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2022 was a very tough year for the cryptocurrency market. And it would seem that everyone is already used to the fact that the market is falling, the quotes are always in the red, but every time we were surprised more and more, wondering: Well, where is it worse already? Of course, not all events have been bad, and hopefully there will be a lot more good events in 2023, but now we have what we have.
Many may have missed some of the key moments that have significantly impacted the cryptocurrency market in 2022. Especially for you, we've put together a selection of events to look back at the year gone by once again.
1)Impact of Fed rate on bitcoin price
The beginning of the year was not exactly a pleasant one for the further growth of bitcoin price. One of these factors was the Federal Reserve's policy. Bitcoin updated its local low at $42,000, bringing the entire market down with it. Historically, it is the change in the Fed's interest rate that can significantly affect the behavior of the cryptocurrency market. It started in 2018, when the Fed raised the rate to 0.25-0.5 percent. It reflected quite positively on the market then, but after May's 50bp rate hike, the market went into a correction. In all, bitcoin lost more than 64 percent in value over the year, and its total capitalization was cut in half.
Why can the Fed rate affect the price of bitcoin?
The price of bitcoin and other cryptocurrencies is primarily influenced by supply and demand and market sentiment. However, interest rates set by central banks, such as the Federal Reserve, can also affect the price of bitcoin.
When the Federal Reserve raises interest rates, it makes holding cash more attractive because it yields higher returns. This could lead to a lower demand for cryptocurrencies such as bitcoin, which could cause the price to fall. On the other hand, lower interest rates can make investing in cryptocurrencies more attractive, potentially increasing demand and raising the price.
2)The collapse of Terra Luna
Luna is the cryptocurrency of the Terra ecosystem. Even before the collapse of Terra Luna, the cryptocurrency was one of the top 10 largest cryptocurrencies by market capitalization and was one of the most popular. However, after the collapse, Terra Luna lost 99.9% of its asset value. This event caused serious damage to the entire cryptocurrency community. So how could such a popular blockchain project collapse in such a short period of time? Let's look into it.
What is USD and how is it related to Terra Luna?
UST is a stabelcoin in the Terra ecosystem. Stablecoins are those cryptocurrencies whose value is tied to another commodity, currency or financial instrument. Terra is the blockchain platform that serves the creation of stabelcoins. However, UST is an algorithmic stabelcoin, which means that its value is not backed by any real assets. Instead, the value of UST is maintained by Luna, and it uses a unique algorithm to always maintain a value of 1( UST) = 1 ($). If the price of UST rises above $1, the algorithm mines more LUNA tokens to stabilize the value of UST at $1 and vice versa.
Why did the Terra Luna collapse happen?
The Terra ecosystem was worth over $40 billion at its peak, but the network's dual token mechanism proved to be its undoing. Before the collapse, about $2 billion of UST was withdrawn from Luna, which was stored in the Anchor protocol. Hundreds of millions were sold in a very short period of time. Such a big sell-off pushed the price of UST down to 0.91 cents. So people started buying LUNA for UST en masse, because even if the price of UST is below $1, 1 UST can always be exchanged for LUNA worth $1. At the same time, the cryptocurrency market was preparing for a major drop, which subsequently pushes the price of LUNA down. Luna's market capitalization falls below UST. This was a problem because UST was algorithmically tied to LUNA for stabilization. As a result, UST lost its peg because the total value of UST could not exceed the value of LUNA. After losing the peg, UST began to sell off en masse as user confidence was lost, which collapsed LUNA at a very rapid rate. As a result, LUNA and UST were delisted from all major cryptocurrency exchanges. This event served as a lesson for all those who were talking about stability and reliability of stabelcoins.
3) The Merge: The End of the Ethereum Mining Era
On September 15, Ethereum developers released "The Merge"(or ETH 2.0), an update that eliminates mining and dramatically reduces the power consumption of the world's second largest cryptocurrency. This action completed Ethereum's transition to the proof-of-stake consensus, officially abolishing proof-of-work and reducing energy consumption by ~99.95 percent.
Background
Back in 2014, when the world's second largest cryptocurrency was created, founder Vitalik Buterin was already considering the PoS consensus algorithm as a replacement for PoW, on which bitcoin ran. This transition was supposed to be more environmentally friendly and did not require huge computing power. Ethereum developers repeatedly pushed back the project date over the past year to give themselves more time to prepare, because one miscalculation could have cost them millions in losses.
Why is mining dead?
