The dream of the cryptocurrency circle is shattered: a 90s cryptocurrency trader lost 2.5 million in six days
2022-12-30 11:29
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Although my country has begun to extinguish the "false fire" of virtual currency speculation since 2017, the so-called "myth of wealth creation" in the currency circle still attracts many investors to enter. Now, when supervision comes, losses will expand and ecological operations will not make ends meet. What will be the ending of this game supported by faith?
What you lose is real money, but what you play with is just illusions.
On December 20, US time, SBF, the founder of FTX, a cryptocurrency exchange that went bankrupt due to a "thunderstorm", was charged with eight counts by US prosecutors. If all the charges are proven, he will face up to 115 years in prison. Coincidentally, on the same day, a group of lawyers for French cryptocurrency investors said they had filed a criminal lawsuit against Binance, the world's largest cryptocurrency trading platform, accusing it of misleading the public and promoting its services before the law allowed it to provide legal services. Binance's founder, Zhao Changpeng, the former richest Chinese, is also facing unprecedented pressure.
On December 23, in response to the news that "the exchange suspended withdrawals of USDC (a fully collateralized stablecoin pegged to the US dollar)" and "refused to disclose financial information", although Binance responded on its official website, external doubts have not dissipated.
Lost 2.5 million in six days
Although my country has begun to put out the "false fire" of virtual currency speculation since 2017 and put "protection locks" on investors' wallets, the "wealth-making myth" of the currency circle still attracted many investors to enter. Zhang Qi from Shenzhen is one of them.
At the end of 2019, Bitcoin was the first to recover, and then it started a round of sharp decline. Zhang Qi, who saw the opportunity, began to buy cryptocurrencies, including Bitcoin. In the ups and downs of the market, Zhang Qi also made some losses and some gains.
It was not until 2020, when the COVID-19 pandemic hit and the United States began to increase the money supply, that Bitcoin broke through several 10,000-yuan mark in March of that year, and finally broke through the 60,000-dollar mark in April. It was also in the expectation that "Bitcoin is expected to rise to more than 100,000 US dollars" that Zhang Qi bought more cryptocurrencies.
Taking advantage of this round of boom, he raised his original 300,000 yuan to "nearly 10 million yuan". However, the change of the market is always unexpected. On May 19, 2021, the price of Bitcoin plunged rapidly, from around US$43,000 to US$29,000, with the highest single-day drop of 34%. Another virtual currency, Ethereum, was almost halved.
From that day on, Zhang Qi's investment profits began to be lost. By the end of 2021, about 70% of them had been lost. On days when the market fell 40%-50% a day, Zhang Qi was restless. "Even eating was stupid. I was so tired." It was also this time when he almost lost all his money that made Zhang Qi calm down and take a rest. "It's unpredictable and full of risks. It feels like the world's largest casino."
Zhang Qi, who stopped trading, was lucky enough to avoid the great turmoil in the cryptocurrency circle in 2022, but Hu Yao, a post-90s in Japan, was not so lucky. He started buying cryptocurrencies in January 2021 after seeing some short essays on social platforms about "making 10 million in 2 days by trading cryptocurrencies". It was also at the beginning of 2021, during the crazy rise of cryptocurrencies, that Hu Yao's 120,000 yuan investment in Ethereum quadrupled to 500,000 yuan.
Having tasted the sweetness of "getting rich overnight", Hu Yao invested almost all of his money in Bitcoin and Ethereum in 2022. However, since November 2021, the cryptocurrency market has ushered in a long winter. Especially after entering 2022, the flash crash of LUNA coin, the "Moutai of the coin circle", in May, triggered a major earthquake in the coin circle, which reached its peak on November 11 due to the bankruptcy of FTX.
From November 6 to November 11, in just six days, "I lost 2.5 million. During these days, Bitcoin fell by more than 20%", Hu Yao told Shijie on December 19, "Bitcoin mining is now a loss-making business, and the mined coins are not enough to cover the electricity bill." On the other hand, Song Feng's life has indeed changed since he wanted to "change his fate" by speculating in coins.
