Since the entrance of altcoins, the crypto market has seen an explosion of creativity, new strategies, and spectacular failures. As with any new technology, there are growing pains associated with innovation. Now, whether these pains originate from bad programming, management, security, or timing is what makes coin collapses so interesting. Here are the 5 largest coin collapses in crypto history.
1. LUNA/UST – The $40 Billion Collapse That Shook DeFi
LUNA entered the market in January 2018. The project was unique in that it introduced a high-performance blockchain, the LUNA token, and an algorithmic stablecoin dubbed UST. This combination promised to be a game changer for DeFi users who saw the option to easily dodge market volatility as a big plus alongside the Terra ecosystem’s offerings.
An algorithmic stablecoin differs from traditional versions in that it doesn’t have fiat currency reserves or off-chain assets backing it. Instead, a mathematical equation will adjust a reserve filled with another cryptocurrency to keep the stablecoin pegged to its value. In this instance, UST had a 1:1 dollar peg.
Crypto Collapses
Everything was going as planned until May 2022, when sudden market volatility caused UST to lose its peg. Unfortunately, the market volatility also affected the value of the tokens’ underlying asset, LUNA. This shift in value meant the algorithm was unable to meet the reserves needed to keep the token pegged at its $1 value.
Recognizing the time it took for the project to regain its peg, traders began to worry about LUNA and its operations. They began selling LUNA in droves. In response, the developers issued more tokens. This maneuver only led to hyperinflation, and within hours, the writing was on the wall. Consequently, the LUNA/UST crash was a massive kick in the charts to traders who saw the project lose $40B in value in less than 24 hours.
2. Mantra – Ongoing Allegations of Insider Dumping
The Mantra OM crash is the most recent token collapse to make the list. This high-level fiasco is still under investigation as the project’s developers claim that market manipulation was to blame for the sudden 90% loss in value over 24 hours.
Mantra was touted as an enterprise-level Real World Asset ecosystem. RWA refers to transferring assets onto a blockchain. For example, you could tokenize your car by making the title a token. In this way, you have now created an RWA blockchain asset.
RWA token holders could transfer ownership of their assets as easily as tokens. They could also break large assets into smaller tokens, allowing more investors to access the market with less capital. All of these factors made the project a draw for RWA traders.
OM Token Price Crash Sparks Controversy
On April 13, everything changed for OM token holders when their Sunday morning was shattered by news of the token dropping from $6.30 to below $0.50 in value in hours. The losses happened so fast that many in the market claimed that some sort of insider trading or rug pull was involved.
These allegations were met with a response from the project’s developers, who state that none of their tokens were sold. However, further investigation found that millions of OM tokens were shared with two community members. In response to the insider trading and member sales, the developers and alleged traders claim that the wallets are not associated with them in any way.
These two members methodically dumped their bags on centralized exchanges during the losses. These actions are confirmed by Binance and OKX. Both exchanges also noted that they had flagged OM token actions because they noticed an increased use of the token to secure lending.
The allegations against the developer continue to stack up. Some now believe this was a long, well-planned plot. They point out that the developers decided to switch from a limited supply token to a deflationary strategy. This maneuver allowed them to effectively issue double the tokens, which appear to have been used to take out loans. As more allegations come forth, both the crypto community and regulators await answers to account for the sudden drop in market cap from $6B+ to just around $681M.
3. Bitconnect – The Infamous $2.75B Crypto Ponzi Collapse
This next crypto collapse was one of the most spectacular ever to have occurred. The Bitconnect ecosystem entered the market in 2016 amid the crypto breakout year. The crypto market was seeing massive adoption at this time, and people were eager to participate in any way possible. As a result, this desire led to an influx of scammers as the tech was still a mystery to most.
Bitconnect entered the market as a crypto P2P lending service. Users could join and send their crypto to Bitconnect. They would receive BCC tokens in return. Their deposited funds would then be lent out to other users, and the interest would be paid to the BCC token holder. This interest was boasted as high as 16% APY. These actions occurred alongside investments and trading that the project alleged helped boost reserves.
However, in January 2018, despite a flurry of promotions and unforgettable seminars where the participants yelled Bitconnect like warriors in battle, the project collapsed. Like others on this list, the project lost 90% of its value in less than 24 hours.
