2022 Analytics and 2023 Expectations About the Web3 World

January 16th, 2023

Credits: Cointelegraph, Fintech News, Investing.com, CoinDesk, Wikipedia

7 Biggest Crypto Collapses of 2022

2022 has been a bumpy year for the cryptocurrency market, with one of the worst bear markets on record and the downfall of some major platforms within the space. The global economy is beginning to feel the consequences of the pandemic, and clearly, this has had an influence on the crypto industry.

Axie Infinity’s Ronin Bridge Hacked

In March 2022, Ronin, the blockchain network that runs the popular nonfungible token (NFT) crypto game Axie Infinity, was hacked for $625 million. The hacker took 173,600 Ether and 25.5 million USD Coin from the Ronin bridge in two transactions. The main difficulty was a lack of a suitably decentralized network created by game developer Sky Mavis. The hacker acquired access to the private keys of five of Sky Mavis’ Ronin Chain’s nine validator nodes, enabling them to compromise the network. When the hackers gained control of five nodes, they essentially controlled over half of the network and were free to accept or deny whatever transactions they wanted. They obtained ETH and USDC via falsifying withdrawals. The crime occurred on March 23, but it was only noticed on March 29, when a user reported being unable to withdraw 5,000 ETH from the Ronin bridge ATM. In the aftermath of the attack, Axie Infinity developers raised $150 million to reimburse the affected users.

Terra USD/LUNA Collapse

On May 7, when over $2 billion in TerraUSD (UST) was unstaked (removed from the Anchor Protocol), hundreds of millions of United States dollars were quickly liquidated. It’s unclear if this was a deliberate attack on the Terra blockchain or a response to rising interest rates. Investors lost a combined $60 billion due to the panic selling that accompanied the decline of TerraUSD Classic (USTC) and Luna Classic (LUNC), a related token. On Sept. 14, a South Korean court issued an arrest warrant for Do Kwon. This happened four months after Terraform Labs’ LUNA and UST tokens collapsed. Do Kwon and five others were detained for allegedly violating regional market restrictions.

Three Arrows Capital Collapse

When Terra collapsed, the crypto hedge fund Three Arrows Capital (3AC), which had a peak market valuation of more than $560 million, suffered significantly. 3AC had invested heavily in several troubled cryptocurrency projects, including the play-to-earn game Axie Infinity, which lost $625 million to a North Korean hack this year, and the centralized cryptocurrency exchange BlockFi, which laid off hundreds of employees in mid-June. The crypto hedge fund eventually collapsed after taking on major directional trades and borrowing from over 20 institutions, and the founders defaulted on its payments. As liquidators try to wind down the failed crypto business of Three Arrows Capital, U.S. Bankruptcy Judge Martin Glenn has issued subpoenas to the company’s founders.

Voyager Digital’s Fall

On July 6, prominent cryptocurrency investment firm Voyager Digital filed for bankruptcy after crypto hedge fund 3AC defaulted on a $650 million loan. 3AC received a significant loan from Voyager with no security. When 3AC defaulted on all of its obligations and its owners left, Voyager lost a significant sum of customer money. Trading, withdrawals, and deposits were all suspended when Voyager reported that 3AC would not repay its loan. In June, Sam Bankman-Fried, billionaire CEO of trading firms FTX and Alameda Research, presented Voyager with a $500 million line of credit to help them weather the market collapse. On July 5, 2022, Voyager Digital Holdings filed for bankruptcy in the Southern District of New York. According to Voyager Digital, the corporation owes between $1 billion and $10 billion to its more than 100,000 debtors. Despite its debts, however, the company believes it has assets worth between $1 and $10 billion. They also guarantee that adequate money is available to pay off the company’s unsecured creditors. In a September court filing, insolvent cryptocurrency broker Voyager Digital revealed that it would auction off its remaining assets.

Celsius Crash and Liquidity Crisis

Celsius’s value plummeted on July 13, 2022, when one of the main crypto businesses, Celsius Network, declared bankruptcy. As the price of cryptocurrencies fell, investors on the Celsius network started withdrawing their Bitcoin holdings in search of safer alternatives. The crypto market has seen a significant sell-off due to the insecurity and falling prices of many major cryptocurrencies, which corresponded with the drop in the price of Celsius. In addition, due to escalating cash flow issues, Celsius announced 23% layoffs on July 3, 2022. When the time came, the company filed for bankruptcy on July 13, 2022. Celsius had total liabilities of $6.6 billion and assets of $3.8 billion, resulting in a $1.2 billion hole in the company’s balance sheet due to the court ruling.

