Investors lost more than $2 trillion since

An attendee wears a “Will work for NFTs” shirt at the CoinDesk 2022 Consensus Festival on Thursday, June 9, 2022 in Austin, Texas, United States. The festival showcases all aspects of the blockchain, crypto, NFT, and Web3 ecosystems, and their broad impact on commerce, culture, and communities.

Jordan Vonderhaar Bloomberg Getty Images

A year ago this week, investors were describing Bitcoin as the future of money and Ethereum as the world’s most important developer tool. Non-fungible tokens were exploding, coin base was trading at records and the NBA’s Miami Heat were just in their first full season at the newly renamed FTX Arena.

As it turns out, that was peak crypto.

12 months from now Bitcoin Topping out at more than $68,000, the two biggest digital currencies lost three-quarters of their value, falling alongside risky tech stocks. The industry, which was once worth about $3 trillion, now sits at about $900 billion.

Instead of acting as a hedge against inflation, which is near 40-year highs, bitcoin has proven to be another speculative asset that bubbles up when evangelists back off and sinks when enthusiasm melts and investors panic.

And the $135 million that FTX spent last year on a 19-year deal with the Heat? A crypto exchange with naming rights is poised to land in the history books with another brand that once had its logo on a sports facility: Enron.

In a glimpse this week, FTX plunged from a $32 billion valuation to the brink of bankruptcy as liquidity dried up, customers demanded refunds and rival exchange Binance tore up its non-binding agreement to buy the company. FTX founder Sam Bankman-Fried admitted on Thursday that he was “f—ed up”.

“Looking back now, the asset’s enthusiasm and prices were clearly getting ahead of themselves and trading well above any fundamental value,” said Katie Talati, director of research at Arca, an investment firm focused on digital assets. “Since the recession has been so quick and violent, many have declared that digital assets are dead.”

Whether crypto is doomed forever or will eventually rebound, as Talati expected, the bloodbath of 2022 exposed many of the industry’s flaws and served to remind investors and the public why financial regulation exists. Bankruptcies have been fast and furious since mid-year, leaving customers with crypto accounts unable to access their funds, and in some cases scrambling to recover money in dollars.

If this is indeed the future of finance, it looks bleak.

Crypto was supposed to bring transparency. All transactions on the blockchain can be tracked. We didn’t need centralized institutions—banks—because we had digital ledgers to serve as a single source of truth.

That narrative is gone.

“Speaking for bitcoiners, we feel that we are stuck in a dysfunctional relationship with crypto and we want to get out,” said Michael Seiler, executive chairman. Micro strategy, a technology company that owns 130,000 bitcoins. “The industry needs to evolve and regulators are coming into this space. The future of the industry is trading digital assets registered on regulated exchanges, where everyone has the necessary investor protections.”

Bitcoin Bull Michael Saylor in FTX-Binance Chaos: The Crypto Industry Needs to Grow
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Saylor was speaking on CNBC’s “Squawk on the Street” as the demise of FTX shook the crypto market. Bitcoin sank to a two-year low this week, before bouncing back on Thursday. Ethereum Also tanked, and Solana and Bankman-Fried, another popular coin used by developers, more than halved.

Equities tied to crypto also suffered. Crypto exchange Coinbase fell 20% in two days, while RobinhoodThe trading app, which counts Bankman-Fried as one of its biggest investors, fell 30% over the same period.

It was already too much pain to go around. Last week, Coinbase reported a revenue plunge of more than 50% in the third quarter from a year earlier, and a loss of $545 million. In June, the crypto exchange cut 18% of its workforce.

“We are actively updating and evaluating our scenario plans and are prepared to reduce operating expenses if market conditions deteriorate,” Alesia Haas, head of finance at Coinbase, said in a Nov. 3 earnings call.

How did it start?

The downdraft began at the end of 2021. At the same time, inflation rates began to rise, and the Federal Reserve raised concerns that borrowing costs would begin to rise as the calendar changed. Bitcoin fell 19% in December, as investors turned to safe-haven assets in a troubled economy.

The sell-off continued in January, with Bitcoin down 17% and Ethereum down 26%. David Marcus, former head of crypto at Facebook parent MetaA phrase used to quickly enter the vocabulary.

“It’s during the crypto winter that the best entrepreneurs build the best companies,” Marcus wrote in a tweet on January 24. “It’s time to focus on solving real problems versus pumping tokens.”

Crypto winter didn’t really hit for a few months. The market also stabilized for a while. Then, in May, stablecoins officially became unstable.

A stablecoin is a type of digital currency designed to maintain a 1-to-1 peg with the US dollar, acting as a type of bank account for the crypto economy and providing a better store of value unlike the volatility experienced in Bitcoin. and other digital currencies.

When TerraUSD, or UST, and its sister token called Luna Dove hit the $1 mark, a different kind of panic set in. The leg was broken. Confidence dropped. More than $40 billion in property was destroyed in Luna’s collapse. Suddenly it was like nothing was safe in crypto.

Major cryptocurrencies have crashed, with bitcoin down 16% in a week, more than half off its peak six months ago. On the macro front, inflation showed no signs of easing and the central bank remained committed to raising rates as long as necessary to slow the rise in consumer prices.

