IMPORTANT NOTES
- In the second quarter of 2022, Bitcoin dropped almost 58 percent of its value, achieving its worst quarterly performance since 2011.
- Macroeconomic factors, such as increasing interest rates and excessive inflation, triggered a stock market sell-off that spread to the cryptocurrency sector.
- However, the industry has faced a wave of liquidity difficulties, with hedge fund Three Arrows Capital slipping into liquidation and loan provider Celsius suspending customer withdrawals.
- The collapse of the algorithmic stablecoin terraUSD in the third quarter also sent shockwaves across the industry.
Bitcoin experienced its worst quarter since 2011. This is why:
Bitcoin has recently had its worst quarter since 2011, as well as its worst month on record.
In the second quarter of 2022, the world's largest cryptocurrency lost roughly 58 percent of its value. The bitcoin market has lost almost $1.2 trillion.
In the midst of the uncertainty, crypto businesses have announced layoffs, and the sector is consolidating through mergers.
Here are five recent flashpoints in the bitcoin business.
1. Economic pressures
To combat runaway inflation, the US Federal Reserve raised interest rates twice during the quarter. This has fueled worries of a recession in the United States and other nations.
It has also impacted equities, particularly high-growth technology firms. The Nasdaq Composite, which is heavily weighted toward technology, is down 22.4 percent for the second quarter, its worst quarterly performance since 2008.
Bitcoin's price movement has been highly connected with those of US stock indices. As investors liquidate risky assets, the stock market sell-off has weighed on bitcoin and the crypto market.
2. TerraUSD's demise
The collapse of the algorithmic stablecoin terraUSD and its sibling token luna last quarter sent shockwaves through the industry.
A stablecoin is a cryptocurrency that is generally linked to a real-world asset. TerraUSD, or UST, was scheduled to be tied to the US dollar one-to-one. Some stablecoins are backed by physical assets like fiat cash or government bonds. However, UST was regulated by an algorithm and a complicated system of coin burning and minting.
That system didn't work. TerraUSD lost its dollar peg, causing the associated token luna to become worthless.
3. Lender Celsius has put a halt on withdrawals.
Celsius, a cryptocurrency lender, halted customer withdrawals in June.
If consumers deposit bitcoin with Celsius, they will receive returns of more than 18%. It then loaned that money to cryptocurrency market participants who were ready to pay a high interest rate to borrow the money.
However, the price drop put that model to the test. Celsius claimed "severe market circumstances" for the pause in withdrawals.
Celsius said in a blog post on Thursday that it was taking "essential actions to maintain and protect assets and investigate options accessible to us."
Among these choices include "pursuing strategic deals as well as a restructuring of our liabilities," among others.
The problems with Celsius showed several flaws.
4. Capital liquidation by Three Arrows
Three Arrows Capital is a well-known hedge fund that specializes on bitcoin investing.
The ten-year-old business, also known as 3AC, was founded by Zhu Su and Kyle Davies and is known for its highly leveraged bullish wagers on the cryptocurrency market.
3AC was exposed to the defunct algorithmic stablecoin terraUSD and its companion cryptocurrency luna.
According to persons familiar with the situation, the Financial Times reported last month that US-based crypto lenders BlockFi and Genesis liquidated part of 3AC's stakes. 3AC borrowed from BlockFi but was unable to satisfy the margin requirement.
A margin call occurs when an investor is required to commit additional cash in order to avert losses on a deal done using borrowed funds.
5. 'Bitcoin Jesus' squabble
CoinFlex, a cryptocurrency exchange, stopped accepting customer withdrawals last month, claiming "extreme market circumstances" and a customer account that had fallen into negative equity.
CoinFlex claims that the customer is high-profile crypto investor Roger Ver, and that he owes the firm $47 million. Ver, dubbed "Bitcoin Jesus" for his evangelical views on the sector in its early days, denies owing CoinFlex money.
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