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From Boom To Bust
The Trillion-Dollar Crypto Crash and the Downfall of Speculative Ventures
The most common reason for business failure is starting a venture in a new industry, where new technologies attract speculation instead of wealth creation.
One recent example of such failures is in the blockchain. Although blockchain is definitely the future of finance, many startups have failed due to unsound business models, speculation, regulation, and cash flow generation. In 2022, the crypto market (cryptocurrencies are products of blockchain technologies) lost over $2 trillion, with thousands of crypto companies going under.
Hot trend businesses fail because founders are gambling with future returns instead of building a lasting entity.
FTX was one of the biggest and most recent businesses to collapse.
The company filed for bankruptcy on Nov. 11, 2022, after a surge of customer withdrawals, which caused a liquidity crunch within the business. The withdrawals were one of many factors that caused the collapse of FTX. And when there is no money left, there is no business left.
Many investors lost their money. There were also multiple lawsuits happening during this time.
According to sources, FTX could have lost a staggering $8.8 billion in customer funds.
Genesis was another giant that went under.
On January 19th, 2023, the company filed for Chapter 11 bankruptcy due to market turmoil. They reported $3.4 billion in total loss from customers and investors.
The collapse of Genesis is an example of systematic risk. These companies are all interconnected, and if one falls, others may also fall due to the domino effect.
A great business should be able to weather market turbulence. Unfortunately, this does not always apply to cryptocurrency exchanges.
Three Arrow Capital was another casualty of the bear market, with 3.5 billion dollars disappearing.
Its biggest investment, which was worth approximately 500 million in UST at the time, became worthless. That's a lot of money lost in a short period of time.
Unfortunately, there is a difference between value and attention. Many of these businesses are being valued based on attention rather than rational evaluation by participants.
Successful businesses are the ones that can generate cash in the long turn
Great businesses are those that can produce a lot of utility for people, which in turn makes them willing to pay money out of their pockets for the services or products.
Cryptocurrency exchanges face significant risks due to people's behavior of getting rich quickly. They also become a platform for a lot of frenzied speculation. The result of this hope is a theme of the Greater Fool Theory, in which the next person who comes in is much more foolish than the former.
When businesses operate on speculation, there is no wealth creation but only wealth exchange.