Tough year for crypto: the disasters of 2022

Cryptocurrency has come a long way since the emergence of Bitcoin in 2009. While it has gained widespread adoption and recognition, the crypto market has also witnessed several major disasters since.

However, this year has been the worst, repeatedly bringing the crypto market to its knees.

This article will look into all the major disasters that occurred up to 2021 and compare them with 2022. We will also provide a forecast on what to expect in 2023, highlighting significant moves by regulators and the role of Proof-of-Reserve (PoR) in ensuring the security and stability of the crypto market. 

Let’s get into it!

Major disasters that have rocked the crypto market until 2021

Mt. Gox hack (2014) 

One of the biggest disasters in the history of cryptocurrency occurred in 2014 on the Mt. Gox exchange. At the time, it handled around 70% of all Bitcoin transactions. Hackers got access to the exchange, and 850,000 Bitcoins (around $450 million at the time) were stolen. 

The hack impacted crypto community and led to a significant drop in the price of Bitcoin. The exchange eventually filed for bankruptcy causing widespread panic and skepticism among investors.

DAO hack (2016) 

The Decentralized Autonomous Organization (DAO) was an innovative contract platform built on the Ethereum blockchain that raised over $150 million in crowdfunding in 2016. However, in June of the same year, an unknown hacker exploited a vulnerability in the DAO’s code and stole around 3.6 million Ether (worth around $50 million at the time). 

The hack led to a hard fork in the Ethereum blockchain, creating Ethereum (ETH) and Ethereum Classic (ETC).

Bitfinex hack (2016)

In August 2016, the Bitfinex exchange, one of the world’s largest cryptocurrency exchanges, suffered a major hack, resulting in the theft of around 120,000 Bitcoins (worth around $72 million at the time). The hack led to a significant drop in the price of Bitcoin and caused widespread panic among investors.

Coincheck hack (2018) 

In January 2018, the Japanese cryptocurrency exchange Coincheck suffered a major hack, resulting in the theft of around 523 million NEM tokens (worth around $534 million at the time). The hack led to a significant drop in the price of NEM and caused widespread panic among investors.

Notably, after a massive boom in 2017, it was this year that Bitcoin crashed. Other cryptocurrencies also followed suit. In September 2018, they all fell 80% from their highs, making it worse than the dot-com bubble collapse of 1995–2000. By November 26, Bitcoin had lost 80% of its value going below the $4,000 mark. 

In January 2018, CBS warned about possible fraud, especially after the Texas Securities Board ordered BitConnect, a British company, to stop operating. It had promised high monthly returns but needed a registered office or provided the required documents.

QuadrigaCX (2019)

In 2019, the Canadian cryptocurrency exchange QuadrigaCX faced controversy that would lead to its fall. Reports revealed that the company’s CEO, Gerald Cotten, had died, taking the passwords to the exchange’s cold wallets (used to store cryptocurrencies offline) with him. As a result, the exchange could not access around $190 million worth of cryptocurrencies, causing widespread panic among investors.

Now, let’s compare these major disasters with what happened in 2022

The collapse of TerraUSD and LUNA

The collapse of two main stablecoins in the crypto industry, TerraUSD and Terra, resulted in around $40 billion in investor losses. The other coin that backed it, LUNA, was also affected by the collapse and has since been renamed Terra Classic.

A stablecoin provides a secure and stable environment for investors, who are usually exposed to high volatility and LUNA and TerraUSD were no different. In theory, the price of TerraUSD would stay the same as when it was first created. That would make it an ideal asset for crypto investors.

In April, LUNA was around $116, steadily falling to a fraction of a penny. Lael Brainard, the Federal Reserve’s vice chair, referred to it as a classic bank run during a speech at an event in July. This project’s sudden collapse has affected individual investors and companies that relied on it for their business models.

Frozen customer accounts, hacks and sudden bankruptcies

Despite the technological advancements that have occurred in the crypto industry, the financial problems that some companies have faced are still timeless. Notably, statistics by Fortune Crypto show that fraudsters deployed over 117,000 scam tokens this year, up 41% from last year. 

Over the years, many companies have taken a hit and either went bankrupt or are struggling to remain afloat. Comparatively, 2022 is the worst if you accumulate all the bankruptcies and hack events of the past. Let’s get into it;

Celsius Network

Celsius Network was a startup that started in 2017 and offered various financial services, such as loans and deposits. According to its website, users could earn interest by depositing crypto. However, in June 2022, its 1.7 million users could not withdraw or transfer funds.

Celsius Network then filed for bankruptcy in July. According to its court filing, its assets had dropped by 80% from March 30, 2022, to July 14, 2022.

3AC and Voyager followed suit

Before crypto prices started declining, Three Arrows Capital, a crypto hedge fund, managed about $10 billion. Unfortunately, its founders hid after the company failed to repay its loans.

In July, crypto brokerage service Voyager Digital filed for bankruptcy due to the failure of Three Arrows Capital to settle its loan. The company noted that the failure of the company to make the payment had caused its financial problems.

