs is understandable because the industry is still finding its place in this complex crossover of finance, technology, and art.
Despite this volatility, there is always an opportunity for intelligent investors.
New NFT art projects are released monthly. There is also ongoing innovation in the latest blockchain technology, such as Solana or FTM.
To succeed in NFT investing, you need to incorporate the investor wisdom below...
💵 Investor Wisdom from the NFT Price Crash
After a few months of hype, the true value of any new NFT project is eventually revealed.
Remember that the hype around any financial innovation is rarely genuine. Positive media around a new crypto project could be secretly funded by the project's marketing team or simply the work of an enthusiastic freelance journalist.
Before investing in an NFT project, you need to answer these two simple questions:
(A) Will this NFT investment payoff in 5 years, or is this NFT project simply short-term hype?
(B) What makes this NFT project unique compared to other similar projects?
Crypto Crisis 4: The Celsius Meltdown
The Celsius Network was a centralized cryptocurrency lending platform. It allowed Bitcoin and Ethereum holders to deposit their holdings in a Celsius account and borrow using their Crypto as collateral. Or, they could lend their Crypto to others and earn interest.
In the early years, Celsius attracted the same optimistic investors drawn to all new crypto projects.
The perception of Celsius was so positive that it attracted investments from Pension Funds, even though they would usually avoid cryptocurrency.
The Network offered high-interest rates of 6% for Bitcoin deposits, which attracted many investors seeking higher returns.
Eventually, the Celsius Network had over $11 billion in assets under management (“AUM”) and over 1 million customers.
Celsius attracted borrowers eager to access funds at low interest rates on their borrowed funds, anywhere (e.g. 5%) compared to traditional bank, which charge much higher interest rates (e.g. 20%).
However, as the Celsius Network matured, the flaws became more apparent.
In 2021, there was a security breach that leaked a significant amount of client data.
US financial regulators investigated the legal classification of Celsius. Specifically, they reviewed the legal classification of Celsius, which some consider a security rather than a cryptocurrency.
Later in 2021, the Prime Trust, a custodian of Celsius’ crypto assets, raised concerns that Celsius had far more liabilities than assets.
By the Summer of 2022, these concerns appeared to be legitimate rather than baseless rumours in the Crypto community.
Later that Summer, Celsius halted cryptocurrency withdrawals due to market volatility, as you can see in the screenshot below.
This sudden restriction on withdrawals was a major red flag for investors. They could not remove their crypto funds from the platform, which put their investments at significant risk.
Largely due to all the uncertainty described above, both Bitcoin and Ethereum decreased in price by over 10%!
(Image Source: Medium)
By July 2022, Celsius filed for bankruptcy under the US “Chapter 11” regulation. The bankruptcy filing allowed the platform to keep operating while undergoing internal restructuring.
Disclosures that the company made as part of this bankruptcy filing were, frankly, shocking. Celsius only had $160mn cash available to fund its operating costs while owing over $4bn to its clients.
To summarise, Crypto deposits on a platform do not have the insurance that bank deposits normally have. If a bank files for bankruptcy, there is a legal agreement for the bank to safeguard your funds from losses. Whereas, if a centralized crypto platform collapses - there is no legal requirement whatever to return your coins back to you.
This is the part of the newsletter where I am supposed to provide a contrasting view about Celsius, perhaps a positive spin on this story. Nope. I don't believe any of the positive spin that the current management at Celsius is spewing out. They are trying to re-brand as a "crypto custodian" service under a new name. They have lost all their credibility. I wouldn't trust anyone involved in this ridiculous attempt at a Celsius "redemption arc."
💵 Investor Wisdom from The Celsius Meltdown
Now you are aware of the risks of a Crypto Lending Platform, here are two lessons you could learn from this fiasco and improve your Crypto Investing Strategy:
(A) "Not Your Wallet, Not Your Crypto."
To maintain complete control of your Crypto, you must store your coins in a cold wallet such as Trezor or Nano Ledger.
However, if you keep your Crypto on a centralized platform such as a Crypto Lending Platform (e.g., Celsius Network) or a Crypto Exchange (e.g., Coinbase), you need to accept the risks involved. If the Crypto Exchange or lending platform goes bankrupt, you could lose the cryptocurrency you have stored there.
