The cryptocurrency market has faced numerous challenges in 2022, including one of the worst bear markets in history and the collapse of several major platforms. The global economic impact of the pandemic has also affected the crypto industry. Here are some of the biggest disappointments in the crypto space this year:
FTX Loses $650 Million in Bankruptcy and Mystery Attack
One of the biggest events in the cryptocurrency world in 2022 was the collapse of popular digital asset exchange FTX, which lost billions of dollars in funds. On November 12, the company filed for Chapter 11 bankruptcy, but that was not the end of its problems. FTX was then hit by a mysterious attack in which several wallets believed to belong to the exchange were emptied of approximately $640 million in tokens. The funds were transferred to other exchanges and converted into different cryptocurrencies.
The identity of the thief or thieves remains unknown. At the first court hearing for the bankrupt exchange, James Bromley, counsel for FTX’s new management, stated that a “substantial amount” of the exchange’s assets are either missing or have been stolen. This incident has added to the challenges faced by FTX, which has already been dealing with bankruptcy proceedings.
Axie Infinity’s Ronin Bridge Hacked for $625 Million
In March of 2022, the blockchain network Ronin, which powers the popular NFT crypto game Axie Infinity, suffered a hack that resulted in the loss of 173,600 Ether and 25.5 million USD Coin, totaling approximately $625 million. The hacker utilized the Lazarus Group to gain access to five out of nine private keys for the Ronin Network’s cross-chain bridge, allowing them to authorize and execute the two fraudulent withdrawals.
According to Ronin, the vulnerability in Axie Infinity’s system arose in November 2021 when the platform experienced rapid user growth and had to loosen its security measures in order to meet demand. However, as the initial expansion phase came to a close, the company reduced its security protocols again. The main issue was the lack of a sufficiently decentralized network provided by game developer Sky Mavis for Ronin Chain. The hacker was able to compromise the network by gaining control of five of Sky Mavis’ validator nodes, giving them majority control and the ability to approve or deny any transactions.
The hack occurred on March 23, but was not discovered until March 29 when a user reported being unable to withdraw 5,000 ETH from the Ronin bridge ATM. In response to the attack, the Axie Infinity team raised $150 million to compensate affected users.
Binance Loses $566 Million in Hack Targeting BSC Token Hub
On October 6, hackers targeted a blockchain connected to the world’s largest cryptocurrency exchange, Binance, stealing $566 million worth of BNB. The attack focused on the cross-chain bridge BSC Token Hub, using artificial withdrawal proofs to create tokens out of thin air. Despite the significant amount of tokens stolen, the perpetrators were unable to retain them all. Binance CEO Changpeng Zhao stated that the company was able to prevent approximately 80% to 90% of the targeted funds from being taken.
This was achieved by freezing the BSC chain network after the attack, though the hackers did manage to move around $100 million in funds to other chains. No users of Binance or its blockchain lost funds in this attack.
TerraUSD/LUNA Collapse Leads to Arrest Warrant for Do Kwon
On May 7, a significant amount of TerraUSD (UST) was unstaked from the anchor Protocol, leading to the rapid liquidation of hundreds of millions of dollars. It is unclear whether this was a deliberate attack on the Terra blockchain or a response to rising interest rates. The outflow of funds caused the price of UST to drop from $1 to $0.91, prompting market players to trade $0.90 in UST for $1 in LUNA.
As more UST was moved out, the stablecoin depegged and the availability of LUNA increased as people sold their UST during the panic. In response, various cryptocurrency marketplaces suspended trading pairs such as LUNA and UST. Following this initial incident in May, Do Kwon unveiled a recovery plan for LUNA, but the value of the currency eventually declined and was eventually abandoned. Terra eventually launched a new currency called LUNA 2.0.
The panic selling that occurred during the decline of TerraUSD Classic (USTC) and Luna Classic (LUNC) resulted in a combined loss of $60 billion for investors.
On September 14, a South Korean court issued an arrest warrant for Do Kwon, four months after the collapse of Terraform Labs’ LUNA and UST tokens. Do Kwon and five others were detained on suspicion of violating regional market regulations.
Three Arrows Capital Collapses After Investing in Struggling Cryptocurrency Projects
The cryptocurrency hedge fund Three Arrows Capital (3AC) experienced significant losses when Terra collapsed, causing its peak market valuation of over $560 million to plummet. 3AC had invested heavily in several struggling cryptocurrency ventures, including the play-to-earn game Axie Infinity, which lost $625 million in a hack by North Korea this year, and the centralized cryptocurrency exchange BlockFi, which laid off hundreds of employees in June.
