The year 2022 is turning into hell for the crypto industry.
The cryptocurrency market has lost over $2 trillion since hitting a record high of $3 trillion in November 2021, amid crypto mania, according to data firm CoinGecko.
This decline is explained by fears linked to an upcoming recession, which are pushing investors to liquidate risky assets such as cryptocurrencies and technology stocks.
But the causes of the depressed crypto market are also to be found in the self-inflicted wounds of the crypto sphere itself. Indeed, in the summer, a credit crunch broke out after the collapse of sister tokens Luna and UST or TerraUSD, two coins issued by the Terraform Labs platform.
Luna and UST were the first dominoes to crumble in what would later turn into a liquidity crunch for the crypto sector.
The two tokens crashed after UST lost its peg to the dollar, the foundation qualifying it as a stablecoin. Such cryptocurrencies are tied to more stable assets, like the U.S. dollar or gold. From May 9 to May 13, at least $55 billion of market cap disappeared, causing many investors to sustain colossal losses.
UST was an algorithmic stablecoin, which was backed not by dollar reserves but rather by its sister asset, Luna. Algorithmic stablecoins are different from centralized alternatives like tether or the USD coin, which are backed by actual dollars or equivalent assets stored in a bank.
From the Bailout of Other Firms...
The fall of these two tokens hit hedge fund Three Arrows Capital, also known as 3AC, which found itself unable to honor its payments to crypto lenders, including Voyager Digital and Celsius.
Voyager and Celsius filed for Chapter 11 bankruptcy, while 3AC was forced into liquidation.
Regulators have launched investigations into this unprecedented crisis.
The same crisis had, however, brought out a white knight: the young billionaire Sam Bankman-Fried, whose fortune was estimated at $15.6 billion on Nov. 7 by the Bloomberg Billionaires Index.
"I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion," Bankman-Fried told NPR.
SBF, as he is nicknamed in the crypto industry, has, through his firm FTX Ventures, embarked on an acquisition spree and bailouts of struggling crypto firms to avoid a collapse of the sector.
He gave credit facilities to lenders Voyager Digital and BlockFi and acquired a significant 7.6% stake in Robinhood, the brokerage house for Gen Z and millennials. He has an option to buy BlockFi.
More recently, Bankman-Fried concluded a deal with Anthony Scaramucci, who was ever-so-briefly White House director of communications under former president Donald Trump. FTX Ventures will acquire 30% of Skybridge Capital, the alternative investment company founded by Scaramucci, aka "The Mooch.
Bankman-Fried and his companies were thus seen as financially sound by investors. On Nov. 2, Coindesk published an article in which the media questioned the financial health of Alameda Research, one of the companies which is linked to FTX.com.
Coindesk claimed that Alameda's balance sheet is made up mostly of FTT, a cryptocurrency issued by FTX.com and linked to the platform. Basically, if the value of FTT collapses@d, the Bankman-Fried empire would find itself in huge financial trouble, without cash.
Bankman-Fried was tested four days later by rival Changpeng Zhao, who announced that he and his business Binance had decided to sell their FTTs valued at $500 million. On Nov. 7, Bankman-Fried made assurances that his empire was doing well and had no liquidity problem.
"FTX is fine. Assets are fine," the billionaire posted on Twitter.
... To Its Own Failure
His statements resemble those of the leaders of Voyager Digital in June and of Celsius Network a few months earlier.
But 24 hours later, he announces that he is selling FTX.com to Zhao and Binance. This announcement caused the price of cryptocurrencies to fall. Bitcoin (BTC), the most popular cryptocurrency, lost more than 10%, while Ether (ETH), the No. 2 currency by market value, fell 14% according to CoinGecko. The crypto market overall was down 10% in the past 24 hours.
The unexpected surrender of FTX and Alameda revives a crisis of confidence that was beginning to dissipate somewhat. This crisis is fueled by the lack of transparency in the industry.
How is it that FTX, which ensured a few hours earlier still to be "fine", finds itself selling out to its greatest enemy and competitor a few hours later? How do you go from having no liquidity problems to "there is a significant liquidity crunch" in just a few hours?
In February, FTX, which has NFL star Tom Brady as a shareholder and ambassador, was valued at just over $32 billion. What is the exposure of many crypto firms to Alameda and FTX?
The industry is in shock and is trying to assess the damage. The Robinhood trading app, in which Bankman-Fried is a shareholder with a 7.6% stake acquired in May, fell 16%.
What will happen to Robinhood (HOOD), BlockFi and Skybridge and other firms - and the list goes on - that have been bailed out by Bankman-Fried recently?
And the other question concerns the retail investors/creditors of Voyager Digital: will they be able to recover their funds as Bankman-Fried promised them?
What is certain is that FTX concerns are plunging the crypto industry into a crisis that feels like deja vu.
