Crypto winter: why did it happen and how to fill the hole?

Причины, последствия и преодоление встречных ветров криптозимы 2022 года

Reading time 6 minutes

According to CNBC statistics, 2022 rocked the cryptocurrency market, which has lost two trillion dollars since its peak in 2021. This period of market cooling is known as “crypto winter”. But there is something about this latest crash that sets it apart from previous crypto downturns: this year’s crypto winter was marked by a series of industry-wide events that exposed holes in the operating system of the “future money” market.

Stablecoin no longer stable
Coinbase and Bitcoin signage during an Initial Public Offering (IPO) at the Nasdaq MarketSite in New York, USA on April 14, 2021. Photographer: Michael Nagle/Bloomberg
Coinbase and Bitcoin signage during an Initial Public Offering (IPO) at the Nasdaq MarketSite in New York, USA on April 14, 2021. Photographer: Michael Nagle/Bloomberg

The most important reason for the crypto winter is the explosion of TerraUSD or UST, a currency known as stablecoins designed to reduce volatility in the cryptocurrency market by maintaining a fixed value. The stability of TerraUSD depends on a complex mechanism driven by an algorithm tied to its sister cryptocurrency LUNA rather than a stable reserve asset like gold or dollars. As Nansen reports, in early July, LUNA’s valuation plummeted from $80 to a fraction of a cent, and TerraUSD also collapsed.

Once praised for providing cutting-edge blockchain investments to users around the world, “the collapse of the Terra blockchain and the UST stablecoin was unthinkable,” Clara Medali, director of research at crypto data firm Kaiko, told CNBC.

The sudden collapse of TerraUSD and UST caused panic in the market. The price of bitcoin has fallen to $26,000, 60% from its peak in November 2021, while ether, the next largest cryptocurrency, has lost 30% in value. Coinbase, one of the largest cryptocurrency exchanges, posted a loss of $430 million. In addition, a tornado swept through crypto networks and hedge funds that had direct contact with UST, in particular the hedge fund Three Arrows Capital or 3AC.

The burden of individual traders
TerraUSD cryptocurrency crash. Source: Coinbase
TerraUSD cryptocurrency crash. Source: Coinbase

The collapse of TerraUSD and LUNA caused a domino effect throughout the electronics industry, including individual investors. Celsius, a company that offered users over 18% returns on staking its cryptocurrencies, filed for bankruptcy in July 2022. In the US, this procedure allows you to restore the corporate debt structure to support the company’s business. Individual investors who have invested their assets in Celsius risk losing them completely.

The risk stems from the fact that the protections and property rights that are used in normal banking legislation for deposits do not apply to cryptocurrency exchanges and exchange contracts. Cryptocurrency translators may disclaim liability for the total deposit amount in accordance with the Celsius terms of use.

Celsius operates like a bank. He will take the deposited cryptocurrency and lend it to other players with high returns. Other players will use it to trade. And the Celsius profit generated from the yield will be used to return back to depositors.

“Players looking for high returns exchanged fiat for cryptocurrency, used lending platforms as custodians, and then those platforms used the funds they raised for high-risk investments – how else could they pay such high interest rates?” said Carol Alexander, professor of finance at the University of Sussex.

Government reaction

As the global financial outlook becomes increasingly cloudy due to rising interest rates, the Special Military Operation in Ukraine, and fuel and grain shortages, consumers are looking for safe investments such as less risky crypto products like ETH. Therefore, it is necessary to issue some rules related to the security of cryptocurrencies in order to minimize the risks and instability of this market.

The Central Bank of Singapore has proposed new measures to regulate the trading of cryptocurrencies and stablecoins, including banning lending companies from taking cryptocurrencies from some retail customers and then lending to others with it – such a scheme does not provide sufficient security for depositors’ assets.

On October 26, the Australian government stated in its budget announcement that investors would be required to pay capital gains tax on profits from the sale of crypto assets through exchanges.

On October 27, the UK Finance Minister added to a bill submitted to Parliament the UK’s right to regulate all cryptocurrencies.

In all the chaos of the crypto winter, imposing rules on all participants, potentially destabilizing the market, will provide the necessary protection to consumers and maintain long-term market stability.





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