Forbes journalists believe that the recent collapse of a Terra ecosystem is the fifth reset of the crypto market. It was preceded by a reset in the form of the first bitcoin exchange’s bankruptcy, The DAO hack, an ICO bubble burst, and other events. Each such reset was accompanied by a significant drawdown of the entire crypto market but ultimately contributed to introducing innovative solutions and new price highs for many crypto assets. Let’s consider all milestone events in the crypto sector’s history and their impact on the crypto market.
Mt. Gox Bankruptcy
Mt. Gox is the very first crypto exchange for bitcoin trading. It was launched in 2010 by programmer Jed McCaleb and bought in 2011 by entrepreneur and programmer Mark Karpeles.
Let’s recall the key moments in the history of Mt. Gox’s rise and fall. From 2011 to 2014, Mt. Gox skyrocketed following the rise in bitcoin’s price and, as a result, became the largest bitcoin exchange in the world. According to various sources, Mt. Gox accounted for 50% to 70% of all BTC transactions at the end of 2013.
However, at the same time, Mt. Gox has been involved in several scandals: business partners accused it of violating agreements, US authorities fined it for working in the country without registration, and clients constantly complained about delays in withdrawing funds which could reach several weeks and even months. As a result, Mt. Gox lost its leadership position in the market but was still considered a reliable trading platform.
Everything changed on February 7, 2014, when Mt. Gox suspended withdrawing bitcoins. On February 24, Mark Karpeles announced the exchange’s closure due to the loss of 850,000 BTC ($460 million at that time), which attackers managed to withdraw from the exchange’s hot wallet for several years. Of the 850,000 BTC, 744,408 coins belonged to 24,000 exchange clients. A month later, the team of Mt. Gox found 200,000 BTC in one of its own wallets.
Since 2014, former customers of Mt. Gox have been trying to get their money back. Found 200,000 BTC were transferred to the trust management of a bankruptcy trustee. In 2017-2018, he sold part of the coins worth more than $405 million. For many years, the parties tried to agree on a rehabilitation plan and establish a procedure for paying compensation. The final plan was adopted at the end of last year — payments should begin this year and will be gradual so as not to bring down the crypto market.
The loss of bitcoins revealed a high level of incompetence, negligence, irresponsibility, and many cases of neglect of security measures. Many victims found it difficult to believe in such negligence and accused Karpeles of fraud. In August 2015, Mark Karpeles was arrested and spent a year in prison, but later, he was released on bail. In March 2019, Karpeles was found guilty of forging exchange documents and sentenced to 2.5 years probation.
Mt. Gox’s bankruptcy has become an important milestone in developing the crypto market. What happened brought down bitcoin but did not lead to its collapse. Identified security issues and miscalculations in management have led to improving security standards of other crypto exchanges. Here’s how crypto exchanges have changed since Mt. Gox’s bankruptcy:
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- coins of users and exchanges began to be stored separately (still, not all crypto platforms do this);
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- compensation funds, which make users a refund in the event of a hack, have appeared;
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- crypto investors realized the principle ‘not your keys — not your bitcoins’ and began to think about the advantages of non-custodial solutions that do not store users’ private keys. As a result, the market for non-custodial wallets began to develop;
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- an infrastructure for analytics and external control over crypto exchanges, for example, a Chainalysis service, have appeared;
The DAO Hack
The DAO is a decentralized venture fund based on Ethereum. It raised funds for investments in startups using smart contracts and worked as a DAO (Decentralized Autonomous Organization), that is, an organization without a governing center or leader, controlled by its community through the voting of token holders.
The DAO project was launched in April 2016 by Christoph Jentzsch and his company Slock.it. Over 4 weeks, more than 20,000 participants raised $165 million in Ether during the Initial Coin Offering (ICO).
In June 2016, several third-party programmers alerted the crypto community that they had discovered vulnerabilities in the project’s smart contracts. On June 14, The DAO members received proposals from the development team to fix the detected bugs and had to vote for the implementation of the corresponding update. However, on June 17, an unknown attacker got ahead of them and took advantage of The DAO’s vulnerability to withdraw more than $53 million worth of assets from the protocol.
The hack hit The DAO and Ethereum hard, whose mainnet had only been up for a year. It is also important that 14% of all ETH in circulation were invested in The DAO. Therefore, the communities of both projects began to hastily look for a way out of the situation.
The majority supported Vitalik Buterin’s proposal to hard fork and roll back the Ethereum network before the attack occurred. As a result of the hard fork, two versions of the blockchain appeared. The new version became the main Ethereum network. However, some did not support Buterin’s decision and did not agree with the hard fork because its implementation violated the key principle of blockchain immutability. They continued to support the old version of the chain, in which the attack still took place — this network was called Ethereum Classic. The DAO was closed in September 2016 after the largest exchanges delisted the project’s token. And in the summer of 2017, the US Securities and Exchange Commission (SEC) declared The DAO ICO an unregistered securities offering.
The attack on The DAO led to a drop in the ETH rate from $20 to $11 — the coin was able to overcome the $20 mark again only in March 2017. But in general, the hack led to positive changes in the market:
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- projects have become more attentive to code auditing, identifying and eliminating its vulnerabilities;
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- developers of crypto projects began to monitor compliance with securities laws and interaction with regulators more closely.