As we mentioned before, the new consensus mechanism in Ethereum does not need the huge computing power that the miners were providing. One would think that since Ethereum can no longer be mined, why not just switch to other cryptocurrencies that support this mechanism. However, if you look at the statistics, it turns out that Ethereum mining accounted for 20 to 39 percent of all crypto-assets' power consumption. For the cryptocurrency market, these are very huge numbers. So huge that if that number of miners moved to other cryptocurrencies, all the coins would exceed the computational supply in a moment. This has led to a decrease in mining rewards, which in turn has led to a depreciation of mining.
4)Bankruptcy of top hedge fund Three Arrows Capital
After the collapse of LUNA, the matryoshka of collapses did not end. Immediately after the collapse of LUNA, all eyes were on Three Arrows Capital (3AC). Three Arrows Capital (3AC), a Singapore-based crypto hedge fund that at one point managed more than $10 billion in assets, was one of many crypto firms that went bankrupt in this bear market in 2022. 3AC had $200 million invested in LUNA, which on top of all their problems served as a match to start the fund's collapse.
Why did Three Arrows Capital collapse?
The main reason for the collapse of 3AC was excessive leverage on long positions in various cryptocurrencies and related derivatives. According to more than one lender, the company may have been misleading its counterparties about its degree of leverage. 3AC borrowed from almost every major lender, from BlockFi and Genesis to Celsius. When the market began to fall, it became clear that 3AC's size and interconnections with other crypto investors made it systemically important. Once the fund failed to meet margin requirements, the cascading series of liquidations was so massive that it led to a 48 percent drop in total cryptocurrency market capitalization in May and June 2022. Using this information alone, in my opinion, the failure of 3AC can be attributed to two reasons: 1) Poor risk management and 2) Unethical and potentially criminal behavior by company heads.
The fall of 3AC led to a multi-billion dollar cascade that took out companies like Celsius, Voyager, and many other cryptocurrency firms with access to a hedge fund.
5)FTX bankruptcy.
Another high-profile event of the passing year was the bankruptcy of FTX, one of the most popular centralized exchanges. This event had a significant impact on the entire cryptocurrency market. Let's look into what it was all about.
FTX had hope in Binance
Binance, the world's largest cryptocurrency exchange, announced Nov. 6 that it was selling off all of its FTT token positions - about 23 million FTT tokens worth about $529 million. Binance CEO Changpeng "CZ" Zhao said the decision to liquidate the exchange's FTT position was based on risk management following the collapse of crypto-token Terra (LUNA). The next day, FTX is experiencing a liquidity crisis. Bankman-Fried, FTX's CEO, tried to assure FTX investors that its assets were stable, but customers demanded $6 billion in withdrawals in the days following the CoinDesk report. Bankman-Fried sought additional money from venture capitalists before turning to rival Binance. The value of FTT dropped more than 80% in two days. On November 8, Binance announced that it had reached a non-binding agreement to buy FTX's business outside the US for an undisclosed amount - this would have effectively saved FTX from collapse, if not for one BUT. Binance backed out of the deal a day later because a corporate audit revealed FTX's concerns about illegitimate spending of its customers' finances.
Implications for Bankman-Fried
On Nov. 11, Bankman-Fried stepped down as CEO of FTX. He was succeeded by court-appointed FTX CEO John Ray. Within hours of filing for bankruptcy, FTX said it was a victim of "unauthorized transactions" and that it would move its digital assets into cold storage for security purposes. At the same time, independent analysts say they suspect about $477 million was stolen from FTX in an alleged hack. On Nov. 16, a class action lawsuit was filed in federal court in Florida alleging that Bachman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors from across the United States. Bahamian authorities arrested Bankman-Fried on December 12, 2022, and imprisoned him. After a December 22 court hearing, a federal judge decided to release Bankman-Fried from custody after his attorneys and federal prosecutors agreed to a $250 million bail, the largest bail in history.
The consequences for the FTX platform and the impact of this collapse on the cryptocurrency industry are ongoing and difficult to assess, counting in the hundreds of millions of dollars.
6)SWO in Ukraine, cryptocurrency donations
On February 24, the SWO began in Ukraine. Since then, more than $60 million has gone to the Ukrainian government's account. Since the war began, interest in cryptocurrency has only grown because cryptocurrency also helps people save their money from costs and devaluations. This happened because the SWIFT payment system could not handle so many payments instantly. We had to wait for about a couple of days for the money to arrive in the account, at a time when transactions through cryptocurrencies took up to five minutes. In addition, people needed a way to safely store money so that it would be liquid outside of the country as well. Donations of insane tokens (or NFTs) also increased as CryptoPunk NFTs worth more than $200,000 were sent to the Ukrainian government's account.
