Since the dawn of crypto over a decade ago, black swan events – unforeseen incidents causing drastic market shifts have not been uncommon. Every few years, the crypto realm suffers at least one major event that causes small or super-large market bears.
It is no doubt that 2022 bore the two most significant black swan events in the history of crypto.
However, this guide digs deep into the past, pointing out other most significant black swan events in the crypto universe since its birth.
The FTX Collapse!
The collapse of FTX remains the most significant black swan event in the world of cryptocurrency. But why?
At the time of its death, FTX was one of the top 3 largest crypto exchanges by trading volumes. Its big moves in the preceding months set a good growth tone for the company.
The Dramatic Fall
Everything began at the dawn of November 2022. In less than ten days, the $32 billion empire fell and even filed for bankruptcy. At the time of its fall, the exchange had about $8.9 billion as liabilities and over $900 million as liquid assets, based on reports.
As part of the FTX empire, Alameda Research, a company started and initially funded by FTX, also followed suit.
Why did FTX die? Mismanagement!
November 18, the headlines of one New York Times article reads: “Why Did FTX Collapse? Here’s What to Know.“
A few days before FTX’s ultimate death, Binance exchange announced plans to buy the exchange in a bid to protect the crypto market from a more profound crush. But, Binance backed out almost immediately as reports of mismanagement of funds began surfacing.
Soon after the initial reports of fund mismanagement, a large volume of withdrawals ensued, leading to a lack of liquidity. Due to their incapacity to complete the billions in pending withdrawals, FTX ran bankrupt.
The Contagion After FTX’s Collapse!
These events unfolded when the crypto market was struggling to recover from a prior black swan event. The markets ran into shambles. Bitcoin, which was trading at $20.7K at the time, took a very sharp decline to sub $16K in mere hours. All predictions pointed to a possible drop below sub-$15K. Other altcoins followed.
Tens, if not hundreds, of projects, including crypto lenders like BlockFi, Celsius and Voyager Digital, began bankruptcy procedures. Most of them lent large sums of undercollateralized loans to Alameda Research and FTX.
Crypto exchanges, including Crypto.com and others, suffered massive asset withdrawals, forcing them to downsize. In fact, it was during this time that a significant demand for proof of reserve increased for crypto exchanges.
The Court Case
It’s 2024, and Sam Bankman-Fried, the then-head of the entity, is facing legal action with a pending judgment. This former head, who led a flashy lifestyle, was found guilty of multiple charges of wire fraud, money laundering, securities fraud and campaign finance violations. Expectations are that he will spend a very long time in prison.
The Terra-Luna Scandal
This black swan event marked the beginning of the 2022 – 2023 crypto market bear run. It was big!
The 60 billion dollar empire plummeted from glory in a period of less than a fortnight, leaving billions in losses for investors. But what really happened?
The Dramatic Fall
Early May 2022, UST, Terra’s native stablecoin, suddenly depegged from its $1 mark. It first depegged to 90 cents, then further to 70 cents, and the trend continued until Terra UST plunged to $0.02. In the period, about $20 billion in value was wiped from UST markets.
But this was not all! LUNA, the native coin of the Terra ecosystem, followed suit. The coin, which was trading at $84 when the entire drama began, dropped below $0.00019 in less than a fortnight.
But what actually happened to UST? What led to a sudden drop in the value of one of the largest crypto stablecoins?
UST was an algorithmic stablecoin. It is unlike stablecoins like Tether and USD Coin, which are backed by USD reserves. UST’s value was standardized by the presence of LUNA and Bitcoin in reserves.
To create a UST stablecoin, you had to burn LUNA. For instance, with LUNA valued at $84, burning it would result in 84 UST.
The crash of the UST began on May 7, when about $2 billion worth of the stablecoins was unstacked from Anchor Protocol. Immediately, hundreds of millions of UST was liquidated. The sudden large selloffs led to a sharp plunge in UST to $0.91, below its $1 peg. Traders took advantage, exchanging $0.9 worth of UST for $1.
This offloading of stablecoin led to a continuous de-pegging to its lowest point.
The Contagion?
Crypto took a downward trajectory, with investors losing millions overnight. Bitcoin plunged from the $39K mark and fell below $20K in less than two months. This bearish trend was going on when the FTX saga unfolded a few months later.
LUNA and crypto investors shared their stories of losing thousands in savings.
Popular crypto networks, including Voyager and Celsius, filed for bankruptcy as a result of the accrued losses. Three Arrows Capital was also sent into liquidation.
The Court Case
The founder of the Terra crypto empire, Do Kwon, still faces lawsuits in the US and South Korea. Despite going into hiding, he was arrested earlier in 2023 and has cases to answer.
The collapse of Mt.Gox
At its peak, Mt. Gox was akin to Binance – super large, high liquidity and trust.
As the first-ever crypto exchange, Mt. Gox towered the crypto realm between 2010 and 2014. The once epicenter of the Bitcoin universe controlled about 70% to 80% of the Bitcoin trading volume.
