What went wrong in the last crypto bull market?
The last crypto bull market was a period of explosive growth, with platforms like Celsius, BlockFi and Voyager offering the promise of high yields and revolutionized financial services. However, the market downturn in 2022 exposed significant weaknesses in their business models. Lack of transparency, poor risk management, over-leveraging, and risky partnerships led to liquidity crises and widespread losses, leaving many retail customers in financial distress and unable to recover their assets.
As the dust has settled, it’s important for retail users to reflect on what went wrong and learn how to make smarter decisions about generating yield in the evolving crypto landscape. This blog post will provide insights into the failures of the last bull market, what to look for when deciding on yield-generating opportunities, and the growing role of regulation and consumer protection in shaping a safer environment.
What went wrong: Key failures of the last bull market
The rapid rise of yield platforms masked fundamental problems. Here’s a closer look at the critical weaknesses that led to their downfall:
1. Lack of transparency
Platforms made vague claims about sophisticated strategies for generating yield, but failed to provide insight into the real risks involved. For example, Celsius boasted high APYs up to 18% without revealing the true extent of their risky investments, such as their large exposure to Terra’s Anchor Protocol and other, still experimental, DeFi protocols like Stakehound and BadgerDao, which resulted in large losses. Customers were left in the dark, unaware that their assets were tied to still experimental protocols.
2. Risky practices and over-leveraging
Several platforms engaged in over-leveraging and relied heavily on risky partnerships, which collapsed when market conditions changed. Trading Firms like Alameda Research and Three Arrows Capital (3AC) borrowed heavily against illiquid assets, including the Grayscale Bitcoin Trust (GBTC) and FTX’s native token, FTT. Over-reliance on illiquid collateral exposed vulnerabilities in the firms’ financial structures as Alameda and 3AC became trapped in illiquid positions, unable to meet their obligations. This triggered a domino effect and led to widespread insolvencies and market instability.
3. Poor risk management
Internal controls and risk management practices were often lacking, leaving platforms vulnerable to sudden liquidity shifts. This was evident in the collapse of Voyager, which had extended unsecured loans totaling $650 million to 3AC. When 3AC defaulted on its loan, Voyager was left with a devastating liquidity shortfall, pushing the platform into bankruptcy.
4. FTX: Over-leveraging and misuse of customer funds
FTX, once one of the most prominent crypto exchanges at that time, faced a spectacular collapse in late 2022. The root of FTX’s failure lay in its sister company, Alameda Research, which was deeply over-leveraged and relied heavily on FTT tokens as collateral.
When FTT’s value started falling, Alameda could no longer cover its debts. Coupled with FTX’s improper use of customer funds, including to cover the losses of Alameda, this lead to a liquidity crisis that engulfed both companies.
FTX’s downfall sent shockwaves through the entire crypto ecosystem, damaging investor confidence and exposing the dangers of unchecked risk and mismanagement. For example, one of the largest yield platforms in addition to Celsius, BlockFi, had substantial exposure to FTX and Alameda and had to declare bankruptcy shortly after the FTX collapse.
What to look for when deciding how to generate yield
In light of the failures seen in the last bull market, retail users need to be more discerning when choosing platforms for generating yield on their crypto assets. Here are the key factors to consider:
a. Transparency in business practices
Transparency was one of the major failures in platforms like Celsius and Alameda Research. Users were left in the dark about how yield was being generated and the risks involved. When evaluating a platform, users should look for clear communication about:
- How yield is generated: Platforms should be upfront about whether they lend to reputable counterparties, invest in DeFi protocols, or engage in other strategies. For instance, Celsius failed to disclose the full extent of its risky exposure to Terra’s Anchor Protocol and Lido’s stETH, leaving customers unaware of the risks.
- What risks are involved: If a platform has exposure in volatile assets or large single counterparties (like Voyager’s loan to 3AC), that information should be disclosed. A lack of transparency here is a significant red flag.
- How they manage risk: Look for platforms that clearly outline their approach to collateralization and liquidity reserves. BlockFi, for instance, failed to manage counterparty risk effectively, leading to its downfall after FTX’s collapse.
b. Sustainable Yields vs. Sky-High Returns
The promise of high double-digit yields, like those offered by Celsius and Voyager, often comes with significant hidden risks. High returns are often subsidized by unsustainable business models or risky strategies, such as unsecured lending or over-leveraged investments. Celsius was able to offer high yields by engaging in risky DeFi investments that collapsed under market pressure.
Retail users should focus on platforms that offer reasonable, sustainable yields. Yields that reflect the risk taken on are more reliable over the long term. Platforms promising too-good-to-be-true APYs could be engaging in risky practices, which can result in frozen withdrawals or insolvency during downturns.
c. Robust Risk Management
A platform’s risk management practices are crucial for managing financial risks. Lessons from BlockFi and Alameda Research show how inadequate risk management can lead to failure. Here’s what to look for:
- Reputable, well-established institutions: Platforms should lend only to institutions with a strong track record. BlockFi’s reliance on risky counterparties like Alameda left it vulnerable when FTX collapsed.
- High levels of collateral or equity buffer: Voyager’s unsecured loans to 3AC demonstrate the danger of lending without adequate collateral to counterparties without solid, transparent financials.
- Diversification of counterparties: Platforms that are overexposed to a single counterparty or asset (like Voyager with 3AC or over reliance on FTT as collateral) are at greater risk of liquidity crises.
How Valos is solving the problems of the last bull market?
At Valos, we’ve taken the lessons from the previous bull market to heart. We understand that trust was broken for many customers, and rebuilding that trust requires more than just offering high yields — it requires a fundamental shift in how crypto platforms operate. Here’s how we’re tackling the problems head-on:
1. Focus on transparency
One of the biggest issues with the platforms that failed was their opacity. Customers were left in the dark about how their assets were being used and what risks they were exposed to. At Valos, we believe in transparency. This means:
- Clear yield generation strategies: We openly explain how yield is generated on our platform, whether through lending to reputable market makers or partnering with well-established players in traditional finance. You’ll always know what’s behind the returns you’re earning.
- Monthly reports: Users have access to detailed reports and performance metrics. You won’t have to dig around or take anything on faith — we’re committed to being as transparent as possible.
2. Strong risk management
Valos has built a robust risk management framework designed to handle the unpredictability of crypto markets. Here’s how we ensure your assets are protected:
- Reputable lending partners: We only lend to market makers with strong, transparent financials and proven track records. This limits exposure to risky counterparties and ensures a more stable yield generation process.
- Stress testing: We regularly stress test our models to see how they hold up in worst-case scenarios. This proactive approach allows us to adjust our strategies before crises happen.
3. Compliance and customer protection
Regulation is becoming a bigger part of the crypto landscape, and Valos is staying ahead of the curve. We embrace regulation as an opportunity to build a platform that protects users and earns long-term trust:
- Compliance from day one: We have built Valos since day one to comply with the highest regulatory standards. As the regulatory environment evolves, we remain proactive in ensuring our platform is compliant with applicable laws, striving to exceed regulatory expectations across all aspects of our business.
Customer-first mindset: Our goal is to prioritize the long-term interests of our customers. Instead of chasing short-term gains, we focus on building sustainable products that deliver real value while protecting assets from unnecessary risks.