Proactive Investors - It was the middle of the year, the crypto markets had already taken a terrible battering, and a new phrase was becoming a stalwart of the cryptosphere: Contagion.
As discussed in detail in part one, we’d already seen hundreds of billions wiped from the markets following the collapse of Terraform Labs and Three Arrows Capital (3AC).
Surely things couldn’t get much worse? As we now know, surely they could.
Contagion spreads to Celsius
One of the revelations of 2022 was how closely linked the various entities populating the cryptocurrency sector truly were/are.
Terraform Labs’ failed stablecoin UST caused a knock-on effect for 3AC, which was highly invested in UST.
This destabilised the entire crypto market, including the price of bitcoin (BTC). This volatility then came knocking at the door of Alex Mashinsky, former head of crypto bank Celsius Network, in the middle of June.
Unbank Yourself! was Mashinsky’s popular rallying cry, splashed across Celsius’ website and t-shirts. Earn high! Borrow low! Change the world! Get Celsius! His hubris showed no end, yet as the saying goes, if it sounds too good to be true, it probably is.
Alex Mashinsky, former Celsuis Network head in trade mark anti-bank t-shirt -- Photo: Shutterstock
On the fateful morning of June 13, a new blog post from Celsius announced: “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals… We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations.”
According to Celsius, the move was necessary in order to “stabilise liquidity and operations while we take steps to preserve and protect assets”.
Those high returns promised to Celsius users turned out to be completely unsustainable and after a month of speculation, the company filed for Chapter 11 bankruptcy protection on July 14.
The news was met with despair among Celsius’ 100,000 unsecured creditors, who remained hopeful of retrieving the billions of dollars worth of funds held at ransom since Celsius froze withdrawals.
They’re probably going to be waiting for years to come, if they manage to get anything back at all.
The real kicker was the actions of Mashinsky prior to the withdrawal freeze.
Two weeks before Celsius froze withdrawals, Mashinsky took to YouTube channel InvestAnswers to rally against the FUD (fear, uncertainty and doubt) surrounding the platform.
The Fudders are “idiots” who “have nothing better to do” exclaimed Mashinsky.
“Don’t believe the FUD,” agreed James Mullarney of InvestAnswers.
Celsius has “the framework and transparency” to let customers know if there is a problem, not to mention the financial backers, he gushed.
Want to make sure your crypto is stored safely for your loved ones? Give Celsius custody of your funds, they suggested.
That advice ended up causing immense damage.
Contagion body count mounts
Celsius Network differed from the year’s previous calamities for the sheer unfairness of the whole situation.
This wasn’t a coin falling in value that you could sell off, nor was it an elite venture fund.
Average people, spurred on by cheerleaders and influencers, put their trust in Celsius only to wake up to find their funds stuck indefinitely.
Customers of a similar platform, Voyager Digital (CSE:VYGR, OTCQX:VYGVF), suffered the same fate when it filed for Chapter 11 on July 6.
Voyager was left exposed to 3AC after the hedge fund defaulted on US$650mln worth of loans, while a press release also cited market volatility and contagion as contributing factors.
Voyager had its own cheerleaders, not least billionaire entrepreneur Mark Cuban, who as a business partner with Voyager went on record calling it “as close to risk free as you're gonna get in the crypto universe”.
What followed was a dark time for the crypto markets. Bitcoin’s price was in the dumps, investment funds were seeing mass withdrawals, Grayscale Bitcoin Trust was tanking, shoddy NFTs projects were mercifully dropping like flies.
But, as you undoubtedly know, we were far from done…
FTX collapse shocks the world
He was the golden child of crypto. An altruist who wanted to save the world. Darling of the media, even respected by politicians. Briefly the richest man under 30.
His crypto empire, once worth over $30bn, would one day be worth a trillion, reckoned Sequoia.
His FTX cryptocurrency exchange was the gold standard for transparency, accountability and reliability.
He was Sam Bankman-Fried and everything was a lie.
The collapse of FTX, once the second-largest cryptocurrency exchange on the planet, was felt far beyond the borders of the esoteric crypto space.
Mainstream news had rolling headlines and politicians and billionaire business moguls scrambled to figure out how this scruffy-haired vegan has tricked them all.
FTX, once the gold standard, could now go down as one of the greatest acts of fraud in American financial history.
The nuts and bolts of what happened will be picked over for years to come, but the allegations distilled to their basic elements are such that Sam Bankman-Fried had two companies- the FTX digital asset exchange and the Alameda Research venture fund.
Alameda Research was one of the foremost funds in the space, offering to bailout countless companies during the recent market rout.
But if the allegations are proved right, it was all built on stolen money. Specifically, Alameda Research is alleged to have had a ‘back door’ into FTX users’ money, which it used to place highly risky trades than ultimately cost billions.
Dodgy political donations have come to the fore, as have allegations that Sam Bankman-Fried was even involved somehow in the Terraform Labs collapse.
When SBF’s empire fell, it sparked a french wave of contagion, with companies he was invested in seeing their credit lines disappear overnight.
Even Fortune was enamoured by SBF – Source: fortune.com
Users, who stood to lose billions, watched in awe as he took interviews with any news outlet that would have him, from CNBC and Good Morning America to citizen journalists on Twitter Spaces.
He consistently denied fraud in this media circus, instead painting himself as a silly goofball who didn’t run the business very well.
Users continued to watch in awe as he maintained a free life in the Bahamas until he was finally arrested at the behest of the US government on December 12.
At the time of writing, SBF is in the process of being extradited to the US, where he faces a life sentence following what is surely going to be a closely watched criminal fraud trial.
As for the bruised and battered cryptocurrency sector, it could take years to recover, if indeed it ever does.
Is there a silver lining? Were there any heroes to speak of? What’s happening next? Stay tuned!
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