ICO Bubble Burst
ICO (Initial Coin Offering) is a way to attract funding for crypto projects by selling their tokens or coins. This is an analog of crowdfunding, a collective tool to launch a project.
Usually, ICOs are held according to the following principle:
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- A company that wants to raise funding issues tokens (based on a third-party blockchain) or coins (native assets of its own blockchain network).
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- It sells them on the open market at a given price, and this price may change at different stages of an ICO.
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- After the completion of the token sale, tokens or coins of projects are listed on crypto exchanges, where they are traded based on supply and demand. If the project is in demand, its assets grow in price; if not, they fall.
The first ICOs were held back in 2013, but they began to enjoy mass popularity in 2016-2018 — in two years, about 3,000 token sales of various sizes were held. In total, according to various estimates, they raised from $22 billion to $70 billion.
In 2017–2018, some projects raised hundreds of millions and even billions of dollars during ICOs. For example, EOS raised $4.19 billion, Filecoin — $257 million, Tezos — $232 million, Polkadot — $145 million.
At first, ICO was presented as the future of investing. It was believed that this method of raising funds has many advantages over other models: first of all, it is the ability to raise funds quickly and cheaply. Moreover, almost anyone could take part in ICOs.
At that time, almost no one thought that ICOs could violate securities laws. But later, most of the world’s regulators began to consider ICO as an analog of IPO. The SEC alone has sued many major ICO issuers, including Ripple and Telegram.
But in practice, up to 80% of ICOs turned out to be scams or were carried out by unscrupulous developers who didn’t even have a working product. At the beginning of 2018, when a so-called ‘crypto winter’ came, an ICO bubble began to collapse. By the end of 2019, about 87% of all ICO tokens brought financial losses to their investors, and many projects were closed.
The confidence of ordinary users in this fundraising model was undermined, and after financial regulators began to pay attention to it, the developers themselves did not want to conduct an ICO. Now ICO has practically disappeared — it was replaced by other fundraising schemes, particularly IEO and IDO.
Despite all its shortcomings, ICO has played a huge role in the popularization of cryptocurrencies:
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- the hype around ICOs became one of the drivers of the sector in 2017–2018 and helped bring information about cryptocurrencies to the masses;
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- after the ICO bubble burst, investors became more selective in choosing projects for financing;
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- the crypto community has developed new forms of fundraising.
Crypto Market Collapse in March 2020
In March 2020, the crypto market lost 40% of its capitalization. It was an investor reaction to the uncertainty caused by the COVID-19 pandemic and lockdowns being introduced. Then, in addition to cryptocurrency, the stock market also collapsed: investors massively got rid of assets to get fiat.
The crypto market began to fall in mid-February. Then, after a two-month growth, bitcoin reached its local maximum of $10,300 and then slowly went down. The drop peaked on March 13 — in one day, BTC fell from $8,000 to $4,000, and on some exchanges — to $3,700. Against this background, ETH fell from $190 to $110, and all coins from the top 10 by market cap lost value by at least 20-30%. So, on March 13, the capitalization of the entire crypto market fell from $216 billion to $160 billion.
However, the crash was not long this time, and the crypto sector recovered faster than other markets. As early as March 14, most assets’ quotes began to recover slowly. In May, bitcoin again reached $8,000, ended the year with a price above $26,000, and it hit an all-time high of $69,000 in 2021.
The last two years have been the most successful in the history of the crypto market:
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- in November 2021, the capitalization of the crypto market reached a record $2.9 trillion;
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- most coins have repeatedly updated their all-time highs;
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- the market has experienced a boom in DeFi, NFT, and GameFi projects.
UST and LUNA Collapse
UST and LUNA are once the most important assets of the Terra blockchain platform ecosystem. On May 9, TerraUSD (UST), the largest algorithmic stablecoin, lost its peg to the US dollar. The coin is currently trading at around $0.04445. The LUNA cryptocurrency, which was used to provide a stable exchange rate for UST, has collapsed from $65 to virtually zero. Before the fall, LUNA was in the top 10 coins by market cap.
Read Next: Luna Crypto Crash: Key Reasons Why Terra’s LUNA Has Dropped 99.7%
The collapse of UST and LUNA shook the whole crypto market. Previously, no truly large project has depreciated so much and so quickly. The fall of coins led to increased volatility in the entire crypto market. Even the largest stablecoin, USDT, lost its peg, but the fall in UST had the greatest impact on algorithmic stablecoins, some of which dropped to $0.5–$0.8 levels and still have not restored the peg. Among the consequences of the fall is attracting the attention of regulators in the US and Europe, who received a strong argument in favor of tightening control over the sector.
What happened with UST and LUNA has seriously undermined investor confidence in stablecoins — primarily algorithmic ones. The authors of Forbes believe that this could lead to almost complete disappearance of algorithmic coins, just as it was with ICOs. But one should not expect a collapse of the entire stablecoin market. The largest real asset-backed stablecoins have stood the test of time, report reserves, and are trusted by users.
UST and LUNA collapse also has positive consequences:
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- the crypto market has passed the stability test;
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- tighter regulation of stablecoins will clear the market of the most unreliable projects and strengthen the position of coins backed by real assets.
Conclusion
The conclusion is as follows: every crash in the crypto market only makes it stronger in the long run. The sector learns from its mistakes, recovers from financial losses, gets rid of shortcomings, and continues to grow significantly.
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