So, what were the biggest crypto fails of 2022?
The Terra Luna/TerraUSD Crash
The Terra Luna/TerraUSD (LUNA/UST) crashmarks one of the biggest crypto events of 2022.
But what caused this disaster?
Image Credit:Bybit
A number of elements came together to seal Terra Luna and TerraUSD’s fate.
Firstly, you’ve got the nature of TerraUSD.
The Terra Luna/TerraUSD Relationship
TerraUSD is analgorithmic stablecoin.
Image Credit: Jurnej Furman/Flickr
Such assets are not backed by any physical commodity or fiat currency.
In this case, that other coin is Terra Luna.
In other words, TerraUSD is essentially backed by Terra Luna.
Image Credit: Bybit/Flickr
If TerraUST’s price fell below a dollar, LUNA would be burned.
It’s this delicate balance that kept TerraUSD relatively stable.
But this algorithm broke down when people began dumping their UST en masse.
Image Credit: Satheesh Sankaran/Flickr
So, why did this happen?
Anchor allowed people to deposit TerraUSD for an incredible 20% return.
As more individuals became aware of Anchor’s huge returns, demand for TerraUSD increased.
However, this was not to last.
In 2022, Anchor switched to a variable return rate, which could go as low as 4%.
At this point, more UST was being sold than bought, meaning the demand spiraled downward.
The burn/mint relationship between LUNA and UST could not function normally amid this drop.
No more LUNA could be burned to maintain UST’s peg, so both cryptocurrencies crashed.
Terra Luna and TerraUST never recovered and were removed from most exchanges.
So, what gave way to this collapse?
This made investors in the traditional and crypto markets nervous and led to a mass sell-off of crypto assets.
As the demand for crypto decreased, its value decreased with it.
The crash of Terra Luna and TerraUSD also played into the lacking confidence in cryptocurrencies.
As a result, almost every asset in the industry suffered.
The crypto industry was already suffering before the May 2022 crash.
In fact, another crash was suffered in late January of the same year.
So things were already fragile, with the May 2022 crash exacerbating the market’s downfall.
But that all changed in late 2022.
FTX uses FTT tokens to pay for things like transaction fees, which will be important a little later.
Binance’s Changpeng Zhao also bought a 20% stake in FTX for $100 million.
So, it’s safe to say things were looking up for this platform.
But this was not to last.
The company also pulled out of a deal in which it was set to acquire FTX.
Bankman-Fried admitted that FTX did not have the funds to fulfill these withdrawal requests.
But behind this platform’s seemingly benign front was a far more concerning reality.
In June 2022, Celsius suddenly paused all withdrawals, meaning users couldn’t move their funds elsewhere.
Then, the platform filed for bankruptcy after letting go of over 20% of its workforce.
But what caused this sudden downfall?
In short, Celsius was dealing with major financial issues.
Many even described the platform as a Ponzi scheme with the way it mishandled user deposits.
Celsius was forced to file for bankruptcy in mid-2022 amid a severe liquidity crisis sparked by the factors discussed.
The trading volume of NFTs fell by an astonishing 97% between January and October 2022.
But what led to this?
A key factor that led to the crash of the NFT market was a decline in investor interest.
The NFT industry may one day fully recover, though for now, that seems unlikely.
No one knows whether crypto will bounce back in 2023.
All we know is that these crypto fails stand as representations of how fragile the market can be.
