Crypto main characters drop like flies when the bear market turns one

Crypto main characters drop like flies when the bear market turns one

A year ago today, total crypto capitalization arrived All-time high almost $3 trillion, marking the beginning of the current bear market.

Bitcoin's $69,000 peak last November ushered in a golden period for digital assets, a place where eccentric characters poured billions of dollars into promising - and risky - startups and protocols and reaped historic returns.

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

“The past year has been dominated by the prodigy,” said Patrick White, chief executive of crypto services company Bitwave.

No prodigy was greater than FTX CEO Sam Bankman-Fried, who ran a popular centralized crypto exchange and was revered for his trading prowess.

“He started out as an arbitrager,” White told Blockworks. "Arbitrage is hard, everyday work. And I somehow always saw him as a very disciplined person."

Iconic enough to be known only as SBF, the former Jane Street Quant slept on beanbags in his office in Hong Kong and pledged give away most of his billions.

Mid-2021 Bankman-Fried said his fast-rising company could be bought by Goldman Sachs once it overtakes its more established rival Binance. When markets peaked a few months later, the FTX hype seemed justified, and a diverse group of characters alongside Bankman-Fried sought to control a piece of the decentralized future.

Emerging crypto lending platform Celsius was forced to expand its Series B round after overfunding its $400 million target. The serial entrepreneur's founder, Alex Mashinsky, published a book on Using Crypto to Achieve Financial Independence, “The Mashinsky Method.”

The somewhat novel stablecoin Terra, launched on Cosmos, and its brash founder Do Kwon enjoyed giddily shooting down any doubters.

As Kwon told a Terra skeptic: “ Have fun staying poor " on Twitter, it became a popular refrain among the so-called LUNAtics, a group of young, very online investors who thought Terra was their way out of uninspiring economic conditions. Of course, given that crypto is always cyclical, Kwon had borrowed the maxim from Bitcoin maximalists.

“This was a demographic that really felt like the world wasn’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 Singapore-based fund became a sought-after backer of crypto projects before the bear struck.

Zhu and Davies put down a deposit on a $50 million yacht that would be larger than any in Singapore. Opulent spending had become part of Crypto's MO: luxury watch prices would languish as crypto assets dried up. Big-spending “pharma bro” Martin Shkreli got out of prison and started a crypto project around the same time.

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

“Use more capital – loyal guys”

The big banks seemed to be arming themselves. An October 2021 Goldman report even praised the virtues of DeFi.

After news of the Covid-19 Omicron variant sent markets crashing in November, crypto had yet to reach its highs. But a flood of larger-than-life crypto characters still placed big bets in the ensuing bear year - fueling the masses to "ape" into digital assets at fire-sale prices.

MicroStrategy CEO Michael Saylor had told investors eight months earlier that they should mortgage their homes to buy Bitcoin. El Salvador's President Nayib Bukele repeatedly “bought” the decline in Bitcoin prices with the country's sovereign wealth fund.

“I hope the year of characters is over,” said Luca Prosperi, consultant at Cherry Ventures. “A lot of these guys are either poker players or traders, and they were massive gamblers.”

As prices fell, Terra's dollar peg began to wobble. In early May, the Terra Foundation spent $450 million on Bitcoin to save the bond.

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

In mid-May, Terra entered a death spiral, wiping out $30 billion in just a few days. Three Arrows Capital lost $200 million from Terra and ended up with a $3.5 billion hole in its highly leveraged balance sheet.

The hedge fund firm filed for bankruptcy, and Zhu and Davies disappeared from public view, appearing at Zoom court hearings silently and with cameras turned off. Court documents showed Zhu made himself a $5 million creditor, and Davies' wife claimed she was owed $65 million.

The crypto liquidity crisis ricocheted outwards. As it turns out, Mashinsky's 8% Celsius yield was not the true value of money, as he told Blockworks in 2021, but an unsustainable cash outflow. It turned out that Mashinsky was also selling Celsius tokens while advising investors to hold them.

When Luna and Three Arrows Capital went under, Mashinsky insisted Celsius was fine. The next day, the exchange paused payouts. Celsius has since filed for bankruptcy and Mashinsky has resigned.

Bull or bear, crypto character worship is dangerous

There seemed to be one crypto project that thrived in the bear market: Bankman-Frieds 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 He explained how FTX would continue to grow even if the competition couldn't.

“Sometimes when other people are bitchy, you bitch,” 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 native FTT token, which is now crashing. After finding new support, Bankman-Fried struck a tentative deal to sell his exchange to rival Binance and fellow billionaire Changpeng Zhao. And that quickly broke too.

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

3AC creditors are seeking to subpoena Zhu and Davies, who appear to have been uncooperative in bankruptcy proceedings. Bukele's El Salvador had to buy back its own debt. When Bankman-Fried sold FTX, the last prodigy in a year of prodigies stopped falling billionaire. Prosperi wonders if crypto can stay away.

“What worries me is that these same people are now worshiping [Zhao], a CEO of an exchange [who] is openly throwing away bags,” Prosperi said. “It’s gambling again.”

On Tuesday, after Bankman-Fried announced Binance's impending acquisition of FTX, Su Zhu broke his public silence, write on Twitter that his last months were spent praying and surfing and he is considering taking up a quiet life in the forest.

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

“I want to let you know that prison isn’t that bad,” Shkreli told Kwon.

Unsure how else to react, the group burst into laughter.

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The post Crypto Main Characters Drop Like Flies as Bear Market Turns One is not financial advice.