FTX Collapse

FTX and its U.S. equivalent, FTX.US, filed for Chapter 11 bankruptcy on Nov. 11. The exchanges collapsed due to a lack of liquidity and money mismanagement, resulting in a large number of withdrawals from fearful investors. Following the announcement of bankruptcy, FTX.US briefly restricted withdrawals on Nov. 11, despite earlier promises that FTX.US would be unaffected by FTX’s liquidity concerns. On the evening of Nov. 11, an alleged hack took more than $600 million from FTX wallets. The assault was revealed by FTX in its assistance channel on the instant-messaging network Telegram. Bankman-Fried was arrested in the Bahamas on Dec. 12 at the request of the U.S. government, which wanted him extradited for eight criminal offenses, including wire fraud and conspiracy to defraud investors. Bankman-Fried was eventually deported to the United States and is awaiting trial after posting a $250 million bail.

BlockFi Bankruptcy

The collapse of FTX earlier in the month generated fear and uncertainty across the market. BlockFi, another cryptocurrency exchange, filed for Chapter 11 bankruptcy on Nov. 28. With assets and liabilities ranging from $1 billion to $10 billion, the firm had over 100,000 creditors. In addition, they had a $275,000,000 debt to Sam Bankman-Fried’s American subsidiary, FTX US. The application shows that the largest client has a balance of $28 million. BlockFi agreed earlier this year to accept a credit package from FTX worth up to $400 million to help it weather a liquidity restriction caused by the exchange’s exposure to the TerraUSD stablecoin’s collapse.

Vauld Mired in Controversy

Vauld has been mired in controversy. The India-registered Singapore-based company has been accused of facilitating “crime-derived” proceeds from predatory lending firms. As a result, India’s anti-money laundering agency has frozen assets worth US$46.4 million from Vauld’s local entity in August. Vauld also suspended its customers from withdrawing, trading, and depositing on its eponymous platform last month, recently filed for bankruptcy, and reportedly owed creditors US$363 million.

Zipmex Filed for Bankruptcy

Zipmex, is expected to be acquired by a venture capital firm for about US$100 million. The move comes as the company filed for bankruptcy protection in Singapore, becoming the latest victim of the global downturn in digital currencies. The Jump Capital-backed firm had to halt withdrawals in July under the strain of a liquidity crunch that has gripped the industry as it was working to address its exposure of US$53 million to crypto lenders Babel Finance and Celsius. It resumed withdrawals a day after.

Sources: Cointelegraph, https://cointelegraph.com/; Fintech News https://fintechnews.sg/

2022 Analytics by Quarters

Q1: Crypto markets get hit by the economy's shift

Cryptocurrencies' bull market lasted from the second quarter of 2020 until the last months of 2021. This was a period marked by the global struggle against the COVID-19 pandemic. Countries around the world opened money spigots to mitigate the negative economic effects of the pandemic, and there was a significant inflow of funds into global markets. This increased the appetite for risk and the flow of funds from institutional investors into cryptocurrency markets accelerated. At the time of the peak, the cryptocurrency market capitalization had reached $3 trillion and the Bitcoin price hit a record high of $69,000.

Global central banks' aggressively loose monetary policy throughout the pandemic left the world with a serious inflation problem. So, in the last quarter of 2021, the U.S. Fed signaled the end of that monetary policy and a shift to a tightening monetary policy, with tools such as balance sheet contraction and interest rate hikes at their disposal. And so ended the bull market for cryptocurrencies.

If COVID-19 response-induced inflation was not enough, Russia's invasion of Ukraine further disrupted supply chains worldwide. This further fueled inflation by negatively affecting production costs.

Crypto markets were not immediately affected by the war, as cryptocurrencies even served as a means of aid to Ukraine via crypto asset transfers. On the flip side, a media narrative developed that Russia could use cryptocurrencies to circumvent sanctions imposed on it by global governments due to the war. These developments would lead to a series of events that profoundly affected all global markets, affecting cryptocurrency markets later on.

The decline that began in November slowed somewhat in Q1, with Bitcoin finding support in the $37,000 band. By the end of March, it saw a bounce that reached as high as $48,000, as the sector reacted positively to the slowdown in inflation growth and the Fed's initial rate hike of only 25 basis points.

Q2: Cryptocurrency firm bankruptcies pick up

The recovery proved short-lived as the second quarter began, as the slowdown in the global economy began to take its toll on the markets.

