When it comes to cryptocurrencies, bitcoin usually dominates.
The public has often confused the most popular digital currency as one that represents the entire cryptocurrency industry.
Since it was created by one or more anonymous people in 2009, bitcoin has always been given a leading role. Cryptocurrency enthusiasts see the most prominent cryptocurrency as a path to financial independence and freedom from the dictates of central banks and politicians. Therefore, they assume that nothing will stop its rise.
Therefore, it is not surprising that everything has always revolved around this digital currency, whose price reached an all-time high of $69,044.77 in November 2021.
But this year, bitcoin played a minor role in the crypto movie. Some experts would even call bitcoin an add-on, even though its value has lost about three-quarters of its all-time high.
Luna and UST fell, hard
That’s because the real star of the crypto industry in 2022 was bankrupt.
The fledgling financial services industry powered by blockchain technology has been rocked by an avalanche of major corporate bankruptcies. These setbacks came on the heels of the cryptocurrency market losing nearly $2.2 trillion from the record $3 trillion hit in November 2021.
It all started on May 9, when sister cryptocurrencies Luna and UST, or TerraUSD, collapsed. The two tokens fell after UST lost its peg to the dollar and the foundation qualified it as a stablecoin. Such cryptocurrencies are tied to more stable assets, such as the US dollar or gold.
From May 9 to 13, at least $55 billion in market capitalization disappeared, causing many investors to suffer huge losses.
UST was an algorithmic stablecoin, backed not by dollar reserves, but by its sister asset, Luna. Algorithmic stablecoins differ from centralized alternatives such as tether or USD coin, which are backed by real dollars or equivalent assets stored in a bank.
This disaster caused a credit crunch that proved disastrous for many companies, including hedge fund Three Arrows Capital, or 3AC, which found itself unable to honor its payments to crypto lenders Celsius Network and Voyager Digital.
3AC was forced into liquidation. Celsius and Voyager filed for Chapter 11 bankruptcy.
TerraUSD’s fall has led to investigations in the US and South Korea and revived calls for tighter regulation of stablecoins.
Institutional investors value these cryptocurrencies because they are designed to be less volatile than other coins and allow funds to move easily within the crypto ecosystem.
Investors lost huge amounts in the crypto crash
The depegging of Terra’s UST coins and the collapse of Celsius and 3AC a few weeks later led to massive losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC, according to blockchain security firm Chainalysis.
This crisis mainly revealed the interconnections and exposure of crypto companies, like banks during the financial crisis of 2008. Another lesson was the lack of transparency of centralized crypto companies, which are largely unregulated.
This opacity created another situation that would cause the overnight implosion of FTX a few months later.
Last summer, the cryptocurrency exchange FTX and its sister company Alameda Research, a hedge fund that doubles as a trading platform, became the companies through which their founder Sam Bankman-Fried took advantage of the crisis of confidence in cryptocurrencies. industry. He consolidated his power and became the new powerhouse of the crypto space.
Bankman-Fried used two companies to bail out struggling companies, but as it would later become clear, some of those deals were questionable, like the one with lender BlockFi.
Details of the FTX debacle
Less than three months later, the Bankman-Fried empire went bankrupt.
Regulators charged the former trader with fraud and conspiracy to defraud FTX clients and investors. It will take time to determine exactly what happened, but it appears that FTX users’ funds came with Alameda’s and were illegally used in high-risk transactions.
Bankman-Fried denied the fraud allegations and denied that he intended to defraud.
For many insiders, the collapse of crypto exchanges is due to a lack of transparency and narrowly held, centralized, ruthless power.
According to Chainalysis, the crash caused $9 billion in losses for FTX clients, but this number does not take into account potential losses for people who deposited their funds on the exchange. The likelihood that these investors will recover them is unclear.
As 2023 approaches, these bankruptcies have cast a shadow of doubt over the entire crypto industry, which must now learn from its failures and mature.
His survival depends on it.