What a golden age we live in! Bitcoin Bitcoin
Bitcoin is booming, and there's someone everywhere you look who's trying to give you a chance to make more.
Summary
Centralised crypto's seduction and danger — Big exchanges, lenders, custodians, and payment platforms rule today, but history has taught us "Too Big to Fail" institutions in crypto and TradFi tend to implode in spectacular fashion.
Disaster history — FTX, Terra/LUNA, Celsius, 3AC, and Mt. Gox all lost billions because of mismanagement, over-leverage, hacks, or fraud — all made worse by centralization and lack of transparency.
TradFi déjà vu — The 2008 financial crisis and Enron debacle echo crypto's missteps, demonstrating that concentration of power without transparency is always a threat in waiting.
Lesson for BTC holders — "Not your keys, not your coins": maintain custody on decentralized blockchains, scrutinize yield-earning platforms, and never assume catastrophe won't strike again.
No one is profiting more from this golden age than The Big Guys. You know who those big guys are — centralized crypto exchanges, centralized borrowing and lending platforms, centralized custodians, and centralized payment and transfer platforms. If you're a crypto investor, chances are that one or more of these Big Guys are sitting on your money today.
You may not view this as an issue. They are worth billions of dollars in assets. They are well-supported by blue-chip investors and other high-end, big-name stakeholders, therefore enhancing their credibility in the eyes of most people. They also tend to need less technical know-how than decentralized systems, include fiat-to-crypto conversion capabilities, and provide a one-stop experience for your crypto trading desires.
Sounds…really wonderful, right?
Oh, the hazard of a short memory. Look back a couple of years, or decades, and we have some of the most disastrous moments in crypto history — much of it brought about by institutions so massive, you could have counted them among Too Big To Fail. And just like the so-called Too Big To Fail banks destroyed everybody from whale investors to mere blokes in the 2008 financial collapse, the crypto-centered entities have presented us with disaster after disaster.
And it's going to keep happening. And happening. And happening.
Don't recall the collapses that highlight the dangers of employing centralized (as opposed to trustless) actors to manage your BTC? Here's a quick reminder:
FTX / Alameda research collapse
Failure of centralization: FTX, the world's third-largest centralized crypto exchange, went out of business in 2022 after misusing clients' funds, insider trading, and illicit leverage using its FTT token and crypto trading company Alameda Research. FTX and Alameda were controlled by the same individual (Sam Bankman-Fried), who is presently serving a 25-year prison term.
Loss amount: more than $8 billion.
Terra / LUNA stablecoin collapse
Failure of centralization: The TerraUST stablecoin depended on algorithmic pegging supported by LUNA tokens, instead of a more decentralized setup that would have involved safer collateral design and more transparent audits and governance. The outcome: the 2022 market crash caused an enormous sell-off for LUNA, the demise of TerraUSD, and the collapse of a number of other enormous, centralized systems that operated opaque, risky behavior.
Amount lost: approximately $45 billion.
Celsius Network & Three Arrows Capital (3AC)
Celsius promised too-good-to-be-true returns, and millions of users bought into it. Celsius's performance delivering those returns rested on shaky investments, including massive exposure to TerraUSD. The collapse resulted in another wave of criminal proceedings, in this instance, CEO Alex Mashinsky receiving 12 years for market manipulation and fraud. The Celsius debacle lost at least $1.7 billion in deposits, in addition to another $4.7 billion in stuck customer funds.
Three Arrows Capital was a superstar hedge fund that at its peak delivered sky-high returns for its customers. But relying on a single, centralized entity would again prove a disastrous decision, as 3AC’s over-leveraged positions in Terra/LUNA and other risky investments triggered a wave of losses that topped $3.3 billion.
Mt. Gox Hack and collapse
Centralization failure: Here, we’ll go back further, to the 2011-2014 run of Mt. Gox.
One of the earliest successful centralized crypto exchanges, Mt. Gox, during its pea,k processed roughly 70% of all BTC transactions. A hack caused Mt. Gox to lose some 850,000 BTC in customer funds — a figure equivalent to nearly $100 billion today. Though centralized exchanges have tightened security significantly in the decade-plus since this tragedy, the sheer magnitude of the Mt. Gox calamity still echoes for those wise enough to recall their crypto history, and the danger that any centralized crypto organization carries.
These crypto instances literally only scrape the tip of the iceberg, however. There are many instances of economic catastrophes in conventional finance that might have been dampened or even outright avoided altogether with the assistance of decentralization and transparency.
2008 global financial crisis
As the housing bubble inflated, some of the planet's biggest banks and other massive financial institutions plunged headfirst into mortgage-backed securities, employing sky-high leverage to ramp up their exposure, and therefore risk.
And then came the collapse, with firms considered Too Big To Fail proceeding to fail utterly out of existence. The U.S.-operation global financial giant Lehman Brothers was one of the largest catastrophes, burning out in bankruptcy and beginning a Wall Street panic that swept around the globe, immobilizing economies in Iceland to Greece and far, far beyond. The crisis erased over $10 trillion — that's Trillion, with a T — of wealth from the face of the Earth.
Enron
Essentially, blockchains are unchangeable public databases, methods of opening up financial transactions to the light of day, utilizing any timeframe desired.
The demise of Enron, a former dominant U.S.-based energy company, showed what you get when you sacrifice transparency for greed. The firm employed numerous varieties of complex accounting deception to inflate earnings statements and conceal huge levels of debt. When the truth finally emerged, Enron dived, teetering all the way to bankruptcy and erasing $74 billion in shareholder value.
Takeaways
We might continue ad infinitum (look up Thodex, Bitfinex, QuadrigaCX, and other crypto fiascos, and MF Global, Wells Fargo, Bernie Madoff, and other TradFi Hindenburgs, all of which might have been avoided or at least softened by decentralization). The point is that centralization and secrecy are the bane of equal trade, and they're an ongoing threat – one not limited to some bygone moment in time, but rather a contemporary threat to society at large, and to your bags specifically.
The guiding principle of crypto (and by extension, finance in general) must never be lost: "Not your keys, not your coins," that is, when it comes to your own money, trust no one but yourself.
So what does this imply for you, the holder of BTC?
For one, read the fine print. As secure as giant-name, centralized entities may appear, take into consideration all the dangers of turning custody of your funds over to a third party.
A good alternative to central exchanges and custodians is decentralized blockchains. They allow you to have sole control over your money through private keys.
Better still, a few decentralized alternatives have begun to appear for those who want to earn yield on their BTC. Even fewer decentralized blockchains and apps provide BTC investment alternatives that reward in real BTC.
So do your homework. If you don't, years from now you may be asking yourself a painful question: Why did I think that catastrophe wouldn't happen again?
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