Institutional investors started reducing their holdings in risky markets as the Fed's determination to slow inflation became clear. After lenders withdrew their support from the market, the liquidity problems caught crypto companies off guard. The Terra ecosystem was the first to be affected, triggering a collapse that would drive many companies into bankruptcy.

TerraForm Labs had a significant amount of staking products on its platform, up to 20% for its algorithmic stablecoin UST. As the tide turned and UST sales accelerated, the crypto asset struggled to remain stable. The promise of unsustainable rates of interest return was the catalyst for the series of events that brought the end of the Terra ecosystem. As a result, LUNA, the reserve unit of the UST, was negatively affected by the loss of UST's stability, and the value of the cryptocurrency plummeted in short order.

The collapse of Terra put the associated lending companies into a liquidity crisis, while also having an extremely negative impact on individual investors, ultimately leading to billions of dollars in losses. In the aftermath, Terra founder Do Kwon fled South Korea and ignored the authorities' call for his prosecution. Kwon is still at large and wanted by Interpol.

The first major company to be affected was Three Arrows Capital (3AC), a major lender in the crypto ecosystem. Then the financial crisis spread to other major crypto companies including Celsius, Genesis, and other lending companies. As a result, the direct and indirect ties between the companies led to the decline of the entire industry.

By June, Bitcoin's price had dipped below $30,000. The rise in energy costs around the world and the sharp drop in the price of Bitcoin started to have a negative impact on cryptocurrency miners. Many large mining companies liquidated their BTC holdings to protect their positions, and BTC fell below $20,000 to around $17,000 by the end of the first half of the year.

Q3: Recovery and a focus on the Ethereum Merge

While the Terra collapse plunged the cryptocurrency markets into chaos and made history, cryptocurrencies did eventually see dip buying in the 3rd quarter.

A summer slowdown in U.S. inflation and the pricing in of negative events supported a recovery. From July to mid-August, Bitcoin saw a 30% increase in value, rising from the $19,000 band to $25,000. The recovery stopped there, however, and selling pressure resumed in the second half of August.

Among the events that marked the crypto sector in the summer was the sanction imposed by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) against Tornado Cash, a transaction scrambling platform operating on the Ethereum network that enables the untraceability of asset transfers. A positive development was Coinbase's collaboration with the world's largest asset manager, BlackRock (NYSE: BLK), for crypto asset trading and custody service. In addition, the European Union finalized the crypto asset markets legislation MiCA, which has the potential to guide global crypto regulations. This development, which resonated throughout the market, was seen as an important step in the years-long regulatory debate.

By September, the Ethereum network's Merge, which had been delayed several times, was finally launched. With the transition from proof-of-work to proof-of-stake consensus mechanism, which has been seen as a turning point for the Ethereum ecosystem, the Ethereum network became an environmentally friendly structure, switching from energy-intensive proof-of-work to a much lighter proof-of-stake process, which is said to save 99.9% of the energy used by the network. This addressed the longtime concern about crypto's environmental impact but brought another problem with it. This time, critics began to raise the issue of network security and decentralization.

While the Merge caused Ethereum to rise in value in early September amidst the hype, the subsequent action showed traders sold the news. Ethereum mining became a thing of the past and miners began to continue their activities as transaction validators by staking Ether in their portfolios. While Ethereum issuance was expected to decline significantly, Ethereum supply started to become deflationary with the burning mechanism. Post-Merge Blockchain data also revealed that verification processes were in the hands of a small number of accounts, raising concerns about the Ethereum network's security and centralization. As a result, Ethereum's price continued to fall along with the rest of the market, failing to see the expected uptick in a market in turmoil post-Merge.

Q4: FTX deals a serious blow to the crypto sector

Entering the last quarter of the year, the crypto market showed signs of new life. Cryptocurrencies managed to close October on a positive note, albeit at a low rate. However, a November storm would drag the entire industry into new turmoil.

The shock came on November 2 with CoinDesk's news that Alameda Research, the trading firm associated with FTX, had a problematic balance sheet to say the least. FTX founder Sam Bankman-Fried had taken on the role of savior in the sector through financial support and acquisitions during the Q2 round of problems and maintained its reputation as a growing company. But Alameda's leaked balance sheet showed that a significant part of its assets was in FTX Token, an illiquid crypto coin minted by FTX. The perception that the company was trying to cover its liabilities with illiquid assets caused the market to quickly sour on the rising crypto star.

The first reaction came from FTX's biggest competitor Binance, with the exchange's CEO, Changpeng Zhao, announcing that they had learned from Terra and would divest their FTT holdings. This development triggered the acceleration of FTT sales in the market. At the same time, as mass fund exit requests from FTX started to increase, the exchange had to suspend withdrawal requests. As it would later be revealed, Alameda had taken FTX customer funds for their own use for some time.

