Crypto Majors Drop Like Flies As Bear Market Turns Old

One year ago today, total crypto capitalization reached an all-time high of just $3 trillion, marking the beginning of the current bear market.

The $69,000 bitcoin peak last November ushered in a golden phase for digital assets, a place where eccentric characters plowed billions of dollars into promising — and risky — startups and protocols made historic returns.

Since then, compounding liquidity crises have driven capital out of crypto markets, and cryptos collectively plunged by two-thirds. The real question is what — if anything — industry participants have learned from the nostalgic good times and rocky prices that have persisted since then.

“The last year was defined by the underbelly,” said Patrick White, CEO of crypto services firm Bitwave.

No wonder was bigger than FTX CEO Sam Bankman-Fried, who ran a popular centralized crypto exchange and was revered for his trading chops.

“He started out as an arbitrageur,” White told Blockworks. “Arbitrage is hard, everyday work. And I kind of always thought of him as a very disciplined person.”

Iconic enough to be known simply as SBF, the former Jane Street quant slept on bean bags in his Hong Kong office and promised to give away the majority of his billions.

In mid-2021, Bankman-Fried said his fast-rising company could consider buying Goldman Sachs once it passed its more established rival, Binance. When the markets peaked a few months later, the FTX hype seemed justified, and a colorful cast of characters jostled with Bankman-Fried to control a piece of the decentralized future.

New crypto lending platform Celsius had to raise its Series B round after overfunding its $400 million target. Its serial founder, Alex Mashinsky, published a book on using crypto to achieve financial independence, “The Mashinsky Method.”

The somewhat new Terra stablecoin was launched on Cosmos along with the associated Luna token. Its brash founder, Do Kwon, liked to shoot down any doubters.

When Kwon told a Terra skeptic to “have fun being poor” on Twitter became a popular refrain among so-called LUNAtics, a group of young, very online investors who thought Terra was their way out of uninspiring financial conditions. Of course, considering that crypto is constantly cyclical, Kwon had borrowed the maxim from Bitcoin maximalists.

“It was a demographic that really feels like the world isn’t really set up for them anymore,” White said.

One of Terra’s main investors was crypto hedge fund Three Arrows Capital, run by millennial former Credit Suisse traders Kyle Davies and Su Zhu. Hailed for its tremendous growth, the Singaporean fund became an in-demand backer of crypto projects before the bear struck.

Zhu and Davies made a down payment on a $50 million yacht meant to be bigger than any in Singapore. Lavish spending had become part of crypto’s MO: The prices of luxury watches would disappear when crypto fortunes dried up. Free-riding “pharma bro” Martin Shkreli got out of prison and launched a crypto project around the same time.

Zhu became notorious for his poetically bullish crypto tweets, once writing“If you don’t understand crypto and refuse to learn, it’s going to be a tough century for you.”

“Place more capital – steady guys”

It seemed that the big banks were bringing themselves. An October 2021 Goldman report even extolled the benefits of DeFi.

Crypto has never regained its highs right before the Covid-19 Omicron variant sent markets tumbling late last year. But a host of larger-than-life crypto characters still hammered down big bets in the ensuing bear year — cheering the masses to “monkey” into digital assets at fire sale prices.

Eight months earlier, MicroStrategy CEO Michael Saylor had asked investors to mortgage their homes to buy bitcoin. El Salvador’s President Nayib Bukele has repeatedly “bought the dip” in bitcoin prices with the country’s sovereign wealth fund.

“I hope the year of the character is over,” said Luca Prosperi, an adviser at Cherry Ventures. “A lot of these guys are either poker players or traders, and they’ve been huge gamblers.”

As prices fell, Terra’s dollar stick began to wobble. In early May, Terra’s Luna Foundation Guard dumped $450 million in bitcoin against the stablecoin to preserve its value.

“Place more capital – steady guys,” Kwon wrote in an infamous, now-deleted tweet.

In mid-May, Terra went into a death spiral, wiping out $30 billion in a matter of days. Three Arrows Capital lost $200 million from Terra, ending up with a $3.5 billion hole in its highly leveraged balance sheet.

The hedge fund firm declared bankruptcy, and Zhu and Davies disappeared from the public eye, appearing in Zoom court hearings muted with cameras off. Court documents showed Zhu made himself a creditor of $5 million, and Davies’ wife claimed she was owed $65 million.

The crypto-liquidity crisis ricocheted outward. It turned out that Mashinsky’s return of 8% Celsius was not the true value of the money, as he told Blockworks in 2021, but an unsustainable cash withdrawal. Mashinsky also appeared to be selling Celsius tokens while advising investors to hold.

When Terra and Three Arrows Capital went under, Mashinsky insisted Celsius was good. The following day, the stock exchange paused withdrawals. Celsius has since declared bankruptcy, and Mashinsky resigned.

Bull or bear, worshiping crypto characters is dangerous

There seemed to be one crypto project that thrived in the bear market: Bankman-Fried’s FTX. The firm bought troubled crypto lenders Bitvo and BlockFi while making a bid for bankrupt Voyager Digital. When Coinbase laid off 18% of its employees, SBF wrote a Twitter thread explains how FTX would continue to grow even when its competitors could not.

“Sometimes, when others Zig, you Zag,” Bankman-Fried said.

Last week, CoinDesk said Alameda Research — the proprietary trading and venture capital firm also owned by Bankman-Fried — was backed by FTX’s original FTT token, which is now plunging. After striking out on new backing, Bankman-Fried forged a tentative deal to sell its exchange to rival Binance and fellow billionaire CEO Changpeng Zhao. And that, too, quickly fell apart.

A year after crypto’s all-time high, the protagonists of the bull market are almost all in legal or financial trouble. Kwon is wanted by Interpol. Mashinsky is being investigated by Celsius’ creditors’ committee because of his trading behavior. Saylor resigned as CEO of MicroStrategy and faces a $100 million tax fraud lawsuit.

3AC creditors are seeking to subpoena Zhu and Davies, who have apparently been uncooperative with the bankruptcy proceedings. Bukele’s El Salvador had to buy back its own debt. When Bankman-Fried sold FTX, the last wonder in a year of wonders toppled, no longer a billionaire. Prosperi wonders if crypto can stay away.

“What worries me is that the same people are now worshipping [Zhao]managing director of a stock exchange [who] is openly dumping bags, Prosperi said. “This is gambling again.”

On Tuesday, after Bankman-Fried announced Binance’s pending acquisition of FTX, Su Zhu broke his public silence, writes on Twitter that his last months were devoted to prayer and surfing, and he is considering a quiet life in the woods.

Around the same time, Do Kwon and Martin Shkreli joined the “Up Only” podcast to talk about FTX’s downfall.

“I will tell you that prison is not that bad,” Shkreli told Kwon.

Unsure of how else to respond, the group burst into laughter.

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