Before that, although he didn't make much money, he slept well every day and his life was quite fulfilling. After entering the virtual currency market in May last year, Song Feng became extremely miserable. He couldn't sleep well because he watched the market every day. "When the market fluctuates greatly, my heart can't stand it." Even if he made 50,000 yuan one night, Song Feng was not happy. Instead, he was panicked. "I know very well that this is the behavior of a gambler, but I feel that I am trapped and don't want to stop."
Soon, reality dealt Song Feng a heavy blow. In December 2022, amid the continued volatility in the cryptocurrency circle, the Euro-Italian exchange where he bought cryptocurrency experienced a flash crash, and the cryptocurrency he held could not be sold. After experiencing the extreme pain of being on the verge of a liquidation, all the money Song Feng earned from watching the market for a year, including the 50,000 yuan he earned that night and more than 10,000 yuan in savings, was eventually lost. Now, facing the mess, Song Feng regrets it very much, "If I start over again, I will definitely not touch virtual currency. There is no future."
This is just the tip of the iceberg in the cryptocurrency world. On May 19, 2021, nearly 600,000 people lost their positions, and more than 44 billion yuan of funds were wiped out. Since 2022, the cryptocurrency market has continued to intensify. Glassnode data shows that as of mid-December 2022, global Bitcoin investors have lost a total of US$195 billion, or about RMB 1,359.7 billion. Most holders sold their Bitcoins at a loss.
What happened to the cryptocurrency world that once attracted so many people?
Behind the turmoil in the cryptocurrency circle
As glorious as the cryptocurrency world was in the past, it is as turbulent now.
There is a widely circulated story in the cryptocurrency circle. In May 2010, someone bought a pizza worth $25 on a Bitcoin forum using 10,000 Bitcoins. This was the first fair exchange rate for Bitcoin, corresponding to a price of $0.0025 per coin.
At the end of 2017, Bitcoin rose to around $16,000; in April 2021, the price of Bitcoin once exceeded $64,000. In other words, Bitcoin has risen more than 25 million times in eleven years. If someone invested one yuan that year, it would become 25 million yuan, and 10 yuan would appreciate to 250 million yuan.
However, the cryptocurrency world is not only about getting rich quickly. In 2022, the cryptocurrency world experienced an unprecedented earthquake, which wiped out a huge amount of wealth. This "earthquake" began with the flash crash of the cryptocurrency LUNA coin. On May 9, the LUNA coin, which had a market value of up to $41 billion, plummeted without any warning. In just a few days, its price fell from nearly $90 to less than $0.00015.
The collapse of the market value of LUNA coins worth tens of billions of dollars not only caused countless investors to lose all their money, but also caused thousands of coins in the cryptocurrency circle to fall. Taking Bitcoin as an example, from the early morning of May 10, Bitcoin plummeted by more than 10% in 15 minutes, and many investors were liquidated during the trading session. According to the data from the currency world, on May 14th, Beijing time alone, more than 160,000 users of virtual currency contracts on the entire network were liquidated, and the amount of liquidation reached 2.12 billion yuan.
The domino effect broke out. Most leading companies in the virtual currency industry "survived the winter" by laying off employees. According to CoinDesk statistics, as of November 30, the virtual currency industry had reduced a total of more than 26,000 jobs. Many financial institutions were reported to be unable to repay user assets and went bankrupt, including the leading hedge fund Three Arrows Capital.
This is a turbulent time for the cryptocurrency industry. From the end of October to the end of November, three cryptocurrency leaders died suddenly in succession. As FTX filed for bankruptcy on November 11, its founder SBF was charged with eight counts by the US prosecutors. If all charges are proven, SBF could be sentenced to up to 115 years in prison.