The collapse of UST shattered investor confidence and exacerbated the already ongoing slide of cryptocurrencies as part of a broader flight from risk. This led to a flood of margin calls from 3AC’s lenders seeking repayment, but the company lacked the funds to meet the requests. Additionally, many of 3AC’s counterparties were unable to meet their investors’ expectations, many of whom were promised 20% annual returns.
3AC ultimately collapsed due to its large directional trades and borrowing from over 20 institutions, with the founders defaulting on their payments. The founders did not appear in court, resulting in the lawsuit proceeding without them. In a leaked court document filed with the Singapore High Court, the Singapore government was asked to accept liquidation proceedings and work with liquidators. As liquidators attempt to wind down the failed cryptocurrency business of Three Arrows Capital, U.S. Bankruptcy Judge Martin Glenn has issued subpoenas to the company’s founders.
Voyager Digital Files for Bankruptcy After 3AC Default on $650 Million Loan
On July 6, cryptocurrency investment firm Voyager Digital filed for bankruptcy after crypto hedge fund 3AC defaulted on a $650 million loan. 3AC had received a significant loan from Voyager without any security, and when it defaulted on all of its obligations and its owners left, Voyager suffered a significant loss of customer funds.
As a result, trading, withdrawals, and deposits were all suspended when Voyager announced that 3AC would not repay the loan. In June, Sam Bankman-Fried, CEO of trading firms FTX and Alameda Research, had provided Voyager with a $500 million line of credit to help them navigate the market collapse. On July 5, 2022, Voyager Digital Holdings filed for bankruptcy in the Southern District of New York, stating that it owes between $1 billion and $10 billion to its over 100,000 creditors, but has assets worth between $1 and $10 billion and sufficient funds to pay off its unsecured creditors.
In a September court filing, insolvent cryptocurrency broker Voyager Digital revealed that it would be auctioning off its remaining assets.
Celsius Network Declares Bankruptcy, Causing Value of Cryptocurrency to Plummet
On July 13, 2022, one of the major cryptocurrency companies, Celsius Network, declared bankruptcy, causing the value of the Celsius cryptocurrency to plummet by 70% in just a few hours and continue to decline in the following days. This was due to a liquidity crisis triggered by falling cryptocurrency prices, which prompted investors on the Celsius network to withdraw their Bitcoin holdings in search of safer alternatives.
In response to the influx of withdrawals, Celsius Network halted BTC withdrawals, swaps, and transfers on June 12, stating that it was necessary due to “extreme market conditions.” This led many users of the platform to assume that Celsius had declared bankruptcy and would be unable to refund their money. The sell-off in the crypto market, coupled with the falling prices of many major cryptocurrencies, also contributed to the decline in the value of Celsius.
In addition, Celsius announced 23% layoffs on July 3, 2022 due to worsening cash flow issues. The company ultimately filed for bankruptcy on July 13, 2022 with total liabilities of $6.6 billion and assets of $3.8 billion, resulting in a $1.2 billion deficit in its balance sheet according to the court ruling.
BlockFi Files for Chapter 11 Bankruptcy Following FTX Collapse
On November 28, cryptocurrency exchange BlockFi filed for Chapter 11 bankruptcy with assets and liabilities ranging from $1 billion to $10 billion and over 100,000 creditors. One of these creditors is FTX US, to whom BlockFi owes $275,000,000. The bankruptcy application also shows that the exchange’s largest client has a balance of $28 million.
This bankruptcy follows the collapse of FTX earlier in the month, which caused fear and uncertainty in the market. Like Three Arrows Capital, BlockFi has faced liquidity issues due to its exposure to the TerraUSD stablecoin’s collapse. Earlier this year, BlockFi agreed to accept a credit package from FTX worth up to $400 million to help it weather this liquidity restriction. However, the financial stability of BlockFi is now at risk due to its reliance on the performance of FTX.
Conclusion
The cryptocurrency market has faced several major challenges in 2022, including the bankruptcy and subsequent attack on FTX, the hack of Ronin, the attack on Binance, and the collapse of TerraUSD. These events have resulted in significant losses for some companies and individuals, and have raised concerns about the security and stability of the cryptocurrency market. It is important for those involved in the cryptocurrency market to be aware of these challenges and to take appropriate measures to protect their assets. In conclusion, while the cryptocurrency market has the potential to offer significant opportunities, it is important to be aware of the risks and challenges that it can also present.