What Went Wrong in the Biggest Cryptocurrency Crashes in 2022?

The fall of LUNA Crypto, Three Arrows Capital (3AC), Babel Finance and FTX crypto exchange demonstrate the importance of mitigating risks in cryptocurrency investments. More importantly, these crypto crashes also show how important it is to be updated with the current happenings in the cryptocurrency market in order to make informed decisions. Here are the brief accounts of the biggest cryptocurrency crashes this year.

Cryptocurrency LUNA Crash: Stablecoin that is not fiat-backed

The widespread domino effect on cryptocurrencies began with LUNA Crypto’s downfall last May, losing an estimated $300 billion across the entire cryptocurrency space. Luna is the native token of Terra’s blockchain network created by Do Kwon and Daniel Shin of Terraform Labs. An algorithmic stablecoin was also created in the Terra blockchain, TerraUSD (UST), whose value was backed by the LUNA token instead of a fiat currency like the US dollar. LUNA’s crash was a result of the unstaking of the TerraUSD (UST) stablecoin from the savings, lending and borrowing platform that ran on the Terra blockchain, namely Anchor Protocol. This lending protocol has been known to make regular crypto investors become rich and has been the main driver of LUNA’s popularity. The more investors lend their assets to future investors, traders, or borrowers, the higher returns they will yield. When Anchor Protocol unstaked over $2B worth of TerraUSD (UST) stablecoin from the platform (which others claimed could be a hack instead), it caused panic among investors, making them sell off more UST for LUNA. Other crypto exchanges then delisted LUNA and UST, making investors lose their investments.

Crypto Hedge Fund Three Arrows (3AC) Crash: Bad Investments on Crypto Projects

The LUNA crypto crash then led to the collapse of one of the most prominent Singapore-based crypto hedge funds, Three Arrows Capital (3AC) last June, which invested in cryptocurrency projects such as the Terra blockchain network. Aside from Terra, it also invested in failing cryptocurrency projects such as the Axie Infinity game, which got hacked from North Korea last year, and the BlockFi cryptocurrency exchange that laid off hundreds of staff this year. Largely because of these bad investments, Three Arrows Capital (3AC) had become unable to repay its lenders, such as the crypto lender, Voyager. Cryptocurrency exchanges and creditor firms that are counterparties to 3AC had been facing big hits of losses with the firm’s collapse as they also borrowed capital from crypto lending firms and invested the money on other crypto projects such as blockchains and crypto exchanges.

Crypto Lender Babel Finance Crash: Crypto Market Slump

Cryptocurrency lenders take deposits from clients and re-invest them, enabling them to earn higher returns which they also impart to their clients. The slump in the cryptocurrency market led a Hong Kong-based crypto lender, Babel Finance, to suspend withdrawals and redemption of crypto assets last June. This was to prevent the selloff of cryptocurrencies in panic, and in return, protect the platform from losing funds. However, suspending withdrawals is also a major sign of the crypto company heading for bankruptcy.

Crypto exchange FTX Crash: Fraudulent Use of Customers’ Funds and Insufficient Assets in Reserve

Once hailed as the world’s third-largest cryptocurrency exchange, Sam Bankman-Fried’s FTX, faced a collapse in early November that swiftly led to billions of dollars of losses to many who invested in the crypto exchange and its native token, FTT, which reportedly fell to over 90% of its value. FTX’s downfall started with Coindesk’s report of its risky investment in Alameda Research, a trading firm also managed by Sam Bankman-Fried, and the revelation that its funding was in FTX’s native token, FTT, rather than in fiat currencies. This has raised the issue of the crypto exchange’s insufficient assets in reserve, particularly fiat currencies, to back the digital assets or cryptocurrencies invested by its users on the platform. With the crypto exchange halting withdrawals, customers are prevented from recovering their cryptocurrencies. FTX then filed for bankruptcy, making customers lose their investments. Furthermore, it has been reported that the exchange has been hacked with $500M from "unauthorised transactions" or "on-chain spoofing", draining wallets thereafter. With the customers becoming unable to recover their investments, financial authorities like the U.S. Securities and Exchange Commission (SEC) are prompted to place strict regulations, safety nets, and laws governing digital tokens and cryptocurrency exchanges.

Current Cryptocurrency Regulations

These crypto crashes lead to better and more widely imposed global regulations to protect the common investors as well as increase security and confidence in the cryptocurrency economy as a whole. Coinut is enthusiastically welcoming regulations as it is dedicated to bringing a trusted and secure platform for its 1.3M global users. To date, the platform has already implemented the subsequent regulations: AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism); FATF (Financial Action Task Force) Travel Rule, which requires all VASP (Virtual Asset Service Provider) worldwide, including cryptocurrency exchanges, to submit the details of senders and receivers of cryptocurrencies for possible money laundering and terrorism financing; and CDD (Customer Due Diligence) and KYC (Know Your Customer) regulations, which are implemented to verify the identity of the customers to minimize risks of money laundering and terrorism financing, among other regulations and laws governing cryptocurrency around the world.

Conclusion

Cryptocurrency investing is highly volatile. Often, it is regarded by experts as speculative investing, wherein the value of the cryptocurrencies is derived from the investors’ sentiments and the hype from the latest news rather than their practical value as means of payment, a financial system for the unbanked population, fast, secure, and accessible international transfers and remittances, prevention of identity theft, easy and low-cost investment capital and more. Hence, these cryptocurrency crashes led to better regulations on cryptocurrency exchanges in Singapore and in other countries on an institutional level and a call for investors’ education about cryptocurrencies and their safe investment practices such as assessing risk-tolerance prior to any investing, having a diverse portfolio and following a time-table for short-term and long-term investment plans among others on an individual level.

RISK DISCLOSURE: ⚠️

Digital payment token investments, such as cryptocurrencies, are not guaranteed by service providers or cryptocurrency exchanges and the government. It is crucial to exercise caution in investing, including the awareness that a part or all of the capital may be lost and may not be recovered especially in cases of high price volatility or down market, bankruptcy, seizures and other factors. Hence, the user’s risk tolerance, investment appetite or capacity for loss should be set firstly and they should observe safe and knowledgeable investment practices accordingly. For more information, please visit MAS' website.

IMPORTANT NOTE: 📢

Coinut.com is a financial entity regulated as a Money Services Business in Canada and an exempt entity under the Payment Services Act in Singapore. Please be reminded that cryptocurrency trading is highly risky and is not suitable for the general public. For more information please refer to Risk Warnings and Risk Statements.