Cryptocurrency Failures and Risks Overview

Aug 22, 2024

Lecture Notes on Cryptocurrency and Recent Failures

Introduction

  • Focus on recent issues in the cryptocurrency world.
  • Reference to Elon Musk and his association with cryptocurrency.
  • Overview of the evolution of crypto since its first introduction five years ago.

Historical Context

  • Crypto Boom: Peak interest in cryptocurrency around 2021.
    • Celebrities were endorsing various crypto platforms.
    • Major investments and endorsements from figures like Matt Damon and LeBron James.
  • Sam Bankman-Fried and FTX:
    • FTX was promoted heavily, claiming to be trustworthy and reliable.
    • Sam Bankman-Fried (SPF) presented as a young genius in finance.

Major Cryptocurrency Collapses

1. Terra (LUNA)

  • Launched in 2018 by Do Kwon.
  • Stablecoin concept: pegged to the US dollar but linked to another coin, Luna.
  • Algorithmic Stability:
    • Claimed to maintain value via an algorithm instead of traditional backing.
    • Ultimately failed leading to billions in losses.
  • Aftermath:
    • Kwon faced legal action and evaded authorities temporarily.

2. Celsius

  • Founded by Alex Mashinski; marketed as a crypto bank.
  • Promised high interest rates (up to 18%) on deposits, significantly higher than traditional banks.
  • Practices:
    • Engaged in risky lending and possibly illegal financial practices.
    • Minted its own coin to inflate its balance sheet.
  • Outcome:
    • Filed for bankruptcy, leaving customers with blocked assets worth billions.

3. FTX

  • Promoted as a safe trading platform for cryptocurrencies.
  • SPF’s dual role as head of FTX and a hedge fund (Alameda Research).
  • Fraudulent Activities:
    • Allegedly used customer deposits to fund his hedge fund.
    • Poor financial management revealed, employing basic accounting software.
  • Consequences:
    • FTX declared bankruptcy amid massive financial mismanagement and fraud allegations.

The Common Thread: Confidence Games

  • All three companies built on a facade of confidence.
  • Emphasis on the illusion of expertise among their founders.
  • Real risks hidden beneath the surface.

Regulatory Considerations

  • Caution against strict regulatory measures: could grant legitimacy to unreliable crypto systems.
  • Importance of transparency and caution when investing in cryptocurrencies.
  • Final Advice:
    • Conduct personal due diligence.
    • Only invest what you can afford to lose.

Conclusion

  • Current status of cryptocurrency: still resembles a high-stakes gamble.
  • Future of crypto uncertain; potential exists, but risks remain high.