FTX Isn't New
FTX Isn’t New
Bad news first.
Then, the good news : )
The Bad News
Mt. Gox
On February 24, 2014, the world’s largest bitcoin exchange suspended trading. It was the beginning of the end for a company that at one time processed an estimated 80 percent of all global bitcoin transactions. The exchange was called Mt. Gox.
On February 28, 2014, four days after suspending trading, Mt. Gox and CEO Mark Karpeles filed for bankruptcy in a wild turn of events that revealed the exchange was missing roughly 850,000 bitcoin; an amount that, at the time, was worth nearly $500 million. Years later, the bitcoin in question would be worth magnitudes more, well into the tens of billions of dollars.
The details surrounding the Mt. Gox hack remain unclear to this day, some even believing it can be attributed to earlier hacks on the exchange in 2011. When Mt. Gox failed, it shook bitcoin markets to their core, sending investors into a panic.
BitConnect
In early 2016, a cryptocurrency project and lending platform launched. Its mission—to provide high interest yield on user deposits. Promoters of the platform were active in nearly every country on Earth. There was an all-out marketing blitz associated with BitConnect. A small group of leaders sat atop the pyramid, accepting bitcoin for their cryptocurrency token BitConnect Coin.
The secret sauce of BitConnect was supposed to be in the tech, using a “proprietary trading bot.” It was how they would produce the unprecedented returns promised to investors. In the end though, the founders of BitConnect stole close to $4 billion while propping up their crypto project that was nothing more than a Ponzi.
Bitfinex
In August 2016, a cryptocurrency exchange based in Hong-Kong suffered a security breach. These breaches at the exchange, Bitfinex, would end up leading to the theft of 119,756 bitcoin and send trading markets into absolute turmoil as customer accounts were limited and then credited with a portion of their losses in Bitfinex tokens.
The stolen Bitfinex bitcoin would be laundered throughout other cryptocurrency exchanges and wallets up until 2022 when US federal authorities arrested a New York couple in connection to the heist of the bitcoin then worth almost $4 billion.
QuadrigaCX
In December 2019, the founder of Canada’s largest crypto exchange took a trip to India with his new wife. During the trip, he took ill and passed away. One month later, his wife and the company, QuadrigaCX, released a statement announcing his passing.
Customers had already begun to complain about being unable to withdraw funds prior to the founder’s death. They became worried that the death announcement was a hoax and that the exchange might have been a prolonged rug pull.
Accounting firm Ernst & Young revealed that the exchange was missing close to $200 million worth of customer funds. A journalist would also uncover a deep-seeded history of Ponzi schemes attributed to the exchange’s founder and authorities would find out that he gambled away upwards of $100 million of company or customer funds via altcoin trading on other crypto exchanges on top of simply spending some of the funds on real estate and personal luxuries.
Terraform Labs
Between 2020-2022, a so-called crypto wunderkind launched a project, Terraform Labs. The altcoin project had a cryptocurrency called Luna and eventually added a stablecoin called TerraUSD or UST. The project received all sorts of funding and investments. Exchanges and lending platforms the world over made Terraform Labs’ cryptocurrency and stablecoin widely available to customers.
In May 2022, the UST stablecoin broke its peg to the dollar. It began to fall and the entire Terraform Labs ecosystem quickly followed. More than $40 billion worth of value disappeared in a matter of days. As time passed, exchanges, lenders, and investors tied to Terraform Labs would reveal their unfortunate positions and the fallout would negatively impact the crypto industry in irreparable ways.
FTX
One month after the Terra collapse, in June 2022, the CEO of the second most popular crypto exchange in the world told Forbes that many of the biggest cryptocurrency exchanges were “secretly insolvent.”
As he said this, his exchange, FTX, was thought to be the white knight of a buckling crypto industry, looking to bail out many of the platforms victimized by the Terraform Labs collapse. Little did anyone know at the time that Sam Bankman-Fried’s own FTX was likely already insolvent as he casually rolled with the media’s portrayal of himself as the “JP Morgan of crypto.”
Ultimately, FTX would fail in historic fashion. Billions (maybe tens of billions when the dust settles) wiped off the table over the course of a few days in November. The company’s research and investment arm would be revealed to have worked in coordination with the exchange to prop up its own token and gamble away customer and investor funds. Throughout it all, FTX got stadium deals, celebrity endorsements, and investments from some of the biggest names in venture capital.
The company lacked a board of directors. Top employees engaged in romantic relationships and lived lavishly near their Bahamian headquarters. Many lacked significant professional experience. All the while, FTX customers and investors were unaware that the exchange was nothing more than a “casino built on top of a Ponzi.”
Even the former CEO of the first mentioned failure in this list, Mt. Gox, has been providing advice to crypto holders throughout the FTX saga…
Other big names in the crypto space such as co-founder of Kraken, Jesse Powell, have also called out the media for being complicit in propping up exchanges like FTX while simultaneously attacking long-standing exchanges like his own or Coinbase.
