As we approached 2024, opinions on the crypto industry’s future varied from cautiously optimistic to expecting a continuation of 2023’s trends. The challenging macroeconomic environment, characterized by high inflation and interest rates, dampened expectations. Despite the potential milestones like a U.S. Bitcoin ETF approval and the upcoming Bitcoin halving, many believed the strong headwinds and the rising popularity of AI technology would divert the remaining venture capital funds. Yet, as Q2 2024 unfolds, the industry’s resilience and strength are surprising many. The Bitcoin ETFs’ appeal to institutional investors and a softer tone from the Federal Reserve have reignited interest in this volatile asset class.
However, how can we learn from past bull run mistakes and repair the reputational damage?
How We Got Here
2021 was a standout year for crypto, with projects reaching record highs and protocols like Anchor Protocol offering returns above 20%. Charismatic founders like Do Kwon, SBF, and Alex Mashinsky were lauded as industry visionaries. However, warning signs suggested a market shift, portraying these leaders as exploiting the hype. Analysts had already pointed out risks in popular projects before the 2021 bull run. In April 2018, former Head of Risk at MakerDAO and Research Analyst at Scaler Cyrus Younessi correctly identified the critical failure point in Terra Luna: “If Terra were to fall and break peg, then it would depend on Luna to Save Terra. But Luna would fall as investors would panic, Terra would continue to fall, and then they would keep contributing to each other’s demise.”
Collapses in 2022, Bears in 2023
The market euphoria of 2021 came to a sudden halt in 2022 with the collapse of Terra Luna, marking the first of many dominoes to fall.
– Terra Luna Protocol
In one of the most remarkable collapses of this period, the Terra ecosystem’s flagship protocol, LUNA, and algorithmic stablecoin (UST) lost their peg to the U.S. dollar, causing the price to crash to zero in a few days. LUNA’s fall from grace was made all the more spectacular because of how arrogant its founder, Do Kwon, was about promoting its strength and stability.
– Celcius Lending Platform
In 2021, Celsius was seen as a leading centralized lending platform. Its founder, Alex Maschinsky, promoted returns of over 20%, attracting both retail and institutional investors. However, as the market changed and asset values dropped, the platform’s model proved unsustainable, revealing it relied on Ponzi-like economics. It was borrowing new deposits to make up for the lack of funds to pay out the high returns, and the whole platform collapsed under the weight, taking with it investors’ deposits.
– FTX Exchange
During the 2021 bull run, the centralized exchange FTX, led by Sam Bankman Fried (SBF), became extremely popular due to SBF’s reputation from his arbitrage trading at Alameda Research. Celebrated by the media and living a modest billionaire lifestyle, SBF promoted effective altruism, propelling FTX to global prominence with celebrity endorsements like Larry David, Tom Brady, and Steph Curry. FTX’s requirement for supported projects to keep assets on its platform meant its collapse affected nearly everyone in the industry. The downfall was triggered by Binance founder CZ, who sold all of Binance’s FTX token (FTT) holdings after it emerged that SBF had been covering Alameda’s losses with customer deposits and using FTT to balance the books.
Transforming Regulatory Environment
2022 sent the crypto industry into a bear market, from which we’re just beginning to recover. The industry was mostly self-regulated, with the SEC stepping in only for clear criminal activities. However, the events of 2022 led to significant criticism of the SEC and Chairman Gary Gensler, particularly for Gensler’s connections with SBF and Alameda Research CEO Caroline Ellison. In response, SEC, under Gensler, shifted towards a more aggressive regulation policy, taking legal action broadly. The shift impacted individual projects like Ripple, Library, and Tornado Cash. The shift also meant constant deferral delays on SEC regulatory decisions, specifically with Bitcoin ETF approvals, targeting good faith actors like centralized exchanges Kraken and Coinbase. Kraken and Coinbase had been asking for clear regulations for years to operate within. For their troubles of trying to remain compliant, the SEC filed lawsuits against each for operating unregistered security exchanges.
Closing out 2023, the SEC made a significant move by arresting CZ, the CEO of Binance, the largest crypto exchange globally. CZ admitted to anti-money laundering violations and faces over ten years in prison, and Binance was fined $4 billion. This aggressive SEC action aimed at the industry attacked these firms directly and hampered their U.S. operations by fostering a climate of regulatory uncertainty and constantly changing rules.
Ongoing Hacks And Heists
Despite the SEC’s new approach to the industry, heists and hacks remained rampant throughout 2023, totaling over $1.7 billion.
While 2024 is again proving to be a hotbed for crypto hacks and scams, the first three months were over $437M. With the looming Bitcoin halving and its historical trend spurring the next bull run, it is relatively safe to say that this problem will get worse before it gets better.
2024 Forecast
So, with all the negative sentiment built up in the industry from the last cycle. How can we emerge and market the industry in a positive light? It is easy to get swept up in the excitement when the market moves, but we need to remember the fundamentals of DYOR.
We are beginning to see how the criminal activity of those wunderkind founders was not because they were in crypto but because they were criminals. SBF and Maschinsky committed embezzlement and financial crimes because they took advantage of user funds, not because of anything inherent with the technology. They are more akin to Bernie Madoff than Satoshi Nakamoto. Explaining the difference is key.
We should also take comfort in the fact that he will be limited to his term despite Chairman Gensler’s disdain for the industry. Other chairmen and women in the SEC have dissenting opinions (Hester Pierce) about the SEC, and his legal challenges to reign in the industry often fail.
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