Why is the cryptocurrency market so turbulent? We have to start with its origin. The name of virtual currency comes from the contrast with physical currency. The earliest virtual currency is Bitcoin, which is a peer-to-peer and decentralized digital asset proposed by Japanese Satoshi Nakamoto in 2008. Because it uses cryptographic principles for transactions, Bitcoin has also become one of the earliest types of cryptocurrency. Other cryptocurrencies issued with Bitcoin as a reference include Ethereum, Litecoin, Dogecoin, Quarkcoin, etc.
The rise and fall of cryptocurrencies are directly related to the Federal Reserve's loose monetary policy.
Mark Mobius, a legendary American investor and "Godfather of Emerging Markets", believes that the U.S. dollar money supply has increased by more than 40% in the past few years, which has given investors enough cash to speculate on cryptocurrencies. Since 2022, the Federal Reserve has raised interest rates seven times. The interest rate hike has reduced the money available for investment in the market. As cryptocurrency prices fell along with the U.S. market, some network stablecoins (a type of cryptocurrency with an "anchor" attribute) that promised to be pegged to fiat currencies such as the U.S. dollar but had inherent flaws were detonated, which in turn affected financing institutions that provide leverage for cryptocurrencies, including exchanges like FTX.
But the root cause of the great turmoil in cryptocurrency can only be traced back to the controversy over whether it has value. Taking Bitcoin as an example, since it has no direct connection with the real industry, its price fluctuations are out of the real world's industrial restrictions and the control of traditional methods. It is also because of this that various cryptocurrency scams emerge one after another as the price of Bitcoin continues to rise.
More importantly, "the huge transaction volume in the cryptocurrency market is affecting the real currency markets of major institutions and even various countries, thus bringing new problems of giant influence and national control." Deng Feng from the Research Institute of Fudan University once mentioned. For example, Musk once hyped Dogecoin, which has a very weak technical foundation, and caused its price to soar.
In addition, the reason why FTX was accused of money laundering and fraud by the US prosecutors was because there was a huge gap of $8 billion on the FTX balance sheet. The US Securities and Exchange Commission (SEC) stated: "SBF misappropriated billions of dollars of customer funds from the trading platform for his own personal interests and to help develop his cryptocurrency empire."
"The punishment of cryptocurrencies has just begun," said SEC Chairman Gensler.
In addition to the bad situation of SBF, the founder of FTX, the founder of cryptocurrency exchange Binance and former "richest Chinese man" Zhao Changpeng is in the same difficult situation.
The troubles of the “richest Chinese”
Born in Jiangsu, Zhao Changpeng immigrated to Canada when he was young and founded Binance Exchange in China in 2017. In 2021, Binance not only became the world's largest cryptocurrency trading platform, but Zhao Changpeng also became the "richest Chinese" with a net worth of US$95.8 billion.
Before he could even get comfortable in this position, Zhao Changpeng's personal wealth shrank from $96 billion to $11.6 billion during this year's cryptocurrency turmoil, evaporating nearly 90%. When Zhao Changpeng fell from the position of "the richest Chinese", Binance also reached a dangerous moment.
Some media used this passage to describe Binance's current situation: the US government is investigating it, international short sellers are sniping it, auditing companies are abandoning it, tens of billions of funds are fleeing it, and Binance's 120 million users are also ready to move... Zhao Changpeng's crisis began when FTX went bankrupt.
In early November 2022, Zhao Changpeng began to sell off 23 million FTX tokens FTT due to concerns about the "death spiral" of FTX (i.e., debt continued to rise while the economy could not grow). Zhao Changpeng's public selling caused FTT token holders to start panic selling, which peaked on November 9.
On the same day, Zhao Changpeng published a public post, which roughly meant: SBF asked me for help and hoped that I would pay to save the situation. I promised to save him. However, the next day, Zhao Changpeng published another post, which roughly meant: FTX’s hole is too big, I won’t save it. When Zhao Changpeng made it clear that he would not pay, FTX declared bankruptcy on November 11. When FTX’s myth of making money was shattered, Binance’s fate also changed.