The last blow: the FTX saga ripple effect

On Nov. 11,2022, FTX and its US counterpart, FTX.US, filed for bankruptcy. The filings came after many withdrawals and the sale of the native token of FTX. Notably, shortly after the two exchanges filed for bankruptcy, they were hit by a hack.

Following the FTX crash, BlockFi, a crypto trading platform, stopped its operations and froze customer withdrawals. It then filed for bankruptcy on November 28. Before the incident, it had a line credit with FTX.US.

On Dec.21, SBF was extradited to the US. Also, Caroline Ellison, the CEO of Alameda, and Gary Wang, the Co-founder of FTX, pled guilty to fraud charges and will settle with the government.

On Dec.22, Sam Bankman Fried was released on a bail of $250 million. His parents posted a $25 million bond against their Palo Alto home.

What should we expect in 2023?

The contagion might resume where we left off

Terra’s collapse in May, valued at almost $60 billion, triggered an avalanche of volatility in the crypto market. It led to the bankruptcy of several prominent financial institutions, including Three Arrows Capital. Celsius was a retail magnet focused on lending and borrowing crypto assets.

At that time, the market was unaware that the exchange, FTX, and its affiliated hedge fund, Alameda Research, were struggling with liquidity issues. Around six months later, reports revealed that the two entities had been diverting client funds to each other. 

The spread of the crypto crisis started in May, following the collapse of Terra. Despite the various cases brought to light in the following weeks, the situation was still not over. For instance, people learned that the crypto trading firm, Orthogonal Trading, was essentially insolvent a month after the FTX collapse. That was because the firm had incurred massive losses due to the failure of FTX.

Genesis Trading, a prominent institutional trading firm, has yet to reopen the withdrawals made by its clients from its lending division, which was affected by the liquidity crisis caused by the FTX collapse and the withdrawal of funds from the company. In addition, the bankruptcy cases of Celsius, BlockFi, Genesis, and Three Arrows Capital are still unresolved.

As the crypto market continues to experience volatility, investors and market participants must remain aware of the potential for further disruption.

More proof of reserves 

As the market faces concerns, we expect more players to step up and provide the necessary transparency through proof of reserves. 

In 2023, we expect the crypto sector to see a lot of energy focused on developing and bringing online services that will provide enhanced transparency and audit while protecting the privileges of currency holders. One of these is Zero-Knowledge proofs, which have made significant progress recently.

The year will bring an exciting change in the crypto industry as the trend for transparency, and regulation continues to gain momentum. More firms will start to provide related services in the space.

More regulation but less than ideal

Over the past decade, regulators have repeatedly refused to regulate the crypto market due to uncertainty. That has resulted in two major crypto price collapses, one in 2022 and another in 2018. After years of inaction, many regulators acknowledge that the industry needs regulation.

If regulations are not enforced quickly enough, they could lead to a damaging or even a less-ideal framework for the industry. Doing so could make it harder to establish proper regulations, which would also negatively affect the industry for years to come.

Before the FTX collapse, the European Union had finalized its regulations related to the crypto-assets industry. These regulations, known as MiCA, are expected to prevent similar cases in the future. After the FTX collapse, Stefan Berger, a Member of the European Parliament, stated on Twitter that governments should refrain from overregulating.

The MiCA should serve as an inspiration to other regulators and the crypto community. If appropriately implemented, it could improve the market’s transparency and prevent cases like FTX from happening. Establishing a regulatory framework could also restore the trust of investors.

All eyes on the equities market’s risk sentiment

In 2023, the equity market’s impact on crypto prices will be significant. In 2022, the market was heavily correlated with technology stocks and riskier sectors. As a result, the environment is sensitive to the macro-environment and plays a significant role in crypto. The sentiment in the market will continue to affect the risk appetite of crypto in the coming years.

Large corporations participation

Despite the various bankruptcies and collapses in the crypto market in 2022, large corporations continue to enter it. VISA recently released a research paper that discussed the potential of automatic payments using cryptocurrencies. 

In October, the Bank of New York Mellon launched its custody platform for digital currencies. A month later, Fidelity Digital Assets also launched its trading platform for retail investors.

Large corporations’ rapid emergence and evolution have been instrumental in driving innovation and accessibility in the industry. In 2023, many more companies are expected to be introduced to crypto.

Final thoughts

Despite the volatility in the crypto market over the past year, it is still important to note that the industry has continued to grow. That is evidenced by the multiple traded cryptocurrencies that have performed well in the past. Industry professionals believe that the trend will continue into the next few years, which bodes well for the investors already involved in the market. Hence, in 2023, the cryptocurrency market will continue to grow.

Although the market may not experience the same volatility as in 2022 over 2023, investors need to monitor factors affecting the crypto market’s development. Some of these include the increasing number of corporate participants, the hostile regulation, and the risk sentiment within the equity market.