2022 was a game-changer in the history of cryptocurrency. The cryptocurrency market not only had a significant course correction, but several coins also crashed. From a technological standpoint, one of the most awaited events in cryptocurrency history, the Ethereum merger, was a success. However, cryptocurrencies were on an unending downfall. The crypto market lost more than $2 trillion in 2022 due to macroeconomic uncertainty and inflation.
What led to the 2022 crypto market crash?
There are various reasons why the 2022 crypto collapsed. Let’s look at some of the key factors that fuelled the bear run:
- Interest hikes were one of the main reasons the crypto market collapsed. The rising rate of interest also impacted the stock market.
- In 2022, speculation and manipulation were at their peaks, which triggered FUD (Fear, uncertainty, and doubt), causing prices to fall even further.
- While the move in monetary policy fundamentally altered the rules of the game for financial markets, the crypto market also had to deal with scandals like Terra USD, FTX, Celsius, and many more.
- Blockchain technology, which was highly acclaimed and advertised as secure, proved to be a good target for cyber heists on multiple occasions. Fraudsters and hackers had one of the most profitable years, as billions of dollars were lost due to such malicious acts.
2022’s biggest crypto crashes
In the end, 2022 was a bad year for the cryptocurrency industry, with several major cryptocurrencies losing massive chunks of their value. Let’s look at some of the most notable ones.
Terra USD Collapse
Investors hastily liquidated hundreds of millions of dollars when over $2 billion in TerraUSD (UST) was unstaked (removed from the Anchor Protocol) on May 7. It is currently unknown whether the move was a premeditated attack on the Terra blockchain or a response to interest rate hikes.
The massive outflow of funds caused the UST price to drop from $1 to $0.91. Market participants responded by exchanging $0.90 in UST for $1 in LUNA. Because of large outflows of UST, the stablecoin began to depeg. As more individuals sold their UST during the panic, there was a corresponding rise in the supply of LUNA.
As a result of this decline, cryptocurrency exchanges began to halt trading of LUNA and UST. Investors lost a total of $60 billion as a result of the collapse of TerraUSD Classic (USTC) and the related coin Luna Classic (LUNC).
A South Korean court issued a warrant for Do Kwon’s arrest on September 14.
FTT
On November 11, FTX and its American counterpart FTX.US filed for Chapter 11 bankruptcy. Lack of liquidity and poor financial management caused the exchanges to fail, and as a result, many investors withdrew their funds in panic. This started the collapse of the firm’s native token, FTT.
Following the declaration of bankruptcy, FTX.US temporarily halted withdrawals on November 11, despite previous assurances that FTX.US would be unaffected by FTX’s liquidity issues. Furthermore, on the evening of November 11, an alleged hack saw more than $600 million drained from FTX wallets. FTX announced the attack in its support channel on the messaging app Telegram.
Twitter users claimed that hackers were also targeting bank accounts associated with FTX. Plaid, a firm that facilitates the integration of consumer bank accounts with financial apps, responded to “concerning public reports” by cutting off FTX’s access to their products on the basis that they had no evidence to suggest that their resources had been used illegally.
On December 12, the U.S. requested the arrest of Alan Bankman-Fried in the Bahamas so that he could be extradited to face eight charges in the United States, including wire fraud and conspiracy to mislead investors. Bankman-Fried was extradited to the United States and is currently free on a $250 million bail as he awaits trial.
Helium
Helium’s market capitalization fell from nearly $1 billion to $270.67 million in 2022. Helium is now down 96% from its all-time high. It all started on September 5, 2022, when angel investor Liron Shapira published an explosive Twitter thread stating that Helium has little to no demand and investor returns have been extremely low.
Several other factors compounded this effect and led to Helium’s Cryptocurrency (HNT) crash, including a proposal by core developers that upset crypto investors, the failure of the FTX crypto exchange, and rumors that Pershing Square CEO Bill Ackman had invested in the project. Furthermore, Helium had misled the public about its clients, casting doubt on the technology’s viability.
Solana
Solana went from being a possible “Ethereum killer” to one of the worst-performing assets in 2022. In 2022, SOL lost over 95% of its value. Solana’s market worth was $52.6 billion a year ago. It has since dropped to $5.94 billion.
A class-action lawsuit was filed against Solana in a federal court in California in July 2022, alleging that the platform favored insiders at the expense of investors. Solana Labs generates value by issuing unregistered security, the SOL token.
Mark Young stated in his complaint that the manner in which SOL tokens were allocated fits the securities criteria under the Howey Test. In other words, Solana’s insiders and promoters own the vast majority of SOL tokens issued by Solana Labs and Solana Foundation in anticipation of profit. The complaint set the stage for Solana’s downfall.
There were some technical issues with Solana as well. Solana pitched itself as the Ethereum killer, yet this allegedly superior system failed to stay online 24×7. On January 21, 2022, Solana was down for an entire day. The first significant downtime reduced SOL prices by 33%, from $141 to $94. Except for February, July, September, and August, similar issues resulted in degraded price performance and volatility throughout the year.
Furthermore, due to its direct financial relationships with Sam Bankman-Fried companies, Solana (SOL) suffered worse than most of its peers during the FTX meltdown. FTX’s Sam Bankman was one of the most vocal supporters of Solana and held a significant share of SOL tokens, further worsening the scenario.