What Zhao Changpeng did not expect was that the FTX incident would backfire on him. The outside world discovered that Binance’s financial status was even more opaque than FTX. After all, before the Merkle tree (a method that can verify whether a crypto exchange has misappropriated user funds) was applied, most cryptocurrency exchanges were not regulated by regulatory agencies.
Dangerous signals soon came from all directions. On December 12, Binance suspended withdrawals of USDC, a mainstream cryptocurrency, for eight hours. This move was considered "abnormal and very dangerous" by the industry; on December 13, investors withdrew $3 billion from Binance in one day, far exceeding the normal withdrawal amount.
On December 18, the American accounting firm Mazars deleted the Binance reserve proof audit report from its official website and stated that it would no longer provide services to the crypto exchange; on December 20, a group of lawyers for French crypto investors stated that they had filed a criminal lawsuit against Binance, accusing it of misleading the public and promoting its services before the law permitted its legal services.
The most damaging is yet to come. The Paper quoted media reports that U.S. prosecutors are considering ending the money laundering investigation into Binance by "bringing criminal charges against individual executives, including founder Zhao Changpeng."
Faced with the concentrated "fire", Zhao Changpeng and Binance tried to show the public the security of their assets through Merkle tree verification, promoting asset transparency, and frequent interactions with users. But in the eyes of the public, the key to Binance gaining user trust is to make transparent financial data public.
After much anticipation, Binance finally spoke out. On December 23rd, US time, Binance responded to market rumors and news such as "Exchanges suspend withdrawals of USDC", "Mazars and the Big Four accounting firms refuse to serve Binance", and "Binance refuses to disclose financial information".
Binance said that during the period when USDC withdrawals were suspended, users could still withdraw other stablecoins normally, and there was no liquidity problem. Regarding the business model, Binance said that it mainly makes profits by charging transaction fees. Regarding the news that "accounting firms refuse to serve Binance", Binance responded that Mazars is not only targeting Binance, but for traditional accounting firms, it is very difficult to verify the overall reserve assets on the chain of crypto exchanges.
As for the rumor that "Binance refuses to disclose financial information", Binance responded that Binance is a private company, not a listed company, and is financially healthy with no external financing needs, and does not need to disclose detailed financial conditions. In response to media reports that "the U.S. Department of Justice has launched an investigation into Binance", Binance said that this is not the first time the media has made such reports, and it is currently unable to respond to any controversial judicial discussions, and emphasized that its own exchange "has the most compliance licenses/licenses worldwide and has invested the most in combating crime."
Although Binance has responded one by one, it is clear that the outside world's doubts will not dissipate until its financial data is transparent. In fact, the living space of virtual currency is becoming increasingly narrow.
There is not much space and time left
In the past few months, Huang Lichong, co-founder of the Synergy Strategy Management Group, who is familiar with US laws and stocks, has been helping a local fund company in the United States to promote the issuance of virtual currencies. The fund company plans to issue new cryptocurrencies such as stablecoins. They hope to launch the project before June 2023, because the US-led global strong regulation of digital currencies will be implemented in June. The fund company originally had a clear plan, but FTX's bankruptcy changed everything.
Before FTX went bankrupt, the situation was also grim. For example, driven by the US executive order, the SEC, together with the Ministry of Finance and other departments, accelerated the legislation on cryptocurrencies. For example, in October, the European Union passed the landmark "Crypto Asset Market Regulation Act". "In some places, as long as the Howey test (a test of whether a cryptocurrency should be classified as a security) of the US Supreme Court is followed, it will not be defined as a security token (allowing holders to have expectations of appreciation, relying on others to build an ecosystem, centralized operation, and using proceeds to invest in ecosystems or projects, and investors' returns rely on others to generate profits, can all be defined as security tokens)." Huang Lichong told Shijie.
