We summarize twelve months of total debacle in the world of cryptocurrencies, which for some revealed their total overvaluation, and for others will serve as an excuse to sink a proposal that would change the economic system.
A year ago, anyone not excited about NFTs either thought it didn’t make sense or tried to explain what it was to someone to see if the two could come to a conclusion. The word Web3 was the buzzword with no one really knowing how to explain it, and holding bitcoin was the updated equivalent of investing in gold, but gold that gave a return more typical of a bloated startup.
Twelve months later, Bitcoin has gone from the $50,000 value it started the year with to around $15,000. Scandals, first with NFTs, then with exchanges and cryptocurrencies themselves, shattered the trust the crypto world had gradually earned outside of its usual enthusiasts. Even the stay at FTX led by Sam Bankman-Fried – who has come to be defined as the white knight of the crypto world – represents a collapse for which it is difficult to find a precedent.
We are now talking about “Crypto winter” and “contagion”. For some, what happened is a reflection that bitcoin and the company weren’t such a strong value in the face of rising interest rates and inflation, which the economic backdrop suffered at the time following the war in Ukraine and the crisis is still inherited of the pandemic. For others, what’s happening are the scams that have grown around a rising market and will continue to grow as they die out. Others believe that what happened was almost a conspiracy by crooks to reverse a series of patterns that threatened and controlled our relationship with money.
If we stop to think, the crypto debates will ultimately remain the same. Except that many went bankrupt along the way and some of the biggest names in the industry turned out to be nothing more than smoke.
There is a before and after in the collapse of the algorithmic stablecoin TerraUSD and the Terra ecosystem in May this year, which the major crypto players fell like dominoes: Three Arrows Capital, Voyager Digital, Celsius Network , FTX or BlockFi.
Before, there were already frauds associated with the NFT world. The Anxie Infinity hack was a good sign.
The hits kept coming, but they weren’t all knockdowns, at least not at first. The Super Bowl, one of the biggest sporting events in the United States, featured flashy, celebrity-studded announcements for cryptocurrency companies like Coinbase, Crypto.com, and the aforementioned FTX, which were always on point. .
For example, everyone will remember Matt Damon’s ad for Crypto(.)com.
El Salvador, with Bukele as president, wanted to become the first crypto nation. There has been talk of Ethereum’s big shift from proof-of-work to proof-of-stake. Binance established itself as the biggest corporate player while Coinbase went public. Both brands struggled to comply with the tax authorities of the states where they wanted to operate.
The crypto world has become increasingly standardized.
But overall, cryptocurrency prices continued to decline. And with each new scandal, others fell. Bitcoin has fallen more than 60%, leading to a drop in digital assets that has wiped out roughly $2 trillion in total market capitalization from highs reached in November 2021.
Decentralization on paper: contagion of the crisis in reality
One of the fundamental principles of cryptocurrencies and blockchain is the idea of decentralization: that no one entity is in charge and no actor can destabilize the rest. What 2022 has shown more than once is that the ecosystem of these digital assets is far more interconnected and concentrated than even its biggest players could have imagined.
The Terra ecosystem operated with two main tokens: Luna, a cryptocurrency, and TerraUSD (UST), a stablecoin that attempted to stay at $1 by maintaining a ratio to the amount of Luna in circulation. In May, the UST began a steady decline away from its dollar peg, eventually bringing both currencies back to zero. The ripples from the implosion reverberated throughout the market, setting the stage for more explosions in the weeks and months that followed.
Here are just a few examples of all the correlations that have been uncovered this year that have taken the whole industry down:
- Many companies have invested in Terra or its parent Terraform Labs, usually by holding Luna tokens or UST stablecoins. These include companies such as Hashed, Jump and Pantera, as well as investment arms Coinbase, Binance and Galaxy Digital.
- Galaxy Digital was one of the biggest known losers from Terra’s collapse. The company, founded by billionaire Michael Novogratz, posted a quarterly loss of $555 million in August. At the end of the year, Galaxy struck another blow, revealing around $77 million in exposure to FTX.
- Binance invested $3 million in the Terra project in 2018. The value of tokens received reached $1.6 billion, CEO Changpeng Zhao said, indicating a big loss when Luna collapsed.
- Hackers have stolen around $600 million from Ronin, the blockchain bridge platform linked to online game Axie Infinity. We later learned that Binance invested in its creator Sky Mavis when it raised $150 million to fill the gap.
- And we get to the heart of FTX’s downfall: Binance revealed a plan to sell $529 million of FTX’s FTT token in November, after a report found that much of the trading firm’s balance sheet FTX’s sister, Alameda Research, was made up of tokens. . This decision caused the value of FTT to decrease while FTX payouts increased. Binance entered talks to acquire the FTX assets the same week, but withdrew its offer shortly after deeming it a black hole.
The fall of FTX revealed another house of cards among crypto funds like Three Arrows, Digital Currency, Genesis or BlockFi, Gemini or Celsius, all now in liquidation or in very few hours.
Justice must now ask itself how to make amends and find out what happened to the billions who disappeared. This is perhaps the biggest scam in history.
The challenge is to see what comes out of the crypto world alive
Is there a solution to this whole crisis? Skeptics and loyalists expect more rules and regulations, especially when it comes to consumer protection.
For some, the thesis is about the purge that will leave Bitcoin, Ethereum and the strongest cryptocurrencies as the only ones. They say it’s just another crisis in the history of Bitcoin. For others, the first central bank digital currency (CBDC), cryptocurrencies linked to central banks and states, will become strong, combining a technology that almost no one who studies it doubts has good applications and support of those who have always supported her old economy.
But with everything changing in just a year, who knows.
