The FTX issue has dragged the total market capitalization of crypto below $1 trillion. The fall of the Bahamas-based crypto exchange has initiated the latest downturn in crypto prices. Stocks are also on a losing streak this year, but crypto coins like Bitcoin (BTC) have had a grim performance in 2022.
At the start of this year, BTC was at almost $48,000, but due to rising inflation and interest rates, its price has come down sharply. As of writing, Bitcoin is down more than 65% this year.
The past year has witnessed some significant crypto bankruptcies and chaos, leading to the falling price of Bitcoin. This article will explore some of the notable crypto events that had a massive impact on the Bitcoin price and other cryptos.
Many countries printed excess money to support their economies during the pandemic, but inflation rises when more money is printed. So the financial regulators of many countries increased their interest rates to tackle inflation. Borrowing becomes more expensive due to higher interest rates, thus squeezing the cash out of crypto and stock markets. When investors do not find easy access to funds, sell-offs occur which reduce asset prices.
Many economies raised their interest rates multiple times in 2022, leading to a downturn in crypto prices. Rising interest rates have affected every crypto in the market, including Bitcoin.
The Terra Collapse
Terraform Labs has produced two popular crypto coins, Terra Luna (LUNA) and Terra USD (UST). These crypto coins had a strong presence in the crypto market. TerraUSD was a stablecoin, while Terra Luna was a typical crypto coin. Both crypto coins were in a burn/mine mechanism to keep UST close to $1. At one point, users invested their TerraUSD in the Anchor protocol. Investors were getting a 20% return on their UST deposits, which led to the high demand for Terra USD.
All that changed when Anchor decided to change its 20% rate to a variable rate. This change in rate led to massive withdrawals of UST, and the supply of UST exceeded the demand. Terraform Lans also ran out of Luna coins to burn to maintain the peg. As a result, UST and LUNA crashed, leading to massive sell-offs. Bitcoin was also affected as a consequence of the fall of Terraform Labs.
Most of us had assumed that the worst of 2022 had passed before the collapse of FTX. FTX was a popular crypto exchange worldwide. It was launched by Sam Bankman-Fried and Gary Wang in May 2019. This platform rose to become a prominent name in the crypto industry until its severe liquidity issues were disclosed.
Additionally, FTX was about to be acquired by Binance, but the deal was called off amid the allegations against FTX. It filed for bankruptcy after the Binance deal fell through. This news sent shock waves across the crypto industry, leading to another crypto market correction. Bitcoin prices dropped by over 25% in less than a week during this crash.
Is Bitcoin going to recover?
Bitcoin and crypto are no strangers to the boom and bust cycles of the market. BTC fell by 84% after a meteoric rise to around $20,000 in 2018. Bitcoin fell by 50% in May 2021 but bounced back to $69,000 later that year.
According to financial experts, the latest downturn in the crypto market is different because the wider economy is also struggling. Analysts say the current crypto winter can last longer due to high inflation, interest rates, and political instability due to the Russia-Ukraine war.
Bitcoin will likely recover when inflation and interest rates come down. It is a fundamentally robust crypto with tremendous potential. Bitcoin’s philosophy and economics are strong irrespective of the market situation.
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