Five Significant Crypto Coin Collapses and Their Lessons

The article outlines five significant cryptocurrency collapses, detailing the factors leading to each failure, including LUNA/UST’s $40 billion loss, Mantra’s insider trading allegations, the $2.75 billion Ponzi scheme of Bitconnect, Celsius Network’s freezing of $1.2 billion, and FTX’s $8 billion fraud. These cases impart crucial lessons about the risks associated with cryptocurrency investments.

The cryptocurrency market has witnessed significant growth and numerous failures since the introduction of altcoins. This article reviews five major collapses, shedding light on factors contributing to their downfall, including programming errors, management failures, and market timing issues. Each case presents valuable lessons for current and future investors in the digital asset space.

1. LUNA/UST – A $40 Billion Collapse in DeFi
Launched in January 2018, LUNA and its algorithmic stablecoin UST aimed to revolutionise DeFi by allowing users to avoid market volatility. Unlike traditional stablecoins, UST lacked fiat reserves and relied on algorithms to maintain its $1 peg. However, a sudden market downturn in May 2022 meant UST lost its peg, impacting LUNA’s value, leading to hyperinflation and a rapid loss of $40 billion within a day.

2. Mantra – Ongoing Insider Dumping Allegations
Mantra’s OM token suffered a devastating 90% drop in value, attributed to market manipulation allegations. The platform aimed to provide a framework for Real World Assets (RWA) on the blockchain, allowing assets to be tokenised for easier transfer. On April 13, OM’s price plummeted from $6.30 to below $0.50, with insider trading accusations arising post-collapse. Although developers denied involvement, investigations revealed significant token distribution to two individuals who profited from the ensuing panic.

3. Bitconnect – The $2.75 Billion Ponzi Scheme
Bitconnect, launched in 2016, promised peer-to-peer cryptocurrency loans, enticing users with high returns on investments. However, by January 2018, it collapsed, demonstrating classic Ponzi scheme characteristics. The SEC later revealed it defrauded investors of $2.4 billion, with Bitconnect’s failure erasing $2.75 billion in market capitalisation and serving as a stark warning against exploitative lending structures in crypto.

4. Celsius Network – Freezing of $1.2 Billion
Celsius operated similarly to Bitconnect, allowing users to deposit assets for CEL tokens. However, during a market downturn in June 2022, users experienced withdrawal issues, leading to a halt in operations announced as liquidity stabilisation. Celsius later filed for bankruptcy, attributing its downfall to poor investment practices, and faced significant fines from regulatory bodies amidst the fallout.

5. FTX – An $8 Billion Fraud
FTX, led by Sam Bankman-Fried, was hailed as a leading exchange until it was revealed that it misappropriated customer funds. The firm had lent out billions without proper disclosures and faced a liquidity crisis in late 2022. Bankman-Fried was ultimately sentenced to 25 years in prison for defrauding users of over $8 billion, marking one of the largest impacts on the crypto market by an individual.

These collapses underline important lessons for crypto investors, particularly about the heightened risks involved with new projects. While the promise of exceptional returns is enticing, focusing on established assets like Bitcoin may offer a more stable investment strategy. For those exploring the decentralised economy, being aware of potential pitfalls is vital. The ever-evolving landscape of cryptocurrencies reminds investors to exercise caution and thorough due diligence before committing to new ventures.