The major factors were the bear market, poor risk management and unsustainable reward systems. This led to people withdrawing their funds from crypto.
This put pressure on the Terra stablecoin. This caused the Luna/UST pair’s stabilization mechanism to break down, leading to the collapse of the Luna and Terra systems. Celcius also made high-risk investments (poor risk management) which also contributed to its collapse. Three Arrows Capital (3AC), was also affected by the Luna/Terra collapse and defaulted on loans from other companies, including Voyager and BlockFi. Voyager and CoinFlex have also faced cash flow issues and halted withdrawals due to being owed large amounts by other parties. BlockFi was bailed out by FTX to prevent further fallout. Their exposures to the Luna/Terra system and risky investments likely played a role in their collapses. And recently there’s FTX. They collapsed because they committed crimes like fraud, insolvency, and trading against customers using inflated balance sheets and customer funds. Alameda also inflated FTX’s balance sheet and used it to obtain credit for crypto gambling, similar to the actions of the collapsed company Enron. FTX was doomed to collapse regardless of these actions.
Now what about a few of the CEXs and CeFi platforms that are still alive today?
Kraken so far has a solid leadership team, multiple sources of revenue, good risk management, a strong reputation, and the ability to adapt to change which have all contributed for it to stay relevant. Haru Invest is not a lending company unlike the other CeFi platforms that have gone under. They focus on arbitrage trading with only BTC/ETH. It’s basically buying an asset at a lower price in one market and then selling it at a higher price in another market or exchange to make a profit. It’s a way to take advantage of price differences and try to earn some cash. They basically differ from the CeFi platforms like Celsius and Voyager since they use a lending business model.
Crypto is repeating the history of banking, including unregulated banks (most crypto exchanges), exit scams, fractional reserve practices, pyramid schemes, Ponzi schemes, uninsured bankruptcies, and bank heists (hacks).
How can surviving projects and companies avoid similar problems in the future? The proper response for people is to withdraw their funds, while for companies is to declare bankruptcy to ensure partial payment for all. However, some may be too ignorant to do so.
Can you think of any other reasons for the market-wide collapse?