When the subject is cryptocurrencies, bitcoin usually dominates.
The most popular of the digital currencies has often been confused by the general public as the one representing the entire cryptocurrency industry.
Since its creation by one or more anonymous people in 2009, bitcoin has always been assigned the leading role. Cryptocurrency fans see the most prominent cryptocurrency as a way to financial independence and freedom from the dictates of central banks and politicians. They therefore assume that nothing will stop its rise.
No surprise, then, that everything has always revolved around that digital currency, the price of which touched an all-time high of $69,044.77 in November 2021.
But this year, bitcoin played a supporting role in the crypto movie. Some experts would even call bitcoin an extra, even as its value lost about three-quarters from its record high.
Luna and UST Went Down, Hard
That’s because the real star of the crypto industry in 2022 was bankruptcy.
The fledgling financial-services industry powered by blockchain technology has been rocked by an avalanche of major corporate bankruptcies. These failures have come right alongside the cryptocurrency market’s loss of nearly $2.2 trillion from its record $3 trillion reached in November 2021.
It all started on May 9, when sister cryptocurrencies Luna and UST, or TerraUSD, collapsed. The two tokens crashed after UST lost its peg to the dollar, the foundation qualifying it as a stablecoin. Such cryptocurrencies are tied to more stable assets, like the U.S. dollar or gold.
From May 9 to May 13, at least $55 billion of market cap disappeared, causing many investors to sustain colossal losses.
UST was an algorithmic stablecoin, which was backed not by dollar reserves but rather by its sister asset, Luna. Algorithmic stablecoins are different from centralized alternatives like tether or USD coin, which are backed by actual dollars or equivalent assets stored in a bank.
This disaster caused a credit crunch that proved catastrophic for many firms, 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 led to investigations in the U.S. and South Korea, and revived calls for stricter regulation of stablecoins.
Institutional investors prize these cryptos because they are designed to be less volatile than other coins and to enable funds to move easily within the crypto ecosystem.
Investors Lost Massive Amounts in Crypto Crash
The depegging of Terra’s UST coin and the collapse of Celsius and 3AC a few weeks later drove 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 links and exposure of crypto firms to each other, like the banks during the financial crisis of 2008. The other lesson was the lack of transparency of centralized crypto companies, which are mostly unregulated.
This opacity created another situation that would cause the overnight implosion of FTX a few months later.
This past summer, the FTX cryptocurrency exchange and its sister company, Alameda Research, a hedge fund that also serves as a trading platform, became the companies through which their founder, Sam Bankman-Fried, took advantage of the crisis of confidence in the crypto industry. He consolidated power and became the new strongman of the crypto space.
Bankman-Fried used the two companies to save struggling firms, but, as would come clear later, some of these deals were questionable, such as the one with lender BlockFi.
The Details of the FTX Debacle
Less than three months later, the Bankman-Fried empire went bankrupt.
Regulators accused the former trader of defrauding and conspiring to defraud FTX clients and investors. It will take time to determine exactly what happened, but FTX customer funds appear to have been comingled with Alameda’s and were illegally used in high-risk transactions.
Bankman-Fried has refuted the allegations of fraud and denied having intended to defraud.
For many insiders, the crypto exchanges’ collapse is due to a lack of transparency and closely held, centralized, reckless power.
According to Chainalysis, the downfall has caused $9 billion of losses for FTX clients, but this number doesn’t take into account potential losses for people who deposited their funds with the exchange. The likelihood of these investors recovering them is unclear.
As 2023 approaches, these bankruptcies have thrown a shadow of suspicion on the entire crypto industry, which must now learn lessons from the failures and mature.
Its survival depends on it.