Crypto 2022 Year in Review: The Bad (Part 2 of 3)

For the crypto industry, 2022 was arguably the worst year on record. Between the collapse of top exchanges and companies, the depegging of one of the most-used stablecoins, and the general market downturn, there’s a lot to be disappointed about this year. Let’s look at the unfortunate events that defined the cryptocurrency industry this year in part 2 of our three-part annual market review.

Read part 1 here!

2022 started eerily similar to 2018: the market hit new all-time highs in the previous November and December before slowly creeping down to valuations around the top of the previous bull market. In November 2021, Bitcoin hit a high of $65,000, and over the next few months fell to around $50,000 at the start of 2022. Unfortunately, the prices of top assets continued to fall, and the cryptocurrency market capitalization went from a high of $3 trillion to a little over $800 billion today. Bitcoin is currently hovering around $16,000, and the high of the 2017 bull market was $20,000. Though it is true that this market is extremely volatile and the prices typically do not reflect the development and ambition of the space, it certainly has a negative effect on the overall industry sentiment and the ability of new companies to raise capital and continue building. 

Besides the continuous price decreases, the year's first half was not too bad. However, in May, the dominos began to fall, as the algorithmically-balanced UST stablecoin lost its peg and caused a massive market collapse. UST was balanced by a sister cryptocurrency, Terra (LUNA), and $1 of UST could always be used to mint $1 of LUNA and vice versa. This mechanism had worked well enough for UST since its launch in 2020, but fears surrounding its continued success caused many investors to exchange their UST for other stablecoins. This caused the price to decrease due to the selling pressure, and both UST and LUNA dropped to being essentially worthless, down from a combined valuation of over $50 billion. As expected, this was a catalyzing event that sent the market into a spiral, as a lot of seemingly unrelated assets were brought down by Terra’s collapse since UST was used in several different DeFi ecosystems.

Another consequence of the Terra collapse was the liquidation of Three Arrows Capital, once considered a premier cryptocurrency hedge fund. As large investors in the Terra ecosystem, its crash revealed their liquidity issues, and they could never recover. Since 3AC had investments outside of Terra, this liquidation impacted the broader market, including Ethereum. Other companies, including the Voyager Exchange and lending platform Celsius, fell to a similar fate. 

As with any year, several different platforms and protocols experienced hacks, but this year’s were larger than ever. According to some estimates, over $3 billion was stolen. The biggest hack of the year was the Ronin Bridge, which led to around $620 million in ETH and USDC being stolen by suspected North Korean hackers. Other notable hacks include the $320 million Wormhole bridge hack, the $190 million Nomad Bridge hack, and the $160 Wintermute DeFi platform hack. If crypto is ever to become mainstream, there need to be better security guards in place to ensure that users do not lose their money to something entirely outside of their control, or at least better insurance options.

Undoubtedly the biggest black swan event of the year was the collapse of FTX and the multi-year fraudulent scheme they were secretly running with sister company Alameda Research. After reports revealed that the companies might be insolvent and the Binance exchange sold their $500 million holding of FTX’s FTT token for “risk management,” users who had funds in the FTX exchange rapidly began to withdraw. This caused a liquidity crisis, as FTX was not storing user funds as promised, and the exchange was forced into bankruptcy following a failure to get acquired or bailed out. This left exchange users, who held billions of dollars on the exchange, with no way to get their cryptocurrency. Additionally, like 3AC, FTX had holdings in companies and cryptocurrencies across the market, mainly in the Solana ecosystem, causing prices for SOL and related currencies to tumble even more than in the rest of the market. This news also forced United States-based lending platform BlockFi into bankruptcy, as FTX had bailed them out over the summer. With FTX founder Sam Bankman-Fried set to be extradited to the United States in the coming days, this saga is far from over. 

As unfortunate as it is, the latter half of this year was dominated by negative news and setbacks for the cryptocurrency industry. The residual effects of these events are expected to carry over into 2023, if not later, as the fallout from FTX continues to wreak havoc on space. Hopefully, there will be some good to come out of next year. Even if it isn’t new all-time highs, developers and builders will continue to find uses for blockchain that will help bring more value and interest to the Web3 space.

Keep an eye out for part 3, where we will dive into what 2023 could look like for the blockchain industry!

By Lincoln Murr

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