Bitcoin plunged 65% in 2022 as Terra, FTX went up in flames

Quick Take

  • Bitcoin has slumped 65% year-to-date as the global crypto market capitalization fell to $839 billion from over $2 trillion.

In case you missed it: Crypto prices plunged this year thanks to industry gaffes and the wider — and very damaging — macroeconomic environment.

The global crypto market capitalization plunged to below $900 million from over $2 trillion as cryptocurrencies entered a bear market in line with traditional markets. With that came some very memorable crashes. 

Bitcoin drops 65% year-to-date 

Bitcoin collapsed this year, beginning its decline in January as crypto became closely linked to macroeconomic events. Throughout all of this, the blockchain itself never once went down. 

Bitcoin was closely correlated with the Nasdaq 100, reaching 0.92 by the end of January, according to The Block's data. The Nasdaq 100 slumped about 9% in January; bitcoin declined nearly 20% — bitcoin typically has a beta of up to three times U.S. stock indices, meaning it's up to three times as volatile.

In March, the U.S. Federal Reserve increased the target range for the fed funds rate and said it would continue to increase it to bring down inflation to its target range of 2%.

"In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate," the Fed said at the time. The central bank noted Russia's invasion of Ukraine as having a profound effect on the economy and potentially causing upward inflationary pressure. 

Markets were spooked as it became likely the key interest rate would continue to increase. Indeed it did, as did inflation. 

The collapse of the Terra blockchain and the ensuing crypto credit crisis hit bitcoin hard, and it triggered the failure of some of the biggest names in the sector over the past six months, including hedge fund 3AC and crypto lender Celsius, among others. 

Terra blockchain capitulation 

TerraUSD lost its peg to the U.S. dollar in May, throwing the idea of algorithmic stablecoins into question and taking down the entire Terra blockchain in the process. 

TerraUSD worked in conjunction with luna, where a holder could burn one dollar of Luna at any given time to mint one terraUSD. Vice versa, one TerraUSD was always exchangeable for a dollar's worth of Luna.

If terraUSD lost its peg to the U.S. dollar, a trader could buy up terraUSD from the open market and then trade it against the protocol for a dollar's worth of luna. As a result, the trader captures 10% arbitrage profit that way, and the peg is restored. Conversely, if terraUSD was trading at $1.10. Traders would buy a dollar's worth of Luna from the open market, mint terraUSD, and then sell it to capture 10% profit on the other side

However, overwhelming selling pressure in May broke the blockchain's system, sending both coins to near zero or below.

Beyond the arbitrage function, a non-profit based in Singapore called the Luna Foundation Guard had been raising funds — mostly bitcoin — to serve as a "forex reserve" for terraUSD. The foundation raised reserves of around $3.5 billion before the collapse.

The foundation said it would lend out around $1.5 billion in bitcoin to defend the terraUSD peg; it was all in vain. Luna and terraUSD still trade on some exchanges, albeit with minimal volumes. 

FTX collapse

FTX's exchange token, FTT, grabbed headlines in November as immense selling pressure sent the token below $1. 

The token collapsed amid a high-profile standoff between FTX and Binance. Binance CEO Changpeng Zhao said in a tweet on November 6 the exchange would begin selling off its FTT holdings.

Zhao said this was due to "recent revelations" — a reference to a report from CoinDesk that revealed details of Alameda Research's balance sheet — the crypto trading firm owned by FTX's Sam Bankman-Fried.

Alameda CEO Caroline Ellison had offered to buy Binance's FTT holdings at $22 per token, and the market quickly jackknifed through this level. Several days after this, following a failed acquisition from Binance, the exchange filed for chapter 11 bankruptcy. 

FTT is currently trading at $0.87, according to Coinbase. Ouch.

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