The history of cryptocurrencies has rarely been boring, but the turbulence of 2022 shook the cryptocurrency industry to its core. The collapse of the Terra ecosystem in May and the FTX bankruptcy in November were major blows to the industry and marked the end of several businesses.
These events caused mainstream investors, who had been drawn to the rising popularity of cryptocurrencies and the promise of decentralized finance, to lose interest in the sector. The tumult also prompted global calls for regulators to take swift and decisive action to protect consumers.
Here is a quick look at the top 10 worst moments in the cryptocurrency world in 2022.
FTX Bankruptcy
The bankruptcy of FTX has been the most devastating event to impact the cryptocurrency industry this year. Despite the various challenges the industry has faced this year, the collapse of FTX was a shock to many. As one of the largest cryptocurrency exchanges in the world, the market was heavily impacted when FTX went down.
In the past, the industry has experienced the collapse of exchanges such as Mt. Gox, but the impact of FTX was particularly severe due to the influence of its former CEO, Sam Bankman-Fried.
FTX was a reputable cryptocurrency exchange that gained a large following due to its innovative approaches to making crypto more profitable and accessible. The exchange was known for its notable partnerships and sponsorships with high-profile figures such as Steph Curry and Tom Brady.
According to a report published in November, the problems with FTX stemmed from financial difficulties at Alameda Research, a sister company of FTX co-founded by Bankman-Fried. FTX accounted for the majority of Alameda’s holdings. The exchange’s downfall was attributed to a lack of transparency and poor management.
FTX suspended withdrawals on November 8 and declared bankruptcy on November 12. Sam Bankman-Fried also resigned as CEO of FTX on the same day.
Terra Collapse
The Terra crash was one of the worst moments in crypto in 2022. Terra, a large-cap crypto ecosystem, was well-known for its algorithmic stablecoin UST, which was backed by LUNA tokens.
Unlike most stablecoins, UST was not fully collateralized by fiat currency or cryptocurrency, instead relying on an algorithmic system to tie its value to the US dollar. UST was very popular among investors who were seeking stability during the ongoing cryptocurrency market downturn that began in 2021.
The Anchor Protocol was another factor that drove up UST and LUNA’s market cap and price. Users who invested UST in the Terra blockchain lending platform received a yield of nearly 20%. As more UST funds flowed into Anchor, the amount of LUNA in the burn wallet increased, causing the price of LUNA to continue rising and leaving investors wondering if it was too good to be true.
Most of the crypto market crashed with Terra, wiping out millions of dollars. The market showed no signs of recovery for a month.
Three Arrows Capital Bankruptcy
At its peak, Three Arrows Capital (3AC) was a crypto hedge fund that managed approximately $10 billion worth of assets. However, when the value of cryptocurrencies plummeted, the firm was unable to repay billions of dollars in loans.
Court records showed that 3AC owes 27 different companies a total of $3.5 billion, including Voyager Digital, Blockchain.com, and Genesis Global Trading.
The documents also revealed that 3AC failed to pay back loans and missed margin calls with lenders on multiple occasions, causing investment accounts to fall below the required levels and not be replenished.
Ronin Network Hack
The cryptocurrency industry has had a history of being plagued by hacks and scams. Each year, numerous instances of exploitation occur, damaging the industry’s reputation.
The April 2022 9-figure Ronin Network hack was particularly noteworthy. Axie Infinity, a popular blockchain game, was negatively affected by the event, leading to a drop in the value of AXS and SLP as players left the game in search of better alternatives.
According to investigations, the hack was carried out by the Lazarus Group, which is believed to have state sponsorship from North Korea. The hack targeted five of the nine Ronin chain validators, utilizing a weak validation system to steal $551.8 million.
Interestingly, the hack was not reported until six days after it occurred, and the team behind the game was unaware of the incident for almost a week, exacerbating the situation.
Voyager Digital Bankruptcy
In July 2022, Voyager Digital, a popular cryptocurrency broker, filed for bankruptcy, contributing to a difficult year for cryptocurrency. In the Chapter 11 bankruptcy filing in the Southern District of New York, the company and its two affiliates disclosed having between $1 billion and $10 billion in assets and over 100,000 creditors.
