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What a golden age we live in! Bitcoin (BTC) is booming, and everywhere you look, someone’s offering you a chance to earn more.
Summary
- Centralized crypto’s allure and risk — Big exchanges, lenders, custodians, and payment platforms dominate today, but history shows “Too Big to Fail” entities in crypto and TradFi often collapse spectacularly.
- Disaster track record — FTX, Terra/LUNA, Celsius, 3AC, and Mt. Gox each lost billions due to mismanagement, over-leverage, hacks, or fraud — all amplified by centralization and opacity.
- TradFi déjà vu — The 2008 financial crisis and Enron scandal mirror crypto’s failures, proving concentration of power without transparency is a recurring threat.
- Lesson for BTC holders — “Not your keys, not your coins”: keep custody on decentralized blockchains, vet yield-earning platforms, and never assume disaster won’t happen again.
No one’s benefiting more from this golden age than The Big Guys. You know who these big guys are — centralized crypto exchanges, centralized lending and borrowing platforms, centralized custodians, and centralized payment and transfer platforms. If you’re a crypto investor, there’s a good chance one or more of these Big Guys are holding your money right now.
You might not see this as a problem. These centralized companies hold billions of dollars in assets. They are heavily backed by blue-chip investors and other fancy, big-name stakeholders, thus bolstering their reputation in the eyes of many. They also often require less expertise than decentralized systems, come with fiat-to-crypto conversion options, and can serve as a one-stop shop for your crypto trading needs.
Sounds…pretty great, right?
Ah, the danger of having a short memory. Go back a few years, or decades, and we encounter some of the worst disasters in crypto history — many of these caused by entities so large, you might have classified them as Too Big To Fail. And just as the supposed Too Big To Fail banks crippled everyone from whale investors to everyday blokes during the 2008 financial crisis, centralized crypto entities have brought us catastrophe after catastrophe.
And it’s going to happen again. And again. And again.
Don’t remember the collapses that underscore the risks of using centralized (rather than trustless) entities to handle your BTC? Here’s a brief refresher:
FTX / Alameda research collapse
Centralization failure: FTX, once the world’s third-largest centralized crypto exchange, collapsed in 2022 following misuse of client funds, insider trading, and shady leverage practices involving its FTT token and the crypto trading firm Alameda Research. Both FTX and Alameda were owned by the same person (Sam Bankman-Fried), who is now serving a 25-year prison sentence.
Amount lost: over $8 billion.
Terra / LUNA stablecoin collapse
Centralization failure: The TerraUST stablecoin relied on algorithmic pegging backed by LUNA tokens, rather than a more decentralized approach that would have included safer collateral design and more transparent governance and audits. The result: the market downturn of 2022 triggered a huge sell-off for LUNA, the death of TerraUSD, and the collapse of several other huge, centralized entities that engaged in opaque, risky behavior.
Amount lost: around $45 billion.
Celsius Network & Three Arrows Capital (3AC)
Celsius offered too-good-to-be-true yields, and millions of users fell for it. Celsius’s ability to deliver those yields depended on shaky ventures, including huge exposure to TerraUSD. The disaster led to another round of criminal charges, in this case, CEO Alex Mashinsky getting 12 years for fraud and market manipulation. The Celsius fiasco resulted in at least $1.7 billion in losses, plus another $4.7 billion in trapped 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 first successful centralized crypto exchanges, Mt. Gox, at its pea,k handled about 70% of all BTC transactions. A hack prompted Mt. Gox to lose about 850,000 BTC in user funds — a sum worth nearly $100 billion today. While centralized exchanges have improved their security considerably in the decade-plus since this event, the massive scale of the Mt. Gox disaster still resonates for those smart enough to remember their crypto history, and the risk that any centralized crypto entity entails.
These crypto examples really just scratch the surface, though. There are countless examples of financial disasters in traditional finance that could have also been mitigated or even prevented completely with the help of decentralization and transparency.
2008 global financial crisis
With the housing market booming, some of the world’s largest banks and other huge financial institutions dove nose-deep into mortgage-backed securities, using sky-high leverage to grow their exposure, and thus their risk.
And then it all collapsed, with companies deemed Too Big To Fail going on to fail right out of existence. The U.S.-based global financial juggernaut Lehman Brothers was one of the biggest disasters, fizzling into bankruptcy and starting a Wall Street panic that spread across the world, crippling economies from Iceland to Greece and far beyond. The crisis wiped more than $10 trillion — that’s Trillion, with a T — in wealth off the face of the Earth.
Enron
At their core, blockchains are immutable public ledgers, ways for anyone to shine a light on financial transactions, using any desired timeframe.
The fall of Enron, a once-powerful U.S.-based energy giant, demonstrated what happens when you bury transparency in favor of greed. The company used many flavors of complicated accounting fraud to pump earnings reports and hide massive amounts of debt. Once the truth came out, Enron crashed, careening all the way to bankruptcy and wiping out $74 billion in shareholder value.
Takeaways
We could go on and on (search Thodex, Bitfinex, QuadrigaCX, and other crypto fiascos, as well as MF Global, Wells Fargo, Bernie Madoff, and other TradFi Hindenburgs, all of which could have been prevented or at least mitigated by decentralization). The bottom line is that centralization and opacity are the enemies of fair commerce, and they’re a constant threat – one not restricted to a long-ago moment of time, but rather a present-day menace to both society as a whole, and to your bags in particular.
The central tenet of crypto (and by extension, finance as a whole) should never be forgotten: “Not your keys, not your coins,” which means when it comes to your assets, trust no one but yourself.
So what does this mean for you, the BTC holder?
For starters, read the fine print. As safe as huge-name, centralized companies might seem, consider all the risks involved in handing custody of your assets over to someone else.
A viable alternative to centralized exchanges and custodians is decentralized blockchains. They enable you to retain exclusive access to your money via private keys.
Better still, a small number of decentralized options have started to emerge for people seeking to earn yield on their BTC. An even smaller number of decentralized blockchains and apps offer BTC investment options that pay out yield in real BTC.
So do your research. If you don’t, years from now you might ask yourself a painful question: Why did I think that disaster wouldn’t strike again?
