- While 2021 created many crypto success stories, with regular folks becoming millionaires, 2022 has reversed course as trillions of dollars have been wiped out of the space.
- The catastrophic collapse of FTX has hurt investor confidence, and there are many casualties coming out of this debacle after what has already been a challenging year for digital assets.
- There were times in 2021 when you couldn’t turn a corner without hearing about cryptocurrency. Cryptocurrency peaked in November 2021 and has experienced a meteoric collapse since then, with bitcoin dropping in value from roughly $68,000 to below $20,000.
In 2021, it was all about meme stock rallies and crypto. In 2022, one could argue the same is true about crypto, but for very different reasons.
The cryptocurrency market plummeted, to put it mildly. The industry was plagued by macroeconomic pressures, scandals, and meltdowns that wiped out fortunes seemingly overnight. As 2022 comes to a close, many crypto supporters are confused about the state of the industry, especially after the recent FTX collapse and all of its casualties.
Let’s look at what happened to crypto over the last year to make sense of how the house of cards has been falling…
How the house of cards is falling
As this grim year in the crypto space comes to a close, it’s only appropriate that the man once touted as a “Crypto Robin Hood” has ended up behind bars. At the same time, investors and government officials are struggling to figure out how a relatively new company with a peak valuation of $32 billion could end up filing for bankruptcy by November. Sam Bankman-Fried, often referred to as SBF, was supposed to appear in front of Congress to testify about what happened to FTX, the crypto exchange he was the CEO of until early November.
On the evening of December 12, SBF was arrested by authorities in the Bahamas at the request of the U.S. Justice Department. He will face various civil and criminal charges as Congress attempts to make sense of how FTX imploded and discusses possible regulatory structures for the digital asset space. The DOJ plans on laying charges against Bankman-Fried that include wire fraud, securities fraud, and money laundering, to name a few. The SEC has filed its civil complaint accusing Bankman-Fried of executing a “years-long fraud” and orchestrating a scheme to defraud investors.
SEC Chair Gary Gensler released the following comment in a statement on the charges being laid against SBF:
“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.”
Before we break down the timeline of this crypto collapse, we must briefly mention some of the bankruptcies that have shaken up the space. The following crypto exchanges and lenders have either filed for bankruptcy or paused customer withdrawals in 2022:
- Three Arrows Capital.
- Alameda Research.
- Voyager Digital.
- Celsius Network.
Cryptocurrency became massively popular during the pandemic months. You would often hear rags-to-riches stories of folks becoming millionaires seemingly days after purchasing “meme coins,” tokens that were essentially introduced as a joke.
In 2021, Shiba Inu, a meme coin, shot up more than 700,000%, and one man came forward with a story of how he could quit his warehouse job because he was now a millionaire. Many more stories like this one popped up throughout the year, and it seemed like the crypto space was filled with free money.
By creating wealth through high returns with cryptocurrency tokens, the space attracted users by promising generous returns on investments. We all know that banks offer meager interest rates for savings accounts. Crypto lenders and exchanges took advantage of this by offering yields approaching 20%. Naturally, this led many folks to turn to the crypto space.
Cryptocurrency peaked in late-2021.
In October of 2021, SBF was on the cover of Forbes (for good reason) and the Miami Heat started a new season at the FTX Arena, where the crypto exchange paid $135 million for a 19-year naming rights deal. At that time, SBF was sharing his benevolent plan to give the majority of his fortune away for the good of humanity.
Near the end of 2021, cryptocurrency prices skyrocketed, and it felt like everyone in the space was getting rich. Around November of last year, bitcoin was trading at around $68,000, the price of ether reached about $4,800, and the crypto market was estimated to be worth around $3 trillion. It felt like the crypto space was unstoppable.