The Dramatic Demise
The exchange descent was a slow death that began in 2011. After a series of security breaches and the loss of thousands of Bitcoins, tension escalated in 2014 when Mt Gox suspended withdrawals, citing suspicious activities.
The exchange discovered a massive loss of hundreds of thousands of BTC, worth millions of dollars. This massive loss eventually rendered the network insolvent. It was the first major black swan event in crypto.
Later, Mt Gox claimed a recovery of 200K Bitcoin. However, this was too late, as the damage was already done.
The most considerable blame for the loss was put on Russian hackers.
The Contagion
The sudden demise of Mt. Gox catapulted one of the biggest crypto market crashes of all time. Bitcoin took an almost immediate direction downwards.
In November 2013, Bitcoin traded at a high of $1.12K. By February 2014, it was clear that Mt Gox was falling. What ensued? A long bearish season sent Bitcoin to about $220, an over 80% plunge.
A Court Case?
Later in 2019, Mt. Gox’s CEO, Mark Karpeles, was convicted of falsifying data to inflate holdings, adding another twist to the saga.
The Binance Regulatory Issue
In November 2023, reports emerged that Binance reached an agreement with US watchdogs for a $4 billion settlement. For what?
The Case?
Binance was accused by the Commodities and Futures Trading Commission CFTC of not following rules and regulations. For the minor misdemeanour, Binance Exchange was forced to pay a fine of $4 billion, one of the largest in corporate fines history. Moreover, Binance agreed to allow for monitoring from government watchdogs for five years.
The Contagion
The news set Bitcoin aback by a few thousand, but the recovery was almost instant. However, for at least the period, there were massive withdrawals from the exchange, with fears of the exchange not remaining afloat.
When writing this report, Binance remained the top crypto exchange network. At its peak, the network had trading volumes averaging $76 billion. Its scandal led to a small plunge, but the exchange remains the largest.
The Bitfinex Hack
Bitfinex thrives in 2023 among the largest and most popular trading platforms within the crypto realm. However, its reputation might not be as clean as many would think.
What Happened?
In 2016, Bitfinex, one of the largest crypto exchanges at the time, was hacked. The attackers left with about $120 thousand BTC, valued at about $72 million.
Why was this so severe? In essence, the Bitcoin stolen would be valued at $4.8 billion when writing this report.
The Contagion?
There was no severe consequence following the attack. Bitcoin dropped from $600 to around $450 and surged back the next day. Hence, the impact on crypto markets was minimal.
The fact that Bitfinex still stands tall today is a plain indication that the hack didn’t kill it.
A Brief Summary of Risks Associated with Crypto Investing
The crypto world is unlike the traditional finance world. In fact, at the helm of its inception was the pure ambition to redefine the financial universe. And, of course, the path it’s taken so far has been great. Moving a $0 to a trillion-dollar industry in merely 15 years is a testament to its exciting growth.
However, there are many risks associated with investing within the crypto universe. It’s these risks that have contributed to the collapse of top networks mentioned in this guide, including FTX and Mt Gox. What are they?
Volatility Risks
The crypto market is hugely volatile. Today, the coins could be all bullish. Things could change almost in a matter of minutes, with tokens losing millions in the process. The Terra saga was a clear depiction of crypto’s volatility. As soon as liquidity was removed, UST depegged, and Terra followed suit.
Security Risks
Based on blockchain technology, the crypto space is exposed to immense security risks. There is always the risk of a hack attack on a crypto network. Since the birth of crypto, dozens of projects have suffered attacks. Bitfinex’s attack is a testament to the security risks.
Regulatory Risks
The Binance case is enough evidence. US watchdogs have been on a constant neck-to-neck attack against crypto projects. Binance is not the only one. Others like Polonies, Bitfinex, Kraken, and even Ripple have fallen under SEC’s radar.
Have We Seen an End to Such Events in Crypto?
History dictates that, No, we have not seen an end to such unpredictable events in the crypto realm. Seeing that the blockchain world is still in its infancy, chances are that we will see more black swan events in the future. These events expose the volatility, security and regulatory risks inherent in this nascent industry.
But, even in the face of such adversities, the crypto-market has shown its resilience, bouncing back every time. While these events left scars of losses and legal battles, they also underscored the need for more security and prudence in managing digital assets.
The constant evolution of the crypto world means we will likely witness more black swan events in the future. But, each event brings an opportunity to learn and improve.
As the adage says, “What doesn’t kill you makes you stronger.” The same can be said about the crypto industry, which continues to grow and evolve, becoming more robust and sophisticated with each challenge it overcomes.
Frequently Asked Questions
What is a Black Swan event?
It is a highly unexpected occurrence that has severe repercussions. In the crypto world, such an event significantly disrupts the market.
How does a black swan event apply to the crypto market?
In the crypto realm, black swan events are rare, but when they occur, they cause massive price declines.
Can cryptocurrencies survive a black Swan event?
Yes. In fact, cryptocurrency has survived numerous such black swan events in its short history. The events mentioned above are the major ones.
How can crypto investors protect themselves from black swan events?
First and foremost, investors should avoid investing more than they can afford to lose. Secondly, they should look up any potential market risks before investing.