Axie Infinity
The most popular player-to-player (P2P) crypto game, Axie Infinity, suffered a dramatic collapse in March 2022. This was due to the Lazarus group hacking the Ronin Bridge, an Ethereum sidechain built to allow asset transfers on the platform. This resulted in the theft of $622 million in cryptocurrencies.
The hack reduced Axie Infinity’s player base significantly, with more than 73% of daily active gamers departing since then.
Axie Infinity’s collapse was part of a more significant trend of crypto firms having challenges in 2022. TerraUSD/LUNA, Three Arrows Capital, Voyager Digital, and Celsius Network were among those that failed. These incidents damaged investor trust and prompted a flight from risk, resulting in a downward trend for cryptocurrencies.
Axie Infinity had a successful 2021, earning more than $215 million at its peak on August 8. This success, however, was short-lived, as the game was discontinued in November 2021 due to its burn mechanism and imbalance in issuing SLPs. The declining trend lasted until May 2022, when Axie Infinity hit its lowest price of $16.20, a far cry from its highest price of $164.90 on Nov 6, 2021.
These reasons have contributed to Axie Infinity’s declining monthly revenue performance by more than 98% since its peak in August 2021.
Convex Finance (CVX)
Convex financing was also severely damaged by the 2022 collapse, with the price dropping by more than 70%. Following a series of unfavorable events, the price of CVX was further cut in half. Several reasons contributed to the downfall of Convex Finance.
Firstly, Convex Finance shifted its voting and incentive distribution on the Votium platform, resulting in user outrage. Later on, Convex Finance’s DNS was hacked. The platform listed five addresses suspected of having accepted malicious contracts, which negatively impacted CVX as holders started to panic.
Celsius crash
The value of Celsius’s CEL token plunged on July 13, 2022, when Celsius Network, one of the major crypto businesses, declared bankruptcy. As the value of cryptocurrencies declined, investors on the Celsius network began selling their cryptocurrency holdings in search of safer alternatives.
As a result, panicked investors exited Celsius in large numbers. On June 12, Celsius Network suspended BTC withdrawals, swaps, and transfers, claiming that extreme market conditions compelled them. Users of the platform believed Celsius had filed for bankruptcy and would therefore be unable to refund their funds. In a matter of hours, the value of CEL dropped by 70%, and it continued to plummet in the days that followed.
Cryptocurrency markets tend to bounce back
The 2022 crypto meltdown has caused significant pain and losses for traders and investors. Many people have lost their entire life savings, and several crypto businesses have gone bankrupt. However, this is not the first time the crypto market has crashed.
Bear market 2011
In 2011, when most people had never heard of Bitcoin, the market was unfavorable. Bitcoin dropped from $32 to $2, losing nearly 93% of its value. However, within a few months, the price began to rise, eventually surpassing its all-time high in 2013.
Bear market 2014 to 2016
By the end of 2013, the price of Bitcoin had dropped from $1,135 to $175 by January 2015. The reason for the collapse was that Mt Gox, the largest Bitcoin exchange at the time, was hacked, resulting in the theft of 850,000 Bitcoin by hackers. The market reacted negatively, with Bitcoin losing 85% of its value. However, prices began to climb in the middle of 2015, reaching a new high of $1200 in April 2017.
Bear market 2018
In 2018, the price of Bitcoin fell from $19,640 in December 2017 to $3,185 in December 2018, and many other cryptocurrencies lost value. The Coincheck breach and SEC rejection of Bitcoin-based exchange-traded funds (ETFs) were the causes of the meltdown. Within a year, the value of Bitcoin dropped by 82%. Bitcoin’s price returned to $20,000 by July 2020, eventually reaching an all-time high of $69,000.
Conclusion
The cryptocurrency market is highly volatile, making it a risky investment. However, it follows an up-and-down cycle. Looking back at the history of cryptocurrency indicates that the foundation of a strong bull market has always been a strong bear market. And, if historical data is to be believed, we may see another all-time high in the subsequent months.
Important Disclosures:
Certain statements in this document might be forward-looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “target”, “seek”, “will” and similar expressions to the extent they relate to the material produced by Bytex staff member. Forward-looking statements are not historical facts but reflect the current expectations regarding future results or events. Such forward-looking statements reflect current beliefs and are based on information currently available to them. Forward-looking statements are made with assumptions and involve significant risks and uncertainties. Although the forward-looking statements contained in this document are based upon assumptions the author of the material believes to be reasonable, none of Bytex’s staff can assure potential participants and investors that actual results will be consistent with these forward-looking statements. As a result, readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results or events to differ materially from current expectations
The commentaries contained herein are provided as a general source of information based on information available as of MMMM DD, 2022. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or relevance of the information contained here. ByteX. makes no representation or warranty to any participant regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. Prospective participants must not rely on this document as part of any assessment of any potential participation in buying and selling of virtual currency assets and should not treat the contents of this document as advice relating to legal, taxation, financial, or investment matters. Participants are strongly advised to make their own inquiries and consult their own professional advisers as to the legal, tax, accounting, and related matters concerning the acquisition, holding, or disposal of a virtual currency. All content is original and has been researched and produced by ByteX.