by When the topic is cryptocurrencies, bitcoin usually dominates.
The most popular of digital currencies has often been confused by the general public as representing the entire cryptocurrency industry.
Ever since its creation by one or more anonymous people in 2009, bitcoin has always been given the starring role. Cryptocurrency fans see cryptocurrency foremost as a way to financial independence and freedom from the dictates of central banks and politicians. They therefore assume that nothing will stop his rise.
No surprise, then, that everything has always revolved around that digital currency, the price of which hit an all-time high of $69,044.77 in November 2021.
But this year, bitcoin played a minor role in the cryptocurrency movie. Some experts would even call bitcoin an extra, even though its value has lost about three-quarters from its all-time high.
Luna and UST went down, hard
This is because the real star of the cryptocurrency industry in 2022 has been bankruptcy.
The fledgling financial services industry fueled by blockchain technology has been rocked by an avalanche of major corporate bankruptcies. These failures came alongside the cryptocurrency market’s loss of nearly $2.2 trillion since its record high of $3 trillion achieved in November 2021.
It all started on May 9, when sister cryptocurrencies Luna and UST, or TerraUSD, crashed. The two tokens plummeted after UST lost its peg to the dollar, qualifying it as a stablecoin. Such cryptocurrencies are pegged to more stable assets, such as the US dollar or gold.
From May 9 to May 13, at least $55 billion of market capitalization disappeared, resulting in colossal losses for many investors.
UST was an algorithmic stablecoin, backed not by dollar reserves but rather by its sister asset, Luna. Algorithmic stablecoins are different from centralized alternatives such as tether or USD coins, 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 service its payments to cryptocurrency lenders Celsius Network and Voyager Digital.
3AC was forced into liquidation. Celsius and Voyager have filed for Chapter 11 bankruptcy.
The fall of TerraUSD led to investigations in the US and South Korea and revived calls for stricter regulation of stablecoins.
Institutional investors like these cryptocurrencies because they are designed to be less volatile than other coins and to allow funds to move easily within the crypto ecosystem.
Investors have lost huge sums in Crypto Crash
Terra’s UST coin depegging and the collapse of Celsius and 3AC a few weeks later resulted in huge losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC, according to the security firm. blockchain Chain analysis.
This crisis mainly revealed the links and mutual exposure of crypto companies, such as banks during the 2008 financial crisis. The other lesson was the lack of transparency of centralized crypto companies, which are mostly unregulated.
This opacity created another situation that would cause FTX’s overnight implosion a few months later.
Last summer, 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, profited from the trust in the cryptocurrency industry. He consolidated power and became the new strongman of the crypto space.
Bankman-Fried used the two companies to bail out struggling companies, but, as it would later emerge, some of these deals were questionable, such as the one with lender BlockFi.
The details of the defeat of FTX
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 some time to determine exactly what happened, but it appears FTX clients’ funds were mixed with Alameda’s and were illegally used in high-risk transactions.
Bankman-Fried refuted the fraud allegations and denied intending to defraud.
For many insiders, the collapse of cryptocurrency exchanges is due to a lack of transparency and tightly held, centralized and reckless power.
According to Chainalysis, the crash caused $9 billion in losses for FTX customers, but this number doesn’t take into account potential losses for people who deposited their funds with the exchange. The likelihood of these investors getting them back is unclear.
As 2023 approaches, these failures have cast a shadow of suspicion on the entire cryptocurrency industry, which now needs to learn the lessons of failures and mature.
His survival depends on it.
