As the world's largest cryptocurrency, Bitcoin lost approximately 58% of its value in the second quarter of 2022, recording its worst quarterly performance since 2011.
About $1.2 trillion has been wiped out from the entire cryptocurrency market, with tens of thousands of accounts being liquidated every day on average. At the same time, the past June was also the worst month in the history of Bitcoin.
Amid this chaos, cryptocurrency companies have announced layoffs and the industry is moving toward consolidation through acquisitions.
There are 5 main reasons for the Bitcoin crash this quarter:
1. Macroeconomic pressure
During this quarter, the U.S. Federal Reserve conducted two aggressive interest rate hikes to combat rampant inflation . This has sparked fears of a recession in the United States and other countries.
This has also hit stocks, especially high-growth technology stocks . The tech-heavy Nasdaq Composite Index fell 22.4% in the second quarter, its worst quarterly performance since 2008.
Bitcoin has always closely correlated with the price movements of U.S. stock indexes. The stock sell-off weighed on Bitcoin and cryptocurrency markets as investors dumped risky assets.
2. TerraUSD Collapse
The first major event of the past quarter was the collapse of algorithmic stablecoin terraUSD and sister token luna, which sent shockwaves throughout the industry.
A stablecoin is a cryptocurrency that is typically pegged to a real-world asset. TerraUSD, or UST, is supposed to be pegged one-to-one with the U.S. dollar. Some stablecoins are backed by real assets such as fiat currencies or government bonds. But UST is governed by an algorithm and a complex system of burning and minting coins.
This system failed. TerraUSD lost its peg to the US dollar and brought about the demise of the associated token luna, becoming worthless.
The incident reverberated throughout the industry and had ripple effects, most notably on cryptocurrency hedge fund Three Arrows Capital, which had exposure to TerraUSD (more on that below.)
3. Lender Celsius suspends withdrawals
Cryptocurrency lender Celsius suspended withdrawals from customers in June.
The company offers users a yield of over 18% if they deposit cryptocurrencies with Celsius. It then lends this money to players in the cryptocurrency market who are willing to pay high interest rates to borrow the money.
However, plummeting prices have put this model to the test. Celsius cited "extreme market conditions" as the reason for suspending withdrawals.
In a blog post on Thursday, Celsius said it was taking "significant steps to preserve and protect assets and explore the options available to us."
Those options include "pursuing strategic transactions and restructuring our liabilities, among other avenues."
Celsius’s problems exposed weaknesses in many lending models used by the cryptocurrency industry that offer high yields to users.
4. The Liquidation of Three Arrows Capital
Three Arrows Capital is one of the most prominent hedge funds focused on cryptocurrency investments.
The decade-old firm, also known as 3AC, was founded by Zhu Su and Kyle Davies and is known for its highly leveraged bullish bets on the cryptocurrency market.
3AC has exposure to failed algorithmic stablecoin terraUSD and sister token luna.
Media reported last month that U.S. cryptocurrency lenders BlockFi and Genesis liquidated some positions of 3AC. 3AC had borrowed money from BlockFi but was unable to meet margin calls.
Back-margin means investors must put in more money to avoid losses on trades made with borrowed money.
Then 3AC defaulted on more than $660 million worth of Voyager Digital loans, sending Three Arrows Capital into liquidation. The situation at
3AC exposes the highly leveraged nature of recent trading in the sector.
5. CoinFlex’s spat with “Bitcoin Jesus ”
Cryptocurrency exchange CoinFlex stopped customer withdrawals last month, citing “extreme market conditions” and one customer’s account turning into negative equity.
CoinFlex claims that the client, allegedly high-profile cryptocurrency investor Roger Ver, owes the company $47 million. Ver, nicknamed "Bitcoin Jesus" because of his evangelical views in the industry's early days, denies that he owes CoinFlex money.
The exchange stated that under normal circumstances, accounts that enter negative equity will be liquidated. But CoinFlex and Ver have an agreement that does not allow this to happen.
CoinFlex has launched a new token called Recovery Value USD, or rvUSD, to raise $47 million, allowing withdrawals to resume and offering a 20% interest rate to investors willing to buy and hold the digital coin .
CEO Mark Lamb told CNBC this week that the company is in talks with a number of distressed debt funds to purchase the token. CoinFlex is also seeking to recover funds from Ver.
Conclusion
Another important external factor behind the sudden rise and fall of Bitcoin is the lack of regulation. Since countries around the world vary greatly in terms of government power, financial market development, and investor risk preferences, countries have different attitudes toward Bitcoin regulation.
Although China has long banned speculation and trading of virtual currency , some Western countries, especially the United States, lack sufficient supervision, which has objectively contributed to the formation of the "cryptocurrency circle", with ups and downs, ultra-high leverage , and full of Manipulators and various pseudo-technical concepts pose major risks to global financial security and financial IT.
Although it seems that Bitcoin has fallen a lot at present, we still need to remain vigilant about the risk of a possible clearing. Bitcoin is nothing more than a series of digital codes, and the main profit is the spread between the low buying price and the high selling price. In the future, if investor confidence collapses and the United States or other sovereign countries declare Bitcoin illegal, Bitcoin will become worthless. Investors should not blindly "buy and buy at the bottom" to avoid being "cut off leeks".
