Over 5 major cryptocurrency companies or projects collapsed in 2022, leading to a cascading effect and exacerbating the bear market.
These failures have been blamed on several things such as bad market conditions, poor risk management practices, etc. But you know better.
In this post, we discussed the various reasons why these projects failed and how you can avoid being a victim in similar situations in the future.
5 reasons why several major crypto companies failed in 2022
1. Poor to zero risk management
From unsecured loans to excessive leverage, almost every major project that failed in 2022 suffered from poor or zero risk management.
Earlier in 2022, CoinFlex ran into a liquidity crisis after it allowed a special client to “gamble” (trade) with its users’ funds without liquidation protection.
The guy lost his bet and the exchange’s funds, causing it to halt withdrawals as they can no longer meet demands.
I find it hard to spend someone’s money that’s kept in my custody, especially when the person can come for it anytime, let alone give it to a gambler as an unsecured loan.
I don’t care if this happens in traditional finance. This is crypto, and crypto was created to solve the problems with the traditional financial system.
And that’s just one example.
I’m sure there’re other shady and irresponsible practices going on behind the scene of these centralised platforms that we don’t even know about until it blows up.
How to protect yourself from this
The only way to avoid falling victim to these risk management failures is to never trust anyone to manage or invest your crypto for you.
Go full DeFi.
It’s a good thing that there are now limit orders, charts, and other sophisticated trading tools on some of the popular DEXes.
And if you have to use an exchange or any other centralised platform to buy or cash out your crypto, use them for that purpose only but never leave your funds sitting idle there.
Furthermore, if you’re a trader who must have funds on an exchange to be able to trade or invest, then understand the risk and choose the exchanges you trade on carefully.
You can also use multiple exchanges to diversify your risk exposure and only have a small portion of your portfolio on each of them.
2. Ponzi schemes or unsustainable reward systems
The main reason Terra Luna (LUNA) and the UST stablecoin failed is that it was a Ponzi scheme with an unsustainable reward system.
The platform was paying out between 15% to 25% APR on stablecoin deposits without a sustainable revenue system to back it.
It was bound to fail. I never bought LUNA or invested in their UST stablecoin staking program despite all the noise about it because it didn’t go well with me.
If you cannot see or tell where the rewards are coming from it’s a Ponzi scheme.
Even if the source of the reward is verifiable, you also need to ask yourself if it’s sustainable and for possibly how long.
Many of these lending platforms like the failed Celsius seem to fall into this category in addition to having poor risk management.
First, the rewards seem too high that their revenue sources could not keep up with it.
Add that to losses suffered from poor risk management practices, and the general market downturn, and you’ll see how their crumbling was inevitable.
How to avoid being a victim of Ponzi Schemes
The only way is to never invest in these kinds of projects in the first place.
Investing in a project with an unsustainable reward program or Ponzi scheme is a short-term degen-play that only the savvy should attempt.
And if you choose to gamble your crypto with them, never act surprised when the house of cards comes crashing and you lose your money.
A project without a verifiable and organic revenue system is unsustainable, and you must not invest in such unless you know exactly what you’re doing.
Sam Bankman-Fried (SBF) embezzled FTX users’ funds and that’s what lead to the collapse of the exchange.
And that’s in addition to having poor risk management systems discussed above.
FTX management did exactly all the things they shouldn’t have done with users’ funds.
The interesting thing is that they still feign ignorance of what happened or blame the competition instead of admitting the embezzlement fraud they committed.
How to protect yourself from this
The likes of FTX are hard to catch because they’re so big and loud that they appeared too big to fail.
However, if you never keep your money on a centralised exchange or give it to someone else to manage for you, you’ll not fall victim to this fraud.
So the key is to maintain self-custody of your crypto by remaining on DeFi. You can use a centralised platform to buy or cash out your crypto but that should be all.
Furthermore, don’t “blindly” trust celebrities and influencers no matter their profile and keep your risk exposure to a single entity reasonable.
4. The contagion
Several major crypto companies failed as a side effect of the failure of popular projects such as Terra Luna, FTX, Celsius, etc.
For example, Three Arrows Capital (3AC) failed due to a combination of factors discussed above exacerbated by the failure of Luna and other projects they’re invested in.
Furthermore, Voyager (a crypto brokerage service) failed as a result of the failure of 3AC to pay back a $350 million loan.
Finally, BlockFi failed due to FTX collapse and so on and so forth. We’re still seeing the ripple effect of these failures across the crypto market.
And there’s very little you can do about this situation other than continue to hang in there and make sure to take responsibility for the custody and safety of your crypto assets, just as it should be.
There’re so many scams in crypto, but the two that gained prominence in 2022 are hacks or exploits and bankruptcy scams.
Some of the hacks and exploits you see are insider jobs, but of course, we can’t prove that.
Secondly, most, if not all these failed crypto projects were masterminded to fail, relying on bankruptcy protection.
They embezzle or outrightly steal customers’ funds and then claim bankruptcy and cite some bad market condition or another failed project as the reason.
Before 2022 we experienced small scams by individual developers and teams of various projects.
But in 2022 institutions came with more elaborate and sophisticated hack and bankruptcy scams.
However, you can protect yourself from all these by being your own boss and taking full custody and responsibility for the safety of your crypto assets.
Do not sacrifice your financial freedom for the convenience of centralised platforms.
In crypto, if you don’t take responsibility for yourself, nobody will.
One recurring theme in the above discussion is that centralised platforms and their platforms don’t really care about protecting you.
Their primary objective is to make as much money as possible, and that includes misappropriating your deposited funds for their gains.
Furthermore, some try to maximise their gains by gambling your deposited funds in risky bets. Or outrightly stealing them and filing for bankruptcy when caught.
Therefore, the best solution to avoiding trust issues on centralised platforms is to limit your exposure to them or operate 100% in DeFi.
What else do you think caused the catastrophic failures of major crypto companies in 2022? Share with us in the comments section below.