2022: The Year Crypto Crashed

Feb 2023

2022 was a terrible year for crypto. It had a series of scandals and after everything was all set and done, 2 trillion had been wiped from the crypto economy (which included thousands of my money too!). It’s easier to see now why the market was tense. We were still dealing with the pandemic. The government was putting lots of money into the economy, and meanwhile supply chains struggled to keep up. This made prices go up. To slow things down, central banks raised interest rates.

Higher interest rates made it more expensive to borrow money and made safer investments, like savings accounts and bonds, more attractive. Crypto is risky and unpredictable and so many people pulled their money out so they could put it in safer places. Crypto prices dropped hard.

When the economy is strong, people are more willing to take risks, like investing in crypto. But when inflation makes everything more expensive, people get nervous and move their money to safer options. That’s exactly what happened in 2022. Interest rates went up, crypto became less appealing, and investors bailed.

The first major blow came with the collapse of the Terra stablecoin, which was supposed to maintain a fixed value of $1, because it was pegged to the US dollar. Terra’s model relied on an algorithm not traditional money reserves. When that system broke down, UST lost its value, and so did its sister coin, Luna. When investors became aware, they sold off their positions, and so the system became unsustainable, triggering a death spiral. All in all, $40 billion was wiped away.

Naturally, this made people nervous because it showed how risky these types of stablecoins could be. Stablecoins were anything but stable.

The next wave of failures came from crypto lenders. Celsius Network, a popular lending platform, filed for bankruptcy just a month after Terra’s collapse. Then, Voyager Digital, another major crypto lender, defaulted on a loan to Three Arrows Capital, which was a hedge fund that was heavily invested in high-risk crypto bets. This led to both companies filing for bankruptcy, worsening the market downturn.

FTX was one of the biggest and most trusted crypto exchanges, almost like a giant online bank for digital money. At its peak, it was worth $32 billion. But in 2022, everything fell apart in just a few days. Reports came out that the people running FTX had mismanaged funds and engaged in fraud. When investors found out, panic set in.

People rushed to withdraw their money, but of course FTX didn’t have enough to pay everyone back. The company went bankrupt, and people lost their money. Its founder, Sam Bankman-Fried, was later convicted of fraud. Crypto investors were having doubts about whether these exchanges could be trusted, myself included.

The destruction didn’t stop with FTX. BlockFi, another major crypto lender, had significant exposure to FTX and was forced into bankruptcy as well. This further destabilized the industry.

The crypto crash wasn’t just a problem for digital assets, it affected the entire financial system. Many traditional banks had exposure to crypto companies, either through direct investments or by providing banking services. When major crypto firms collapsed, some banks found themselves in trouble too. I’ll talk about in the next post.