FTX’s Sam Bankman-Fried was lauded as a “crypto whiz kid,” yet another one of “the smartest guys in the room.” The same thing was said of the founders at Three Arrows Capital involved in the Terra collapse…
These are not the smartest guys in the room. They are not remarkable traders and they have no secret sauce. They’ve revealed themselves to be con artists, nothing short of the likes of Bernie Madoff.
They are a constant reminder that bitcoin is more important now than ever before and that your personal, privately-owned bitcoin should be held by you and you alone instead of handed over to a untrustworthy custodian who gambles it away or uses it to cover their own debts.
To name a few…
These are just a few high profile examples of unfortunate incidents in the history of crypto, each occurring due to either hacks, fraud, or mismanagement.
They also reinforce every single one of bitcoin’s value propositions.
Bitcoin exists to give total ownership over a digital asset to the individual. It relies on no centralized third party or trusted custodian.
There is no CEO who can exit-scam its holders. No hack that can steal funds. No hedge funds that can gamble away your holdings in the blink of an eye.
Of course, it does seem like all of this is happening to bitcoin because these centralized entities with exposure to bitcoin are holding credits for customers’ bitcoin and other related funds.
It’s important to note that bitcoin or crypto held on an exchange is just a credit for those coins. You do not own that bitcoin and are trusting the exchange to keep it safe and let you access it.—“Holding Bitcoin Off Exchanges”
The unfortunate reality is that these failures are happening to a “crypto” industry made up of the same bad actors who have plagued the legacy system for years. The broader crypto industry has become an ambiguous bucket comprised of centralized businesses, cryptocurrency projects and coins, and investors. These businesses and crypto projects are nothing more than, at best, tech startups and new financial companies, and, at worst, outright scams.
Even in the best case scenario, the endless VC-backed search for the next Silicon Valley unicorn rages on. Crypto exchanges like FTX or altcoins like Solana get major financial players in on the ground floor with one goal—ROI for themselves first at all costs. Due diligence is cast aside. Project roadmaps are nonexistent. A culture of pumping and profiting off of companies that never turn a profit (Uber, WeWork, Snap, Door Dash, Robinhood) permeates crypto just as it does traditional markets.
Okay…
Deep breath.
It isn’t all bad.
There are some bright spots.
Now for the good news : )
The Good News
Bitcoin fixes this.
Or, it’s at least trying its darn best to.
In the early days of bitcoin, it was difficult to buy and sell. Unless you were mining bitcoin and running the core software, you had to seek out a centralized exchange like Mt. Gox. Your options were limited.
Over time though, more and more onramps came about as did better self-custody wallet solutions for individuals to hold bitcoin privately as was intended.
What’s Bitcoin?
Bitcoin is the first widely adopted digital currency. In the simplest sense, bitcoin is digital money.
People can send bitcoin securely to each other without an intermediary such as a bank or payment processor.
Important to note here—you don’t even need a bitcoin or crypto exchange to send and receive bitcoin.
Bitcoin is digital money on the internet.
Bitcoin:
is decentralized
is censorship resistant
solved double-spending
has a fixed supply of 21 million
A pseudonymous computer programmer who went by the alias “Satoshi Nakamoto” created bitcoin between 2008-2009. When I say “created,” I mean he wrote a whitepaper describing a peer-to-peer digital cash system. Then, he released a free and open-source software version of the project.
“Bitcoin is a technology, it is a currency, and it is an international network of payments and exchange that is completely decentralized.”—Andreas Antonopoulos
Other cryptocurrencies had been attempted prior to bitcoin. Satoshi even cites some in his whitepaper. He was, however, able to solve a critical problem that plagued these earlier attempts commonly referred to as the Byzantine Generals Problem.
In short—bitcoin allowed two unknown parties to trust one another without reliance on a third party or intermediary.
To go one step further—Satoshi accomplished this through an improved version of “proof-of-work” consensus.
What’s proof-of-work? It’s a process by which computers solve complex math problems in order to validate transactions on the bitcoin network. Once validated, those transactions are recorded on a public ledger called “the blockchain.”
This specific process of sending and receiving money digitally is profound because it all happens without a single person or group in charge of the network and because the bitcoin being created and sent online cannot be double-spent or otherwise counterfeited.
Bitcoin effectively enforced true digital scarcity. That’s it.
Bitcoin promises or claims to be nothing more than the code that enables this.
Best Practices
How do you avoid scams and centralized failures? As bitcoin and crypto grow in popularity, more and more bad actors will seek to take advantage of new, under-informed, entrants in the space. Even good actors who rush to market too hastily with businesses that lack oversight and proper due diligence also put you and their customers funds at risk.
If you own bitcoin, it may be impossible to avoid the price volatility and fallout correlated with broader market failures. But, it’s 100% possible to hold your own bitcoin and sleep soundly at night.
Basic rules of thumb:
limit exchange exposure
use normal investment strategies
Use this resource:
And remember…
I’m here to help.
Have questions?
Ask me in the comments.
Or, connect on Instagram!
If you’ve never used a self-custody wallet before, I’ll also walk any paid subscribers through setting one up and am happy to answer questions whenever I can.
I am not an investment or financial advisor. All opinions expressed are mine alone. Read the full DISCLAIMER on the About page.
HODL on Garth.