Following the suspension of withdrawals, FTX and Binance signed a memorandum of understanding for Binance to purchase FTX. Binance then pulled out of the deal during the due diligence process. The back and forth only accelerated FTX's fall as the brokerage lost its last chance to get out of the crisis. Thus, the world's second-largest crypto exchange was forced to declare bankruptcy in as little as a week. A day after the bankruptcy announcement, FTX continued to make headlines with a suspicious hacking incident.

Throughout the month of November, several cover-ups involving FTX and Alameda Research came to light. It became clear that Alameda had been struggling since May and that FTX had been using client assets to fund Alameda. In December, U.S. authorities announced charges - including defrauding exchange customers, securities fraud, money laundering, and campaign finance fraud - against Bankman-Fried, and he was arrested on December 13 in the Bahamas.

FTX's rapid collapse caused panic among crypto investors, and crypto asset withdrawals from centralized exchanges have skyrocketed since November. Crypto exchanges began to publish their assets one by one, adopting the proof-of-reserves principle in an effort to regain user trust. However, the sudden termination of cooperation with crypto companies by the auditing firms that determine the reserves of the exchanges has emerged as a new negative.

Amid all this chaos, Bitcoin took another significant hit in the last quarter of the year and reached the lows of 2022 with the rest of the market. With the outbreak of the FTX crisis, Bitcoin fell as low as $15,000 and has been flat at $16,000 since November.

Source: Investing.com, https://au.investing.com/analysis/2022s-top-crypto-events-and-the-2023-crypto-outlook-drama-contagion-and-hope-200541930

2023: The Year of Regulations vs. Decentralization

Crypto regulation remains a dark forest. In the year ahead the SEC and CFTC will likely push the boundaries of their existing authorities through novel enforcement actions, says attorney Mike Selig.

The crypto-asset regulatory landscape will likely remain a dark forest in 2023. SEC Chair Gensler believes the majority of crypto assets are securities but is not in favor of new crypto market rules or guidance. On the other hand, CFTC Chair Behnam seeks additional CFTC authority over crypto assets but the agency is currently limited in its ability to issue rules or guidance for these markets. While crypto projects continue to push the boundaries of decentralization and community governance, the SEC and CFTC will likely push the boundaries of their existing authorities through novel enforcement actions. With neither agency poised to issue new crypto rules, 2023 will be the year of regulation versus decentralization.

The impact of many negative events throughout the year is likely to continue into the new year. Many market commentators expect the domino effect to continue due to the interconnectedness of crypto companies.

Countries that have so far been slow to regulate crypto may take concrete steps to control the market in 2023, especially as individual investors have also suffered serious losses from 2022's various incidents. The threat of contagion from the cryptocurrency sector to traditional finance has also increasingly been discussed as a reason to increase regulation. So, 2023 may be referred to as a year of regulation for crypto markets.

On the other hand, there may be important developments in the field of central bank digital currencies (CBDC), which countries have been working on for several years. Countries have already expressed their intention to compete with the crypto sector using the same technology. Thus, we may see a new front opened against cryptocurrencies with CBDCs.

It's worth noting that even though the negativity caused institutional investors to exit the market in large amounts in 2022, many financial giants decided to expand their services into the crypto space throughout the year and established various strategic partnerships in this direction. The movement of these companies in the coming year may create the means for institutional money to return to the crypto space, depending on more favorable macroeconomic conditions.

What should not be overlooked is that the troubling events of 2022 are likely to continue in 2023. The crypto industry may continue to be under pressure in 2023 due to liquidity shortages and the fear of contagion.

Definitions to remember in 2023:

The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929.([2])([3])([4]) The primary purpose of the SEC is to enforce the law against market manipulation.([5])([6])(: 2 )

The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.

Sources: Wikipedia; Investing.com, https://www.investing.com/analysis/cryptos-top-events-in-2022-and-the-crypto-outlook-for-2023-200633820; CoinDesk, https://www.coindesk.com/consensus-magazine/2022/12/23/2023-the-year-of-regulation-vs-decentralization/

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Contents:

Top Crypto Funding Stories of 2022

Haun Ventures: $1.5B

Huobi: $1B

NBA Top Shot Creator: $725M

Dragonfly Capital: $650M

Fireblocks: $550M

Binance Labs: $500M

Yoga Labs: $450M

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Multicoin Capital: $430M

Framework Ventures: $400M

Ava Labs: $350M

Near Protocol: $350M