FTX, Luna, Celsius, Voyager: The Year of Crypto Bankruptcies
When the subject is cryptocurrencies, bitcoin usually dominates.
The most popular digital currency has often been confused by the general public with the one representing the entire cryptocurrency industry.
Since its creation by one or more anonymous people in 2009, bitcoin has always been given the leading role. Cryptocurrency fans see the most important cryptocurrency as a means to financial independence and freedom from the dictates of central banks and politicians. They therefore assume that nothing will stop its rise.
It is therefore not surprising that everything has always revolved around this digital currency, the price of which reached an all-time high of $69,044.77 in November 2021.
But this year, bitcoin played a supporting role in the crypto movie. Some pundits would even call bitcoin extra, even though its value has lost around three-quarters of its all time high.
Luna and UST got down hard
This is because the real star of the crypto industry in 2022 was bankruptcy.
The nascent financial services sector, propelled by block chain technology has been rocked by an avalanche of major corporate bankruptcies. These failures have been accompanied by the cryptocurrency market losing nearly $2.2 trillion from its all-time high of $3 trillion reached in November 2021.
It all started on May 9, when sister cryptocurrencies Luna and UST, or TerraUSD, crashed. Both tokens crashed after the UST lost its peg to the dollar, with the foundation calling it a stablecoin. These cryptocurrencies are linked to more stable assets, such as the US dollar or gold.
From May 9 to 13, at least $55 billion of market capitalization disappeared, causing many investors to suffer colossal losses.
UST was an algorithmic stablecoin, which was not backed 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 real dollars or equivalent assets stored in a bank.
This disaster triggered a credit crunch that proved catastrophic for many businesses, including hedge fund Three Arrows Capital, or 3AC, which found itself unable to meet its payments to crypto 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 United States and South Korea, and revived calls for stricter regulation of stablecoins.
Institutional investors like these cryptos because they are designed to be less volatile than other coins and to allow funds to move easily within the crypto ecosystem.
Investors Lost Massive Sums In The Crypto Crash
The depegging of Terra’s UST coin and the collapse of Celsius and 3AC a few weeks later led to massive losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC, according to the blockchain security firm. On-chain analysis.
This crisis mainly revealed the ties and exposure of crypto companies to each other, like banks during the 2008 financial crisis. The other lesson was the lack of transparency of centralized crypto companies, which are for the mostly unregulated.
This opacity created another situation that would cause the overnight implosion of FTX a few months later.
Last summer, cryptocurrency exchange FTX 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, profited from the crisis of confidence in the crypto industry. He consolidated power and became the new strongman in the crypto space.
Bankman-Fried used both companies to rescue struggling businesses, but, as will become apparent later, some of those deals were questionable, like 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 customers and investors. It will take time to determine exactly what happened, but FTX client funds appear to have been mixed with Alameda and used illegally in high-risk transactions.
Bankman-Fried refuted the allegations of fraud and denied having intended to defraud.
For many insiders, the collapse of crypto exchanges is due to a lack of transparency and tightly held, centralized, and reckless power.
According to Chainalysis, the fall caused $9 billion in losses for FTX clients, but this figure does not 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 bankruptcies have cast a shadow of suspicion over the entire crypto industry, which must now learn from the failures and mature.
Its survival depends on it.
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