A Look at The Great Collapse of the crypto industry of 2022
TL:DR
•In 2022, the crypto industry saw a series of major collapses, including those of TerraUSD, Three Arrows Capital, BlockFi, and FTX.
• These failures had ripple effects throughout the industry, causing losses for companies like Galaxy Digital and Binance.
• Many retail investors lost their life savings in the market wipeouts and potential frauds.
• Some believe that more rules and regulations are needed to protect consumers in the future.
Despite a strong start to the year, 2022 turned out to be a disaster for the crypto industry. Major players like TerraUSD, Three Arrows Capital, BlockFi, and FTX all experienced major collapses that shook the markets and left investors scrambling. It was an unwelcome reminder of how volatile the cryptocurrency space still is, even as it has become increasingly accepted in mainstream financial circles. Now more than ever, investors are being extra careful as they assess their options within this still-burgeoning sector and make decisions about which projects to back or avoid.
The Great Collapse
The cryptocurrency industry was riding high in 2021. After all, there were flashy commercials splashed across the screens during the Super Bowl featuring Coinbase, Crypto.com and FTX. Crypto conferences were also hosted in both the Bahamas and Miami, where industry insiders discussed Bitcoin’s upcoming potential.
On top of this, political giving and lobbying efforts in Washington began to demonstrate its growing influence by those in power. However, a crypto price crash saw these highs come to an end, with Bitcoin alone seeing a 60% fall from its peak market value that April — an overall loss of $2 trillion dollars for digital assets as NFT prices fell back to their original levels.
In another hit, “effective altruist” Bankman-Fried was arrested not long after going from a modern-day John Pierpont Morgan to now being charged with multiple crimes such as fraud. While some believe crypto will continue climbing upward, it seems that reality has gotten the best of them for now.
Through the Terra collapse of 2022, blockchain investors and companies were confronted with the reality that their digital-asset ecosystem was far more centralized and at risk than they had previously thought. The coins Luna and TerraUSD (UST) proved to be intrinsically vulnerable to instability, eventually tanking both to zero — leading the markets into a period of shock that lasted through multiple collapses in the months that followed.
Companies like Hashed, Jump and Pantera; as well as Coinbase, Binance and Galaxy Digital made large investments in Terra or its parent Terraform Labs — typically by holding Luna tokens or UST stablecoins. When this all came crashing down, it was Galaxy Digital — headed by CEO Michael Novogratz — who took on one of the biggest losses: $555 million in quarterly earnings for August alone. This demonstrated that decentralization offers only so much security in a technology still largely untested in terms of scalability within its own boundaries.
Like Dominoes
Many prominent firms have invested in Terra or its parent Terraform Labs, securing positions in Luna tokens and UST stablecoins by companies like Hashed, Jump, Pantera, and their respective investment arms at Binance, Coinbase, and Galaxy Digital. Unfortunately, it was Galaxy Digital — headed by CEO Michael Novogratz — who took on one of the biggest losses: $555 million in quarterly earnings for August alone. This demonstrated that decentralization offers only so much security in a technology still largely untested in terms of scalability within its own boundaries.
Moreover, the Terra company was further fractured when the value of its tokens took a dive plus the recent hack to Ronin — which saw an expose to $600 million — which then led Binance to invest $150 million into Sky Mavis. The acquisition talks with FTX had been going on since November in an attempt to acquire assets that reached up to $529 million but were quickly withdrawn afterward. It is clear that these few examples of investments prove costly for certain companies who held Luna tokens or UST stablecoins.
Trouble at Binance
By the end of 2022, it seemed Binance had made some bad investments. Galaxy was hit with a whopping $77 million in exposure to FTX while Binance’s $3 million investment in Terra project tokens had gone from a value of up to $1.6 billion down to nothing after Luna collapsed. Moreover, after Ronin — connected to online game Axie Infinity — suffered an enormous hack of almost $600 million, Binance sought to help plug the hole with an investment in Sky Mavis’ business; investing $150 million only for it to backfire when Binance pulled its offer to acquire FTX’s assets after revealing plans to sell $529 million of their FTT token.
FTX contagion spreads
In August, crypto lender Hodlnaut shocked the world when they halted withdrawals and retracted their licensing application in Singapore due to Terra-related losses estimated at nearly $190 million. Even more disturbing was the news that they had laid off 80% of its staff following proceedings with police in Singapore. Unsurprisingly, Three Arrows Capital soon followed suit and entered liquidation in June after failing to meet margin calls from lenders caused by Terra’s market destabilization.
