Following a lackluster rise in 2021, in which many new crypto millionaires and several crypto startups achieved unicorn status, came the dramatic fall in 2022. The industry was plagued by macroeconomic pressures, scandals, and meltdowns that virtually overnight wiped out fortunes.
As the year 2022 draws to a close, many cryptocurrency supporters are concerned about the state of the industry, particularly in light of the recent FTX collapse and the contagion it caused, bringing down several firms associated with it.
Many people who couldn't stop talking about crypto and recommending it to their family at Christmas dinner last year may find the tables turned this year, with them having a lot of explaining to do about the state of digital assets today. While that conversation will be awkward,
The disaster was widespread, but crypto turned it into a virus.
External factors such as rising inflation, rate hikes by the United States Federal Reserve, and international conflict shook investor confidence in the market, resulting in a sell-off in both traditional and crypto markets.
External market conditions, aided by an unchecked centralized decision-making process, claimed Terra as the bull cycle's first major player. Within days, the $40 billion ecosystem was destroyed. More importantly, it triggered a crypto contagion that claimed the lives of at least a half-dozen other crypto players, primarily crypto lenders, with exposure to the Terra ecosystem.
The Terra ecosystem's demise severely impacted lenders, bankrupting Three Arrows Capital and many others. Due to extreme market conditions, Celsius paused withdrawals, causing cryptocurrency prices to fall, and then declared bankruptcy. FTX had to bail BlockFi out with a $400 million cash injection.
FTX appeared to be overly eager to bail out several troubled lenders at the time. However, just a quarter later, it was revealed that FTX was less liquid and cash-rich than it claimed. In fact, the crypto exchange was leveraging multibillion-dollar valuations and loans with its native tokens and in-house, non-existent projects. Its sister company, Alameda Research, was discovered to be involved in the construction of a house of cards that eventually collapsed in November.
The crypto exchange and its founder, Sam Bankman-Fried, who had a philanthropic outlook for the world, turned out to be outright frauds and stole money from customers. The former CEO was discovered to have misappropriated customer funds and was arrested in the Bahamas on December 11.
Bankman-Fried was extradited to the US on securities fraud and money laundering charges. The former CEO, however, was able to secure a bail plea against a $250 million bond paid by his parents, who put up their house to cover his astronomical bail bond.
While the arrest of Bankman-Fried and his trial in the United States have given some FTX users hope, the chances of many customers receiving their funds are very slim, with lawyers predicting that it could take years, if not decades, to recover the funds.
Two back-to-back crypto contagions caused by a series of poor decisions and the greed of a few may be difficult to explain to the family. So admit it, everyone makes mistakes in the bull market, believing they are doing the right thing by involving their family. However, one can always focus on the positives and the lessons learned from mistakes, and the 2022 crypto contagion is no exception.
Centralized exchanges and coins come and go, but Bitcoin is here to stay.
The collapse of the Terra ecosystem was a significant setback for the industry, both in terms of value and how the outside world perceives it. Crypto survived the collapse and was on its way to recovery, only to be dealt another blow in the form of FTX. The FTX saga is far from over, but it demonstrated what corruption and large donations could do to your public image, even if you have stolen billions of dollars from people.
Many are portraying the collapse and crypto contagion as the end of trust in the ecosystem. US regulators are warning that the crackdown is just getting started, with SEC Chairman Gary Gensler comparing crypto platforms and intermediaries to casinos.
Any crypto veteran, however, will tell you that the industry has seen much worse and has always recovered. While the collapse of the third largest cryptocurrency exchange (FTX) is significant, it pales in comparison to the Mt. Gox hack from the early days of exchanges.
Mt. Gox was once the most significant external factor casting doubt on the cryptocurrency industry, particularly Bitcoin. When the exchange was hacked in 2014, it accounted for more than 70% of all Bitcoin transactions. The hack significantly impacted BTC's price at the time, but the market quickly recovered in the following cycle.
Crypto users are withdrawing funds from cryptocurrency exchanges at a rate not seen since April 2021. Nearly $3 billion in Bitcoin was forced to withdraw from exchanges and moved to self-custody wallets in November.
Bitcoin, the original cryptocurrency, has survived the collapses of several major exchanges over the last decade and has risen to the top of each of those collapses in the subsequent cycle. This is why most early investors and supporters frequently advocate for self-custody and hodling BTC over investing in new altcoins that may appear profitable during a bull run, but there is no guarantee that they will survive the next bull run.
The demise of these centralized entities in 2022 may also prompt policymakers to develop some form of official universal regulations to ensure investor security.
Regardless of the entities involved in facilitating various use cases and services on top of them, the core technology of decentralization and Bitcoin, the OG cryptocurrency, are here to stay. More aware users who adhere to self-custody rather than allowing their funds to sit on exchanges could usher in a new wave of crypto reforms in 2023. Also, it's best not to give anyone financial advice, especially during a bull market.
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