When it comes to cryptocurrency, Bitcoin generally comes out on top. And the general public sometimes misunderstands the most popular digital currency as representing the whole cryptocurrency sector.
Since its creation in 2009 by one or more unknown individuals, Bitcoin has taken the lead. Cryptocurrency supporters consider the most famous cryptocurrency as a path to financial independence and independence from central banks and politics. As a result, they believe that nothing can stop its rise.
So it’s no wonder everything has always centered around that digital currency, whose price reached an all-time high of $69,044.77 in November 2021.
However, Bitcoin had a secondary role in the crypto sector this year. That’s because the true star of the crypto sector in 2022 was bankruptcy.
An avalanche of major corporate bankruptcies has shaken the young, unprepared financial services industry fueled by blockchain technology. These failures combined with the cryptocurrency market’s collapse of approximately $2.2 trillion from its all-time high of $3 trillion in November 2021.
The collapse of sibling cryptocurrencies Luna and UST, or TerraUSD, began on May 9. These cryptocurrencies were linked to more stable assets such as the US dollar or gold. After UST lost its peg to the dollar, the two tokens fell, despite the foundation classifying it as a stablecoin.
Between May 9 and May 13, at least $55 billion in market capitalization vanished, leading many investors to suffer massive losses.
UST was an algorithmic stablecoin backed by its sister asset, Luna, rather than by dollar reserves. Algorithmic stablecoins vary from centralized alternatives like Tether or USD coins, which are backed by real dollars or similar assets held in a bank. Institutional investors valued these cryptos because they are meant to be less volatile than other currencies and to allow capital to flow freely across the crypto ecosystem.
This catastrophe triggered a credit crisis that proved catastrophic for several businesses, including hedge fund Three Arrows Capital, or 3AC, which could not make payments to cryptocurrency lenders Celsius Network and Voyager Digital.
3AC was forced to go bankrupt. Celsius and Voyager both declared bankruptcy under Chapter 11.
The fall of TerraUSD led investigations in the United States and South Korea, as well as new calls for tougher regulation of stablecoins.
According to blockchain security firm Chainalysis, the depreciation of Terra’s UST token and the eventual collapse of Celsius and 3AC resulted in significant losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC.
These collapses mainly revealed the connections and exposure of crypto companies to each other, similar to the banks during the 2008 financial crisis. Another lesson was the lack of transparency of centralized cryptocurrencies, which are largely unregulated.
This opacity generated another scenario that led to FTX’s sudden implosion a few months later.
This past summer, the FTX cryptocurrency exchange, and its sister firm, Alameda Research, a hedge fund that also acts as a trading platform, were the companies through which its creator, Sam Bankman-Fried, took advantage of the crypto industry’s confidence crisis. He consolidated dominance and established himself as the new crypto space’s strongman.
Bankman-Fried utilized the two companies to help failing businesses, but as it would later become obvious, some of these deals were questionable, such as the one with lender BlockFi.
The Bankman-Fried enterprise went bankrupt less than three months later.
Regulators charged the former trader with defrauding and scheming to defraud FTX clients and investors. It will take time to figure out what happened, but FTX customer money appears to have been mixed in with Alameda’s and unlawfully utilized in high-risk transactions.
Bankman-Fried has denied the claims of fraud and the attempt to scam.
According to several insiders, the crypto exchanges’ collapse results from a lack of transparency and tightly controlled, centralized, mature leadership.
According to Chainalysis, the collapse has resulted in $9 billion in losses for FTX customers, although this figure does not include possible losses for those who placed assets with the exchange. It is uncertain if these investors will be able to get their funds back.
As 2023 approaches, these bankruptcies overshadow the whole crypto business, which must now learn from its failures and previous mistakes because, since this moment, its survival depends on it.