BlockFi then took an $80 million hit from Three Arrows’ debt, followed shortly after by Voyager who declared over $660 million in exposure to Three Arrows before filing for Chapter 11 bankruptcy. As things became increasingly dire, FTX US granted BlockFi a $400 credit line with the option to acquire them. However, matters were made worse when FTX also collapsed and not only voided their agreement but also restarted the auction process for Voyager’s assets, now bid on at a sum of 1.4 billion dollars — an amount once again under threat while investors anxiously await further developments in what has become an ever murkier situation each passing month.
The string of calamities that began amidst the crypto markets in June has culminated in a virtual avalanche of misfortune with one of the most devastating blows to prolific centralized finance firms and crypto enthusiasts- the fall of FTX. As FTX filed for Chapter 11 bankruptcy on November 11th, their fate was sealed amongst the millions of dollars owed to creditors, including Tiger Global and SoftBank Group who were forced to write down their investments.
This wasn’t an isolated incident either, as many other DeFi lenders had similarly experienced financial struggles earlier in the year. Celsius was no exception when they froze withdrawals due to Three Arrow’s defaulting on loans, something which subsequently led to the little-known Pharos Fund claiming $81 million from the firm — though it is now clear that even this couldn’t save them in the long run. The scope of the damage is undetermined, but one thing remains certain; many investors have undoubtedly suffered immense losses due to this unanticipated downturn within the cryptocurrency sector and the fall of FTX due to its FTT token and the fraudulent actions of Sam Bankman Fried, Gary Wang, and Caroline Ellison.
After days of controversy surrounding Binance’s FTT announcement, the biggest names in finance watched in shock as FTX Group filed for Chapter 11 bankruptcy. Already owing billions of dollars to creditors and founder Sam Bankman-Fried being arrested in the Bahamas and charged with wire fraud and other allegations by US authorities, Softbank Group, Sequoia Capital, and Temasek performed write-downs on the value of their FTX shareholdings while others such as Tiger Global had extensive equity stakes within the group totaling up to $38 million. FTX wasn’t alone however, companies such as BlockFi and Babel Finance have also been experiencing difficulties since June, leaving an entire industry mired in turmoil.
Impact of the Collapses
The crypto industry faced several major collapses in 2022, leading to significant losses for both companies and retail investors. Many exchanges closed their doors as a result of these events, leaving customers unable to access their investments or cash out their remaining funds. This led to an overall decline in confidence in the crypto market, with some analysts predicting that it could take years for trust to be restored.
In addition to financial losses, there have been allegations of fraud and mismanagement within certain companies. In some cases, top executives have been accused of embezzling funds or taking advantage of insider knowledge to make large profits while leaving investors with nothing. These claims are still being investigated by government agencies and law enforcement officials, but the damage has already been done — many people have lost significant amounts of money due to these events.
Regulatory Changes to Protect Investors
In response to these collapses, government agencies around the world have proposed regulations designed to protect consumers and prevent similar events from occurring in the future. Some countries have proposed bans on certain types of crypto trading or restrictions on how much individuals can invest in digital assets without proper oversight. Other nations are exploring ways to regulate exchanges more stringently so that fraudulent activities can be easily identified and stopped before they cause further damage. Additionally, changes may be made to trading platforms and exchanges in order to make them more secure and reliable for consumers.
The introduction of new regulations could provide numerous benefits for consumers moving forward, such as increased protection against fraudulent practices or greater transparency when it comes to investment decisions made by executives or employees within a particular company. It’s important for investors who are considering entering the crypto market in 2022 (or any other year) to understand how these regulations may affect them before taking any action with their money — ignorance is not bliss when it comes to investing!
Can crypto be saved?
The volatile crypto market in 2022 has been characterized by instability, fraud allegations, and multiple failed investments. Numerous familiar names in traditional finance had gone all-in with cryptocurrency this year, investing personal stakes and impacting their portfolios. Big stars such as Tom Brady and Gisele Bündchen had taken equity stakes in FTX Group’s multiple entities but many funds were eventually frozen or halted, leaving people with potentially life-changing losses.
Despite the scrutiny of regulation and finger-pointing between CEOs within the burgeoning industry, it remains to be seen what initiatives will be taken to ensure the safety of retail investors. Will advocates for a stricter regulatory environment succeed in implementing stronger consumer protection laws? The answer is yet to be determined but one thing is certain: the skeptics are here to stay becoming more vocal as time passes by.
This year, the year 2022 will undoubtedly go down in history as one of great turmoil within the cryptocurrency industry — rightfully known as “The Great Collapse” but this year can also be one that brings about important regulatory changes that could benefit both companies and individual investors alike moving forward. While it is impossible to predict what the future holds for cryptocurrencies, it is clear that 2023 will bring about an intriguing mix between innovation and regulation that could shape how we interact with digital assets going forward. No matter what happens next year (and beyond), one thing is certain — 2022 was just a prelude to (hopefully) an exciting journey ahead!
