Two messes that contributed to the crypto crash
An already troubled market was roiled by these scandals
The value of most cryptocurrencies has fallen considerably this year—even stablecoins have had their problems. I had thought that the US$-pegged sector of crypto had seemed dicey as this year had gone on, but few were prepared for the first of the messes that I am discussing here—the cratering of the UST stablecoin which then dragged down the associated Luna crypto. Seemingly stable reserves held by exchanges and users evaporated rapidly, causing fear and panic in the overall crypto markets.
What happened with Luna is still being looked into. Scrutiny is mounting on its founder Do Kwon, who is likely to face numerous lawsuits. However holders of UST and Luna are unlikely to get much of their original investment back. But whether the flaws were specific to UST and Luna or not this is a major PR hit for algorithmic stablecoins—this collapse is basically a worst case scenario outlined by critics come true.
Another crypto mess is happening in another corner of “de-fi" with Celsius, a crypto lending platform which has frozen customer withdrawals. Whatever the reasoning for the move, it has led to fears of insolvency and rumors of a Goldman Sachs takeover. For people with accounts at Celsius, it’s not clear if or when they will regain access to their assets.
This certainly outlines a problem of trust in the crypto space: online exchanges and trading platforms will typically hold the keys to their users’ crypto. If something happens to that company, it may become hard or impossible to get access to your assets. This is why many long-term crypto holders prefer to set up their own wallets and save their own keys.
While these issues are bad news for the overall crypto sector, the failures here are not with the core concept of a blockchain being undermined, say mathematically, or with hashing power. These are more akin to typical finance business scandals, where risk management becomes inadequate and difficult markets expose weak players. But with these scandals feeding in to the fear and doomsaying right now in the market, it is hard to say (even with the relative stability of the last week) when crypto will hit a bottom.