Why the ‘crypto winter’ of 2022 is different from previous bear markets

The two words that appear on the lips of every cryptocurrency investor today are undoubtedly “crypto winter.”

Cryptocurrencies have suffered a brutal decline this year, losing $2 trillion in value since the peak of their massive recovery in 2021.

BitcoinThe world’s largest digital currency, it is down 70% from its all-time high in November at $69,000.

This has led many experts to warn of a prolonged bear market known as “crypto winter.” The last such event occurred between 2017 and 2018.

But there is something about the recent crash that makes it different from the previous downturn in crypto – the recent cycle was marked by a chain of events that caused contagion across the industry due to its interconnected nature and business strategies.

Bitcoin and the cryptocurrency market more broadly are traded in a way that is closely related to other risk assets, particularly stocks. Bitcoin published file The worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq is down more than 22%.

This sharp market reversal caught many in the industry from hedge funds to lenders by surprise.

Another difference is that there were no big Wall Street players using “highly leveraged positions” in 2017 and 2018, according to Carol Alexander, professor of finance at the University of Sussex.

There are certainly parallels between the current crash and past crashes – chief among the seismic losses incurred by novice traders who were lured into cryptocurrencies by promises of huge returns.

But a lot has changed since the last major bear market.

How did we get here then?

TerraUSD, or UST, was an algorithmic stablecoin, a type of cryptocurrency that was supposed to be linked one-on-one with U.S. dollar. worked across Complex mechanism governed by algorithm. But UST lost its peg to the dollar resulting in Ramsey’s sister Luna also collapsed.

This sent shockwaves through the crypto industry, but also had knock-on effects for companies exposed to floor treasury losses, notably the hedge fund Three Arrows Capital or 3AC (more on them later).

“The collapse of the Terra blockchain and the UST stablecoin was widely unexpected after a period of explosive growth,” Medali said.

Celsius, a company that offered users over 18% returns for depositing their cryptocurrency with the company, Withdrawals paused for customers last month. Celsius behaved kind of like a bank. It will take the deposited cryptocurrency and lend it to other players with a high return. These other players will use it to trade. The percentage gain generated from the return will be used to pay back the investors who have deposited the cryptocurrency.

But when the economic downturn hit, this business model was put to the test. Celsius continues to have liquidity issues and has had to pause withdrawals to effectively stop issuing crypto from the bank.

“Players seeking high returns to be exchanged in cryptocurrencies used lending platforms as custodians, and then those platforms used the money they had raised to make risky investments – how could they pay the high interest rates?” Alexander said.

Three Arrows Capital, or 3AC, is a cryptocurrency-focused hedge fund in Singapore that has been one of the biggest victims of the market downturn. 3AC was exposed to color and suffered losses after the collapse of the underground tanks (as mentioned above). The financial times Last month, it reported that 3AC had failed to meet a margin request from crypto lender BlockFi and had liquidated its positions.

Then the hedge fund It defaulted on more than $660 million Loan from Voyager Digital.

as a result of, 3AC immersed in the filter And the filed for bankruptcy Under Chapter 15 of the US Bankruptcy Code.

Three Arrows Capital is known for its highly leveraged and bullish bets on cryptocurrencies that have fallen during the market crash, highlighting how these business models have experienced a pump.

The infection persisted further.

When Voyager Digital filed for bankruptcyNot only did the company owe crypto billionaire Sam Bankman-Fried’s Alameda Research $75 million — the City of Alameda also owed Voyager $377 million.

To further complicate matters, Alameda owns a 9% stake in Voyager.

“Overall, June and Q2 as a whole were very challenging for the crypto markets, as we saw the collapse of some of the largest companies in large part due to poor risk management and contagion from the collapse of the largest crypto hedge fund 3AC,” Medali Kaiko said.

“It is now clear that almost every major central lender has failed to properly manage risk, exposing them to a contagion-like event with the collapse of one entity. 3AC has taken out loans from nearly every lender that they have been unable to repay after the broader market crash, causing a crisis Liquidity amid high refunds from clients.

Even established players like Queen Piece Affected by falling markets. Last month, Coinbase laying off 18% of its employees to reduce costs. The US cryptocurrency exchange has seen a collapse in trading volumes recently in conjunction with the drop in cryptocurrency prices.

Meanwhile, Butterfly said crypto miners who rely on specialized computing equipment to settle transactions on the blockchain may also face a problem.

“We have also seen examples of potential stresses where miners are allegedly not paying their electricity bills, which could indicate cash flow issues,” he said in a research note last week.

This is likely why we see some miners selling their holdings.

The role for miners comes at a high price — not just for the equipment itself, but for the constant flow of electricity needed to keep their machines running around the clock.