Bitcoin, digital currencies crash in 2022 crypto winter amid crises, turmoil, bankruptcies

By Ovunc Kutlu

ISTANBUL (AA) - Bitcoin and cryptocurrencies crashed in 2022 amid several crises, bankruptcies and market turmoil, while a lack of regulation and accountability has shaken investors' confidence in digital currencies and tokens.

Cryptocurrencies made a strong start to the year with high optimism from crypto enthusiasts often using the expression: "To the Moon!" for Bitcoin and many altcoins -- popular and unknown.

But macroeconomic uncertainty, interest rate increases by the US Federal Reserve and other central banks and inflation climbing to record levels slowly dimmed those high hopes.

Although crypto supporters saw Bitcoin and others as a hedge against record inflation and devaluation in fiat currencies, such as holding gold and silver against inflation, the view was soon dismissed as cryptos started plunging in the second quarter.

While central banks' aggressive monetary tightening and rate hikes have lowered the amount of liquidity in the markets, they also prevented new investments, especially in the technology sector.

The cryptocurrency market became highly correlated to Nasdaq in late 2021 and the tech-heavy index plummeted a massive 34.3% in 2022 as of Wednesday.

The total market size of the crypto market dove to $792.7 billion Thursday -- down almost 65% from the $2.25 trillion close in 2021. The market saw more than $1.4 trillion evaporate this year, according to data compiled by Anadolu Agency.

The value of the crypto market hit an all-time high of $3 trillion in November 2021 but saw more than $2.2 trillion wiped out since.

Bitcoin's share of the crypto market, known as dominance, was around 40% Thursday, and its decline strongly affects other digital currencies and tokens.

The price of Bitcoin took a massive nosedive of 64% this year to around $16,630 as of Thursday, after finishing last year at $46,224. The world's largest cryptocurrency by market capitalization climbed to its highest level of almost $48,163 on March 28, but it is down 65.5% from that figure.

Ethereum was trading around $1,200 on Thursday, which is a whopping 67.4% decline from its 2021 close of $3,677. The world's second-largest cryptocurrency by market cap and the largest altcoin reached as high as almost $3,889 on Jan. 4 but it is down 69% from that level.

- Luna stablecoin crash

Several crises surrounding stablecoins and exchange platforms also added fuel to the fire, which led to a firesale in the crypto market.

The crypto market saw $1 trillion evaporate in five weeks starting in early May as Bitcoin fell below $29,000 -- its lowest in 16 months.

A stablecoin called TerraUSD, or UST, initially designed by Singapore-based Terraform Labs in 2018 to be pegged to $1, plummeted below $0.26 on May 11, creating fear, uncertainty and doubt among crypto enthusiasts.

While other popular stablecoins use their reserve cash and various assets to manage a 1-on-1 ratio against the dollar to present stability and avoid volatility. UST, on the other hand, uses an algorithm of burning and minting its sibling token Luna, and it enables UST to adjust its supply and manage a price close to $1.

With the price of UST in free fall, more Luna were burned to support the price of UST by Luna Foundation Guard.

Despite the efforts, Luna, once a top 10 coin, lost more than 95% of its value in a few days, while crypto investors were worried that the organization could dump billions of Bitcoin it owns to support UST.

Such fears were realized one week later when it was made public that the organization sold at least $2.1 billion of Bitcoin in 10 days, leading to a rapid decline in the value of other crypto coins and tokens.

US Treasury Secretary Janet Yellen immediately urged American lawmakers about oversight concerning stablecoins after the TerraUSD price tanked.

- FTX implosion

Once the world's third-largest cryptocurrency exchange by volume, FTX was in "a significant liquidity crunch," according to Binance CEO Changpeng Zhao in early November.

Although FTX approached rival Binance for a buyout, the world's biggest cryptocurrency exchange by volume backed out from the deal. That led to a major sell-off in the crypto market and pulled Bitcoin's price below $16,000 that month.

Gary Gensler, the head of the US Securities and Exchange Commission (SEC) said Dec. 7 that cryptocurrency companies that facilitate transactions in the market should comply with existing laws. "The runway is getting shorter" between crypto firms' compliance and enforcement of the SEC, he said.

A week later, FTX's new CEO John J. Ray III told the House of Representatives Financial Services Committee that the company had "unacceptable management practices" under former CEO Sam Bankman-Fried.

While the SEC charged Bankman-Fried with defrauding investors on Dec. 13, two of his associates, co-founder and former CTO Gary Wang and Alameda Research's former CEO Caroline Ellison, pleaded guilty to federal charges that include conspiracy to commit wire fraud, commodities fraud and securities fraud.

Bankman-Fried was extradited from the Bahamas to the US on Dec. 22 and immediately taken to the District Court for the Southern District of New York.

Facing eight charges, he was released on $250 million bail and has his next court hearing is Jan. 3 in the Manhattan court.

- Bankruptcies

Fraudulent activities, online scams, massive hacks, bankruptcies and global celebrities promoting coins and tokens that went bust were other crises during the highly deregulated and decentralized crypto market.

Singapore-based crypto hedge fund Three Arrows Capital lost more than $3 billion in 2021 and 2022, becoming the first major crypto company to go bankrupt this year on July 3.

Three Arrows Capital's demise immediately caused a domino effect, as it did not repay loans of more than $660 million to cryptocurrency firm Voyager Digital, which filed for Chapter 11 bankruptcy protection July 5.

Crypto lending firm Celsius Network, which managed $12 billion in assets in June, also filed for bankruptcy July 13.

And, digital asset lender BlockFi filed for bankruptcy Nov. 28, two weeks after announcing it had "significant exposure" to FTX.

2022 could be remembered as "the crypto winter" and a major turning point for Bitcoin and cryptocurrencies -- either with high hopes turning into shattered dreams for investors, or lessons learned in a deregulated market with early technology that is still taking baby steps.