This event once again showed the necessity of cryptocurrency in different life situations and, most importantly, how important the decentralized nature of these assets is.
7)GameFi Project Hype: STEPN
GameFi projects are taking over the gaming sector more and more. One such sensational project in 2022 is STEPN. It's an app that lets you make money from physical activity. The project was able to reach a growth of up to two million daily users. For Web3.0 projects, that's a really big success.
How does it work?
To start earning tokens and logging their mileage on StepN, users first need to spend at least 12 solan or about $600 on a pair of virtual shoes. The digital shoe is in the form of a non-negotiable token (NFT) that runs on the Solana network and the Binance smart chain, so it can be resold later. Unlike other Web3.0 projects like Axie Infinity, which works on a play-to-earn basis, STEPN works on a move-to-earn basis. That means you only get money during physical activity.
STEPN's release on IEO Binance
The announcement of IEO Binance on March 1 was an absolute turning point for STEPN. In a market that was not the most active to growth at the time, GMT STEPN opened at Binance with a 17x profit and then rose from $0.1- to $4.
8)Airdrop of the NFT project Bored Ape Yacht Club.
There have been rumors for months about an upcoming token for the famous Bored Ape Yacht Club community. After acquiring CryptoPunks and Meebits, the team announced its APE token. In March, Bored Ape Yacht Club (BAYC) collection holders received airdrop of ApeCoins tokens for each NFT they held. The Airdrop received by one BAYC was originally worth about $140,000. The most savvy members took BAYC out of the liquidity pool, got the Airdrop and got it back, earning $1.1 million in one day. It was one of the most profitable investments of all time in the cryptocurrency industry. BAYC had a great impact on the development of NFT and Web3.0, actively developing the virtual meta universe.
9)Sanctions against Tornado Cash
Another shock to the crypto world was the U.S. government's decision to impose sanctions on Tornado Cash. The ban on Tornado Cash prevents American citizens from using the service and has led to a lot of introspection by crypto-idealists. How can a decentralized protocol designed to function automatically and without outside interference be subject to such aggressive government oversight?
What is Tornado Cash?
Tornado Cash is a decentralized, open-source cryptocurrency mixer. Mixers are designed to hide users' transaction history, increasing the privacy of what is otherwise an open and transparent blockchain. For example, suppose you send a bitcoin to a mixing service. It is mixed with other bitcoins in a private peer-to-peer pool (P2P) and distributed anonymously. You receive another bitcoin sent from a new address, and the connection between the original sender and recipient is severed.
How has this affected the crypto industry?
Such functionality has attracted increased criminal activity through the platform. Since its launch in 2019, the U.S. Treasury Department believes Tornado Cash has been used to launder a staggering $7 billion in cryptocurrency. The Tornado Cash case marks the first time the U.S. government has sanctioned a smart contract. Public blockchains are designed to be unstoppable and uncensorable without any single entity capable of interfering with or destroying them. Decentralized tools are inherently at odds with governments and powerful corporations that seek to control platforms and access user data for their own purposes. Without decentralization, cryptography is largely meaningless. This has caused alarm among many people in the cryptocurrency community and beyond.
The aftermath of Tornado Cash has caused many Ethereum blockchain-based applications, including those that proudly called themselves decentralized, to start blocking users with ties to Tornado Cash.
10)Multiple hacking incidents
Among other things, in 2022, the cryptocurrency market also suffered from massive hacking attacks, resulting in almost $4 billion in damages. Compared to last year, hacking losses increased by 58%. Let's list the major major hacks:
BNB Chain Bridge Hack: The largest chain attack in the history of the crypto industry, with more than $700 million in damage. Despite such damage, BNB managed to recover to its previous numbers.
Hacking Ronin Axie Infinity: The hacking of the largest DeFi project also caused significant damage to the crypto world. Ronin, Axie Infinity's side network, was attacked. 173,600 ETH and 25.5 million USDC worth $625 million were stolen.
Bitkeep was compromised: The BitKeep wallet had security vulnerabilities. Hackers hijacked some APK package downloads and made spoofs of those packages, resulting in the theft of many user funds. A total of $8 million in damages was promised to be paid in full.
Conclusion
This year has shown ups and downs. Looking at these ups and downs, it is impossible to say with certainty what the future holds for the cryptocurrency world. However, this experience clearly shows the need to diversify your assets. After all, you never know what may happen in the future. What these events have shown is that the cryptocurrency market is a very high-risk market and is not yet established enough to compare it to the same stock market. However, we believe that all these mistakes will lead to a new approach in the development of DeFi applications and services that will provide us with freedom and decentralization in the manifestation in which it was originally planned.