Voyager Digital attributed the bankruptcy to the volatile market and the sudden collapse of Three Arrows Capital. The filing also revealed that Voyager Digital owed $75 million to Alameda Research, owned by Sam Bankman-Fried, and approximately $960,000 to Google. No other companies were named as creditors in the filing.
Celsius Bankruptcy
Another blow came on June 12, 2022, just as the cryptocurrency market was regaining its footing. Celsius, a cryptocurrency lending firm, crashed shortly after it announced it was suspending withdrawals. The news shook the market, sending other crypto assets into a tailspin.
The revelation that CEO Alex Mashinsky was engaging in unauthorized trading on the company’s books aggravated matters. The company was declared bankrupt soon after, triggering a chain reaction.
Platforms such as Compound, Maker, and Aave, as well as investment firms such as Galaxy Digital, Genesis, and Three Arrows Capital, which had lending relationships with Celsius, bore the brunt of the damage.
Three Arrows (3AC) was hit the hardest after allegedly defaulting on a series of loans amounting to $3.5 billion. The FTX collapse (in some ways) resulted from the Celsius bankruptcy.
BlockFi Bankruptcy
Following the FTX crash, BlockFi, a cryptocurrency exchange, halted customer withdrawals and normal business operations. On November 28, it declared bankruptcy.
The exchange’s problems began in June when the crypto hedge fund Three Arrows Capital went out of business. This resulted in a liquidity crisis.
During the June crisis, former FTX CEO Sam Bankman-Fried provided a life raft to BlockFi. The life raft, however, quickly lost shape as the FTX empire crumbled.
In its bankruptcy filing, BlockFi stated that it had “a lot of exposure to FTX“ and its sister company, Alameda Research.
The US Treasury’s Ban on Tornado Cash
After discovering that Tornado Cash was being used for money laundering, the US Treasury’s Office of Foreign Assets Control sanctioned the privacy-preserving protocol.
Despite protests, both centralized and DeFi platforms were urged to blacklist Tornado cash wallets. The Fiscal Information and Investigation Service of the Netherlands eventually arrested Alexey Pertsev, the developer of the Tornado Cash core.
The incident left a blemish on cryptography history because it was the first time a regulatory authority sanctioned open-source code rather than a platform. Concerns were also raised about the blockchain industry’s ability to withstand censorship.
Bitcoin Crash
Bitcoin failed to break the $70,000 resistance and began to decline in late 2021. Since November 2021, Bitcoin has been in a bear market, with one of its largest historical crashes coming in 2022.
In June, the cryptocurrency fell below $20,000 for the first time since 2020, causing massive market panic.
The ongoing bear market is largely due to the crisis of algorithmic stablecoins, specifically the TerraUSD Classic stablecoin, which is designed to support a stable 1:1 peg with the US dollar using blockchain algorithms rather than equivalent cash reserves.
Elrond Hack
The Elrond blockchain’s native token, EGLD (Elrond eGold), was massively looted in June when hackers exploited a flaw in the decentralized exchange Maiar to steal approximately $1.65 million of the token.
According to researchers, the hacker stole EGLD from the exchange using three wallets and a smart contract. The EGLD was worth approximately $113 million.
The hackers immediately sold about 800,000 coins on the same DEX (decentralized exchange) for $54 million, while the remaining tokens were either sold on controlled exchanges or exchanged for Ethereum.
In Conclusion
- Cryptocurrency was created in the aftermath of the 2008 global financial crisis when people lost trust in traditional institutions. However, the turbulence in the cryptocurrency market in 2022 has shaken user trust in cryptocurrencies.
- Many people hoped that stricter regulation would restore trust. However, the FTX bankruptcy appears to have derailed legislation heavily lobbied for by Sam Bankman-Fried. Some DeFi platform operators argued that regulations were biased in favour of large, centralized exchanges (such as FTX).
- Stiffer regulation may one day make cryptocurrency a more reliable investment. What is unknown is how much of the industry can withstand such scrutiny.
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