Crypto prices start to drop
Near the end of 2021, it was evident that inflation was still soaring and that the Fed would have to raise rates to cool off the economy. Bitcoin dropped by 19% in December as the stock market sell-offs began and investors started liquidating their assets. In early 2022 the market volatility further escalated for stocks and crypto. Even though many crypto enthusiasts touted that the digital assets would serve as an inflation hedge, that’s not what happened. As it became apparent that inflation would have to be tamed with rate hikes from the Fed, markets began to swing.
Investors rushed to cash out, and many felt that the crypto winter had begun. It became evident that crypto wouldn’t be the hedge against inflation many hoped it would be. Crypto was just another speculative asset that fluctuated based on macroeconomic factors. Crypto prices continued to drop with every rate hike and they haven’t shown any signs of recovery lately.
The Luna collapse
When the Luna crypto network collapse occurred in May, it was considered the most enormous crypto crash ever with an estimated wipeout of about $60 billion. Stable coins were no longer stable. This shook the entire global digital currency market as there were many casualties and retail investors lost significant money.
There were two major players involved in the collapse: the TerraUSD/UST stablecoin and the actual luna coin. When luna and UST crashed, there was a liquidity crunch in the entire crypto space. The Luna coin went from an all-time high of around $119 to plummeting below a fraction of a penny, before it was delisted.
The fall of TerraUSD started the crypto contagion that bankrupted Three Arrows Capital and many other lenders. By June, Celsius paused withdrawals due to “extreme market conditions,” and this news caused crypto prices to drop even further. Then a month later, Celsius ended up filing for bankruptcy. BlockFi had to be bailed out by FTX with a $400 million cash injection.
FTX went down and took many casualties
When crypto enthusiasts thought things couldn’t get worse, it did. The FTX platform collapsed, and it brought down even more crypto lenders. While we’ve already covered this ongoing saga in other articles, it’s worth repeating that the FTX exchange went from being too big to fail to melting down completely in just a few days.
Investigations are ongoing to determine if FTX was lending its customers’ money to the trading firm Alameda Research, which SBF also owned. Bankman-Fried has tried to blame management failures and poor accounting for the collapse of the once $32 billion exchange, but those simple answers need to be expanded on.
What’s next for crypto?
MicroStrategy cofounder Michael Saylor recently declared that the crypto industry needs to grow up and speculated that this crypto crash could lead to the acceleration of regulation in the space. There is no way to avoid government scrutiny at this point.
White House press secretary Karine Jean-Pierre spoke last month about how cryptocurrencies risk harming ordinary Americans and that proper oversight is required. Jean-Pierre also stated, “The most recent news further underscores these concerns and highlights why prudent regulation of cryptocurrencies is indeed needed.”
Many crypto enthusiasts hope that the worst is behind them. Others aren’t so sure of what to expect. What will this government involvement mean for the crypto space? It’s difficult to tell what will happen next.
How should you be investing?
Since crypto exchanges and lenders aren’t overseen with the same regulations as the banking industry, it can be extremely risky to invest in these speculative digital assets. If 2022 has taught us anything about investing it is that when something seems too good to be true, it almost always is.
If you’re looking to invest in the cryptocurrency space, you may want to consider our Emerging Tech Kit, which helps spread risk across the industry, in favor of investing in a single coin or company. If you’re looking for something more stable, something less speculative and even less affected by the current volatility int he market, check out the Large Cap Kit.
Q.ai takes the guesswork out of investing. Our artificial intelligence scours the markets for the best investments for all manner of risk tolerances and economic situations. You can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.
Just earlier this year, Katy Perry turned to Instagram to joke about how she was quitting her music career to become an intern for FTX. As of this morning, the former CEO of FTX is behind bars.
It’s tough to tell if crypto will be doomed for the foreseeable future or if the space can eventually bounce back, but the entire industry has been exposed. The crypto space is filled with flaws and risks that will make it difficult for retail investors to find the confidence to invest heavily in this industry again. Many retail investors have seen their hard-earned money evaporate and disappear this last year.
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