5 Reasons Bitcoin Seeing Worst Quarter and a Month Since 2011

Bitcoin Downfall
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In the second quarter of 2022, ‘Bitcoin’ the world’s largest cryptocurrency lost about 58 percent of its value. The cryptocurrency market has lost approximately $1.2 trillion.

In the midst of the chaos, crypto firms have announced layoffs, and the industry is consolidating through acquisitions.

Here are five recent flashpoints in the cryptocurrency industry.

1. Economic conditions

To combat rampant inflation, the US Federal Reserve raised interest rates twice during the quarter. This has fueled fears of a recession in the United States and other countries.

It has also impacted stocks, particularly high-growth technology stocks. The Nasdaq Composite, which is heavily weighted toward technology, is down 22.4 percent for the second quarter, its worst quarterly performance since 2008.

Bitcoin’s price movement has been highly correlated with that of US stock indexes. As investors sell risky assets, the stock market sell-off has weighed on bitcoin and the crypto market.

2. TerraUSD’s downfall

The collapse of the algorithmic stablecoin terraUSD and its sister token luna last quarter sent shockwaves through the industry.

A stablecoin is a cryptocurrency that is usually linked to a real-world asset. TerraUSD, or UST, was supposed to be pegged to the US dollar one-to-one. Some stablecoins are backed by physical assets like fiat currency or government bonds. However, UST was governed by an algorithm and a complex system of coin burning and minting.

That system didn’t work. TerraUSD lost its dollar peg, causing the associated token luna to become worthless.

The incident reverberated throughout the industry and had repercussions, most notably on cryptocurrency hedge funds Three Arrows Capital, which had exposure to terraUSD.

3. Lender Celsius has put a halt to withdrawals.

Celsius, a cryptocurrency lender, halted customer withdrawals in June.

If users deposit cryptocurrency with Celsius, they will receive returns of more than 18%. It then lent that money to cryptocurrency market participants who were willing to pay a high interest rate to borrow the money.

However, the price drop put that model to the test. Celsius cited “extreme market conditions” for the pause in withdrawals.

Celsius announced in a blog post on Thursday that it was taking “important steps to preserve and protect assets and explore options available to us.”

Among these options are “pursuing strategic transactions as well as a restructuring of our liabilities,” among others.

The problems with Celsius exposed flaws in many of the lending models used in the cryptocurrency industry, which promised users high returns.

4. Capital liquidation by Three Arrows

Three Arrows Capital is a well-known hedge fund that specializes in cryptocurrency investments.

The ten-year-old firm, also known as 3AC, was founded by Zhu Su and Kyle Davies and is known for its highly leveraged bullish bets on the cryptocurrency market.

3AC was exposed to the defunct algorithmic stablecoin terraUSD and its sister token luna.

According to people familiar with the situation, the Financial Times reported last month that US-based crypto lenders BlockFi and Genesis liquidated some of 3AC’s positions. 3AC borrowed from BlockFi but was unable to meet the margin requirement.

A margin call occurs when an investor is required to commit additional funds in order to avoid losses on a trade made with borrowed funds.

Then 3AC defaulted on a Voyager Digital loan worth more than $660 million.

As a result, Three Arrows Capital went bankrupt, a person familiar with the situation told CNBC this week.

The 3AC situation has recently exposed the highly leveraged nature of trading in the industry.

5. Bitcoin Jesus’ squabble

CoinFlex, a cryptocurrency exchange, stopped accepting customer withdrawals last month, citing “extreme market conditions” and a customer account that had fallen into negative equity.

CoinFlex claims that the customer is high-profile crypto investor Roger Ver, and that he owes the company $47 million. Ver, dubbed “Bitcoin Jesus” for his evangelical views on the industry in its early days, denies owing CoinFlex money.

According to the exchange, an account that goes into negative equity would normally have its positions liquidated. However, CoinFlex and Ver had an agreement that prevented this from happening.

To raise the $47 million needed to resume withdrawals, CoinFlex issued a new token called Recovery Value USD, or rvUSD, and is offering a 20% interest rate to investors who buy and hold the digital coin.

This week, CEO Mark Lamb told CNBC that the company is in talks with a number of distressed debt funds about purchasing the token. CoinFlex is also attempting to recoup funds from Ver.

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