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In June, the bottom fell out.

Lending platform Celsius halted withdrawals due to “extreme market conditions”. Binance also halted withdrawals, while crypto lender BlockFi cut 20% of its workforce after more than quintupling since the end of 2020.

Crypto hedge fund Three Arrow Capital plunges into liquidation.  This is how it happened

Prominent crypto hedge fund Three Arrow Capital, or 3AC, defaulted on more than $670 million in debt, and FTX signed a deal giving it an option to buy BlockFi at a fraction of the company’s last private valuation.

Bitcoin had its worst month on record in June, losing nearly 38% of its value. Ether decreased by more than 40%.

Then came bankruptcy.

Singapore-based 3AC filed for bankruptcy protection in July, months after revealing it has just $10 billion in assets. The firm’s risky strategy involved borrowing money from across the industry and then turning around and investing that capital in other, often nascent, crypto projects.

After the 3AC decline, crypto brokerage Voyager Digital wasn’t far behind. That’s because 3AC’s big default was on the loan from Voyager.

“We strongly believe in the future of the industry but prolonged volatility in the crypto market, and Three Arrow Capital’s default, required us to take this decisive step,” Voyager CEO Stephen Ehrlich said at the time.

Next was Celsius, which filed for Chapter 11 protection in mid-July. The company had been paying customers up to 17% interest to store on its crypto platform. It will lend those assets to counterparties willing to pay sky-high rates. After the liquid dried up, the structure collapsed.

Meanwhile, Bankman-Fried was setting himself up as the industry’s savior. The 30-year-old, based in the Bahamas, was ready to raise carnage and consolidate the industry, claiming FTX was in a better position than its peers because it stashed cash, kept overhead low and avoided borrowing. With a net worth of $17 billion on paper, he personally bought a 7.6% stake in Robinhood.

SBF, as he is known, has been dubbed by some as “the JPMorgan of crypto.” He told CNBC’s Kate Rooney in September that the company has $1 billion to spend on bailouts if the right opportunities arise to keep key players safe.

“If we have a real pain, if we have a real hit, and it’s not fair to customers and it’s not going to be good for regulation. It’s not going to be good for anything. It’s not going to be good for anything,” Bankman. – Fried said. “From a long-term perspective, it was important for the ecosystem, it was important for the customers and it was important for people to be able to work in the ecosystem without fearing that unknown unknowns would somehow blow them away.”

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Sam Bankman-Fried faces possible bankruptcy after failed FTX deal

It’s almost as if Bankmann-Fried were describing her own fate.

FTX’s lightning-fast descent began this past weekend when Binance CEO Changpeng Zhao tweeted that his company was selling the last of its FTT tokens, FTX’s native currency. This followed an article in CoinDesk, pointing out that Alameda Research, Bankman-Fried’s hedge fund, held an outsized amount of FTT on its balance sheet.

Zhao’s public announcement not only caused the price of FTT to drop, it also forced FTX customers to exit. Bankman-Fried said in a tweet Thursday that FTX clients demanded nearly $5 billion in withdrawals on Sunday, which he called “the largest by a large margin.” Lacking reserves to cover a virtual bank run, FTX turned to Zhao for help.

how’s it going

Binance announced a non-binding agreement to acquire FTX on Tuesday, in a deal that would have been so disastrous for FTX that equity investors were expecting to be wiped out. But Binance reversed course a day later, saying FTX’s “problems are beyond our control or ability to help.”

Bankman-Fried is scrambling for billions of dollars to stay out of bankruptcy. He says he’s also working to maintain liquidity so customers can get their money out.

Venture firm Sequoia Capital, which first backed FTX in 2021 at an $18 billion valuation, said it will mark its $213.5 million investment in FTX “down to 0.” Multicoin Capital, a crypto investment firm, told Limited Partners on Tuesday that it was able to recover a quarter of its assets from FTX, but the funds still stuck there represent 15.6% of the fund’s assets, and there is no guarantee that it will All will be. Recovery is.

In addition, Multicoin said it was taking a hit because its largest position was in Solana, which was falling in value because it was “generally considered to be within SBF’s sphere of influence.” The firm said it is sticking to its thesis and is “looking for assets that can outperform market beta over market cycles.”

“We are not short term or momentum traders, and we do not operate on short time horizons,” Multicoin said. “Although this situation is painful, we will remain focused on our strategy.”

It won’t be easy.

Ryan Gilbert, founder of fintech venture firm Launchpad Capital, said the crypto world is facing a crisis of confidence following the founding of FTX. While it was a tumultuous year for crypto, Gilbert said Bankman-Friedman was a trusted leader who was comfortable representing the industry on Capitol Hill.

In a market without a central bank, an insurer or any institutional protection, trust is paramount.

“It’s a question, can trust exist in this industry at this stage of the game?” Gilbert said in an interview Thursday. “To a large extent the concept of a trust is as insolvent as some of these companies.”

See: Crypto exchanges are scrambling

CoinDesk: Crypto exchanges are scrambling to keep up "Proof of deposit" In the aftermath of the near collapse of FTX

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