In this case, when Celsius halted crypto withdrawals, it effectively locked investors out from obtaining their precious cryptocurrency.
Don't let this be you - take your coins off any platform and store these in the cold wallets mentioned above.
(B) "Extremely High Returns = Possible Ponzi Scheme."
The interest rates for storing your coins on Celsius would be over 15%+, while borrowing from Celsius would be as low as 1%.
These interest rates seem too good to be true. When things seem too good to be true, they usually are. It's a red flag.
Proceed with caution when the returns of investment seem unrealistically good.
Avoid these scenarios by only risking a small portion of your investments on these centralized lending platforms, or take the safest option and don't use them.
Conclusion - Is it over for Crypto? Or is it over for YOU?
In conclusion, there are a lot of hyperbolic takes in Crypto this year. They say, "it's over for crypto" or "time to rope."
Maybe this is the "Dot-Com Bubble Crash" or the "2008 Financial Crisis" for Crypto.
Maybe all those hours you spend as an investor, researcher, developer, or marketer are not worth it anymore.
Or...maybe…
This isn't a Crypto problem - maybe it's a YOU problem.
Lol. I know — the Audacity.
How could I blame you for the 2022 Crypto Crisis?
Here's why:
Crypto is an innovative new area of finance and technology that is understandably going through constant refinement. Hence, this industry will inevitably involve volatility and uncertainty.
If you respond emotionally to these circumstances - then that is your fault.
If you respond with FUD (fear, uncertainty, and doubt) - then that's your fault.
Your unstable emotions are not the fault of an innovative new technology that is still working on finding a way to revolutionize global finance and governance.
So here are the two key lessons to learn from 2022, the year of crisis for Crypto:
Lesson 1: Follow These Crypto Investing Rules
Remember these 4 Simple Rules for Crypto Investing:
(1) Only invest what you can afford to lose.
(2) Only invest in Crypto projects you have researched and genuinely trust.
(3) Focus on Bitcoin investments only if you want the safest option.
(4) Trust your instincts.
If a new Crypto project offers unrealistic returns or seems suspicious, don't feel any pressure to invest just because it's currently a "popular trend."
Lesson 2: Use The Correct Crypto Mindset
Lastly, it would be best if you had the correct mindset in Crypto to survive and thrive consistently. This mindset is more important than having a one-time lucky investment in a new project.
Incorporate these two mental frameworks for the Correct Crypto Mindset:
(1) Use Stoicism.
Stoicism refers to a state of mind that involves being calm and strategic. Patience will allow you to see reality for what it is. You will be able to see the reality of any circumstance, whether good or bad, no matter how it impacts you.
Be confident that you can leverage any events in Crypto as either a financial win or at least learn from any loss. Focus on what is within your control, i.e., be responsible for changing your investment strategy as the Crypto landscape changes.
Use this mindset when others ride the media's emotional roller-coaster of fear, uncertainty, and doubt ("FUD"). Sometimes people are full of euphoria, and sometimes they are filled with outrage. Their emotions change with the wind. Don't let their feelings impact you.
Use stoicism to your advantage to make rational, sound, thoughtful decisions.
(2) Focus on the signal.
Every time there is a significant "Crypto Event," whether it is a profitable new crypto, exchange, or project - you need to ask these questions:
(A) What are the critical reasons for the success/failure of this Crypto event?
(B) How could I apply this analysis to future Crypto projects?
These two questions will allow you to identify the path to abundant opportunities within Crypto.
Ignore the "noise." The "noise" refers to all the distractions, i.e., other people's emotions, personal drama amongst those in leadership positions at a particular Crypto project or exchange, and elaborate theatrical narratives manufactured by the media to create an interesting story behind a Crypto event.
Focusing on the signal will save time, energy, and effort in quickly identifying the best next step in your Crypto strategy.
Thanks for reading, and look out for more content, as I have plenty more Substack posts ready to publish soon!
Please share this Substack post with others who want a simple summary of what happened in Crypto in these recent crisis scenarios.
If you have any questions, please leave a comment below and I will be sure to respond.
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