Although the SEC believes that any digital currency is a security token according to the above standards, the logic is correct, but in fact the SEC has not strictly enforced the law. The bankruptcy of FTX has made the attitude of the US Securities and Exchange Commission tougher and more serious. Now they believe that virtual currencies including functional tokens (generally referring to virtual currencies with existing transaction history, distributed ledgers or blockchains, unchangeable, decentralized, and transferable without intermediaries) are all unregistered securities and violate securities laws.
That is, under the long-arm jurisdiction of US regulators, "as long as it is identified as a 'digital token of an investment contract', it may be subject to cross-border enforcement if it is marketed or promoted to any US citizen, US tax citizen, US company, or not registered in the United States, Hawaii, Puerto Rico, or the US Virgin Islands, or if it violates US laws and regulations," Huang Lichong explained.
This means that the cryptocurrency project that Huang Lichong participated in designing needs to be adjusted according to the legal structure designed before the FTX bankruptcy order. The old legal advice can no longer keep up with the expected regulatory changes. "Even if the project is finally successfully issued, it will face high legal risks. There is basically no effective way to circumvent it, and it is not possible to solve the problem by hiding on an offshore island. In the long run, it will end up in a mess."
In fact, the costs of virtual currency in terms of technical maintenance, ecological chain, supervision, and compliance are much higher than those of traditional securities. They all hope to maintain a balance between income and expenditure by avoiding compliance costs, but even so, it is still difficult for digital currency exchanges to make a profit. Coinbase, which is listed in the United States and is considered to be the most mature digital exchange in terms of compliance in the currency circle, is also in a state of loss and shrinking income.
Coinbase's financial report shows that it lost $545 million in the third quarter of 2022, the third quarterly loss. Due to a sharp increase in compliance costs, listing fees and trading declines, Coinbase has lost $1.2 billion in the past 12 months. "In the era of global hype about virtual currencies, exchanges rely on charging high issuance and listing fees. Except for a few small profits, the rest are still losing money and need to rely on market manipulation to subsidize costs. When regulation comes, losses will expand and ecological operations will not make ends meet." Huang Lichong analyzed. This is also one of the reasons why most virtual currencies have reached a dead end, and FTX is the most representative example.
This is not the fault of blockchain technology, but is similar to the Internet bubble crisis in 2002. Huang Lichong explained that the reduction in costs and the breadth of applications cannot support the operating ecology of exchanges and virtual currencies. When the financial bleeding continues, the ecological operators will take risks and form a Ponzi scheme. For example, artificially manipulating prices, creating false markets, and selling at high prices after speculation to subsidize operations, including pledging to third parties at high prices and then withdrawing loans. "Using this method to maintain the ecology, you can only run away. This behavior is already a financial crime, but no one cared before."
Huang Lichong also told Shijie that although local regulators in non-common law regions (common law generally refers to the Anglo-American legal system) can also take action, US regulators can also block customer accounts of banks in other countries that provide US dollar services. Digital currencies with expected returns are "unregistered securities issuances", and "air coins" with no real value are likely to violate securities laws. "In the future, most virtual currencies will find it difficult to escape, but the regulatory power is limited and it is impossible to enforce the law in full."
In fact, a crackdown is also taking place around the world. According to 21st Century Business Herald, Jon Cunliffe, deputy governor of the Bank of England, said that cryptocurrencies and services should be more strictly regulated. South Korean regulators stressed that a comprehensive regulatory framework is expected to be completed next year. This means that many cryptocurrencies will be hit globally.
Once it comes to this point, investors will be trampled if they want to flee. "Losing all the money may be the final destination," Huang Lichong judged. Song Feng was in great pain about this reality. On the one hand, he also understood that cryptocurrency speculation was a "gamble"; on the other hand, he continued to indulge because he "wanted to get his money back." He didn't know why he was like this.
Although gambling and game design use psychology and physiology to make people secrete dopamine and cannot stop, its essence is a confidence game. When people no longer have confidence, the game will end.