Bitconnect Unmasked as a Classic Ponzi Scheme
Further investigation would reveal Bitconnect to be nothing more than a Ponzi scheme. The developers had successfully scammed traders out of billions, and it wasn’t long before regulators wanted blood. The SEC alleges Bitconnect defrauded investors out of $2.4B in funds.
The project’s failure wiped $2.75B in market capitalization and left a bad reputation for blockchain lending services that would continue for years. Consequently, Bitconnect remains a cautionary tale of how you should avoid projects that promise too much.
4. Celsius Network – How $1.2B in Crypto Was Frozen
Celcius was another P2P lending protocol that promised to make the average token holder into a bank. The network shared many characteristics with Bitconnect in that users would deposit assets and receive CEL tokens representing their holdings.
Celcius Network quickly gained popularity. The project listed +$8B in loans out and +12B in assets under its control during its peak. Part of its strategy was that it took customer funding and reinvested it into other crypto projects, trades, and yield generation services.
Notably, Celcius had a zero fee structure and open enrollment, features which appealed to DeFi users. This strategy helped the project obtain a large user base and expand its operations and holdings. The plan was going well until June 2022.
During this bear market, the value of cryptocurrencies dropped sharply, causing the lender to call in its loans. At the same time, it had its loans called in. Further investigation revealed that Celcius was heavily invested in some shady operations. In particular, the FTX exchange.
Celsius Freezes Withdrawals as Panic Spreads
On June 2, Celsius users began to experience issues when they attempted to withdraw their funds. By June 13th, the community received an email stating that the pause was to stabilize liquidity. This action fell in line with a larger market crash, which saw CEL lose a third of its value alongside other tokens.
Less than a month later, Celsius filed for bankruptcy. The project’s founders cited poor investments and asset deployment as the reasons for the failure. Now, the company’s founder faces charges and fines from the SEC and FTC. Additionally, Celcius agreed to pay a massive $4.7B fine, one of the largest in history.
5. FTX – $8B Vanishes in Crypto’s Most Audacious Fraud
At the top of the list for most audacious cryptocurrency collapses has to be the FTX exchange. This story has mesmerized the media for over a year. The FTX team, led by Sam Bankman-Fried, purposely misled investors and traders to the tune of billions.
FTX was touted as one of the top-performing exchanges in the crypto market only days before its massive collapse. Subsequent investigations would show that the team had appropriated and lent out client funds using several business entities they controlled, such as Alameda Research.
Source – ABC News
High-risk investments became evident after the FTX team reached out to Binance to help float their operations. Binance, rather than help, pointed out the inconsistencies in their finances. These actions helped others to realize that FTX was running a scam operation. However, the damage was done.
FTX Fraud Exposed: Lavish Spending and Missing Billions
Notably, Prosecutors can prove that Bankman-Fried spent billions in customer funds to pay for his lavish lifestyle. The court revealed that of the $11.3B he supposedly lent to his investment firm, Alameda Research, only $2.3B was ever found.
Unlike many of the other stories on this list, Bankman-Fried was sentenced to 25 years in prison for his role in defrauding traders of +$8B in funds. The true scale of the losses may never be truly registered, as FTX’s collapse led to several other operations failing in quick succession.
What These Collapses Teach Us About Crypto Investing
All of these tales of spectacular coin collapses share some common points. For one, there’s a mix of new technology and ROI opportunities presented to the market. There’s nothing wrong with investing in new projects or strategies, but you should be aware that the risks are much higher than going with proven, effective options like Bitcoin.
It can seem frustrating that most people will never be able to afford an entire Bitcoin. However, this isn’t a bad thing. It simply points to the success of the project and how it continually gains value over time. It’s only been 15 years, and Bitcoin has gone from $0.50 to +$100K.
Even at today’s value of around $80k, it’s still a great option for those seeking to store value and participate in the decentralized economy with minimal risk. Stacking Satoshis may not be as exciting as participating in the latest DeFi trend, but for those seeking to avoid collapse, Bitcoin is a wise option.
More Crypto Collapses Could Be Coming – Stay Informed
While these coin collapses are enough to make you want to hold your Trezor tight at night, they should not deter you from exploring the decentralized economy. The main thing to remember is that if it sounds too good to be true, chances are you don’t want to be involved. Can you think of any other spectacular crypto collapses? If so, leave a comment and share.
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