November 10, 2021 was a day of great euphoria in the bitcoin and cryptocurrency market. It wasn’t just bitcoin that was skimming $69,000, in what seemed like a triumphant run to $100,000. Also the market capitalization was very close to reaching USD 3 billion.
Despite the warnings of some analysts about an imminent deterioration of the stock market and a significant increase in inflation rates, bullish sentiment in the cryptocurrency market was unaffected.
However, in 2022, rising inflation and government measures to combat it configured a recession scenario, that dragged the cryptocurrency sector to one of its worst crises. Eight months after its all-time high, there is still no certainty that bitcoin has bottomed out, with a price decline of 69% in that period. The market capitalization of cryptocurrencies has gone from USD 2,973 billion to 952,000 million, in figures from CoinMarketCap. In other words, lost more than 2/3 of the capitalization of cryptocurrencies in eight months.
A drop that reinforced bearish sentiment
The collapse of Terra at the beginning of May, contributed to accentuate the bearish trend of the bitcoin and cryptocurrencies market, as we reported in this medium. Terra token LUNA lost 99% of its value in three days, while Terra stablecoin UST lost up to 70% of its dollar peg in the same period.
Terra’s LUNA token went from USD 116 on April 3 to practically zero on May 11. Meanwhile, Terra’s stablecoin UST lost its peg to the dollar on May 9, trading at just a few cents on the dollar today. The impact of this drop was huge, as UST’s market capitalization was almost $2.5 billion, whereas today it is just over $500 million. The cryptocurrency market lost, only in maymore than USD 420 million.
proliferate red ink
Like cascading dominoes, liquidations of companies in the ecosystem began to occur, which in turn pushed other companies into default. An emblematic case of this situation occurred with the investment company Three Arrows Capital (3AC), which declared bankruptcy last Friday, July 1, according to what was reported by Bloomberg. 3AC managed more than USD 10,000 million last March.
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The insolvency filing occurred after the Voyager Digital fund issued a notice of default to 3AC, which owes Voyager some $646 million.
The investment platform Celsius also presented difficulties, because by declining the value of the BTC deposited as collateral for loans requested from MakerDAO, Compund and Aave, it ran the risk that those BTC collaterals would be liquidated. This Thursday, July 7, Celsius announced that it had paid the loan owed to MakerDAO, a fact reported by this medium. In this way he recovered the BTC in guarantee, but you still have to pay off the outstanding debt with the other two creditors.
Signs that further deepen the crypto winter
In the last five weeks, cryptocurrency companies have laid off more than 2,000 employees. Coinbase has been the most affected in this wave of layoffs, removing 1,180 workers from its payroll on June 14, representing 18% of its workforce. This notably accentuated the wave of layoffs that had already been affecting the sector in previous months, as reported by CriptoNoticias. Among the companies that reduced staff were Tesla, Celsius, Bitpanda and exchanges Crypto.com and BlockFi.
Bitcoin mining companies were not spared from layoffs. The American Compass Mining announced this Friday the 8th that it terminated the services of 15% of its staff and that it will cut benefits to its management staff.
On the other hand, investors withdrew record amounts of capital from bitcoin funds when its price fell to the annual minimum on June 18. In that week, there were outflows of USD 423 million of funds, which practically erased the incoming flows of 2022, as reflected in data from the firm CoinShares.
FTX throws a lifeline
The BlockFi loan company was also close to bankruptcy and made the decision in mid-June to lay off 20% of its staff, as reported in this medium. At the end of June, the possibility was raised that FTX would acquire BlockFi, and that the injection of capital would save it from the crisis.
Although the CEO of FTX, Sam Bankman-Fried, did not give further details about the BlockFi rescue operation, through his Twitter account lamented that venture capitalists were not providing more support to crypto companies in the risk situation they are going through.
More recently, BlockFi CEO Zac Prince gave details of the agreement between FTX and that company. This is a USD 400 million loan, subordinated to client funds. This also contemplates a purchase option for USD 240 millionbased on specific BlockFi performance conditions.