Nobody who was around during Q2 of 2022 will ever forget what happened in this most seminal of periods. Bitcoin’s collapse from $47,000 to $26,800 wasn’t even the headline news, nor was the UK officially welcoming crypto companies.
No, Q2 of 2022 belonged to Terra USD, LUNA and Do Kwon.
April
Bitcoin had experienced a quiet first quarter of 2022, but that all changed in the second, with an early drop from $47,400 at the start of April to $38,000 by the end of the month setting the scene. This period coincided with the halfway point between two halvings, a point in time that historically has led to a price drop of up to 67%, and all signs were that history was about to repeat itself.
The UK government confused its citizens by promoting itself as a cryptocurrency hub right as its financial watchdog, the Financial Conduct Authority, was spending millions trying to tell everyone to avoid the industry. The icing on the cake was the announcement of an officially sanctioned NFT by the Royal Mint, which, obviously, was savaged by all and sundry.
Elon Musk got everyone all shook up when he became Twitter’s largest shareholder in April and promised action on the plague of crypto bots, prompting many to suspect the world’s richest man might make a bid for the company. DOGE, naturally, spiked on the speculation.
The shutting down by German police of the world’s biggest dark web marketplace, Hydra, brought back memories of Silk Road this month, although no one was arrested this time round. However, €23 million ($25.3 million) worth of bitcoin was seized, which will make for one hefty auction some time.
Virgil Griffith, the former Ethereum developer who was convicted of helping North Koreans evade sanctions through cryptocurrency in 2019, was sentenced to five years in jail in April, having vowed to fight the charges right up until the day before the trial. Griffith eventually realised he was better off taking a plea deal and entered a guilty plea.
There was more North Korea news this month as warnings were issued by the FBI and the Cybersecurity and Infrastructure Security Agency that the country’s state-sponsored hacking groups were increasing their crypto attacks. This came just four days after Lazarus, the best known North Korean hacking group, was named as the group behind the Ronin hack, worth over $500 million to the rogue state.
Coinbase soft-launched its NFT exchange, Coinbase NFT, this month, with a focus on the social aspect of the nascent community. This quickly descended into insults being hurled and prices paid being criticised, but the consensus was that the platform was a reasonable addition to the NFT exchange space.
Bitcoin received a timely boost in April when investing giant Fidelity announced that it was including the cryptocurrency in 401(k) plans, the first company to do so. Often seen as one of the holy grails for Bitcoin supporters, the move opened up the opportunity for the 23,000 companies that use Fidelity to include Bitcoin in their retirement options, marking the clearing of another adoption barrier.
Bitcoin mining was back in the news in a big way in April as a new group, Change the Code Not the Climate, urged Bitcoin to make the “basic switch” to a proof-of-stake consensus mechanism, following Ethereum’s ongoing plans to do so. Using spurious facts and an even more tenuous grasp on the mechanics, the group, backed by Greenpeace, blamed Bitcoin mining for having a huge impact on climate change, despite it making up only 0.2% of CO2 production worldwide.
This news was compounded by a New York Assembly bill that would prevent new mining activity in the state and require all existing Bitcoin mining operations to work within new parameters or face being shut down.
April ended with the shock news that one Edward Snowden was one of the team being the cryptocurrency Zcash. Snowden was revealed as the man behind the moniker John Dobbertin, one of six people who helped create the cryptocurrency in 2016. Snowden was outed during a promotional video, where he said that he offered his services out of a sense of “public interest”.
May
May was about one thing – LUNA. Actually, two things – LUNA and UST. Actually three things – LUNA, UST, and Do Kwon. For those VERY late to the story, here’s the gist. A Korean man by the name of Do Kwon created a stablecoin called Terra USD (UST) which worked in association with another cryptocurrency called LUNA. It was an algorithmic stablecoin that was supposed to use market incentivisation to maintain its peg. The Luna Foundational Guard (LFG), which oversaw the Terra USD project, stockpiled Bitcoin as collateral, amassing a $3 billion war chest.
When the markets became a bit rocky in early May, the markets lost confidence in the LUNA token and the entire system unwound spectacularly, with UST depegging and LUNA crashing from $100+ to less than a dollar in the space of a few days. The LFG deployed its war chest, but it wasn’t enough to stop the ‘death spiral’ that had already begun.
The UST/LUNA crash saw $40 million worth of investments collapse, with life savings being lost and suicides linked to the crash. The entire episode was made worse by the fact that Kwon had been supremely arrogant about the functionality of Terra USD, which led to many sadly revelling in the crash. The collapse led to the entire crypto market crashing as a result, with Bitcoin dropping to $25,000.
Mainstream media outlets also revelled in the Terra USD bust, with renewed calls for stablecoin regulation making headlines soon after. The collapse of the protocol instantly became one of the biggest events in crypto history, comparable in scale with the collapse of Mt. Gox. In many ways the Terra/LUNA collapse was a watershed moment for crypto, a line in the sand that caused regulators to look at immediate and swift regulation.
May wasn’t all about Terra, although you’d be forgiven for thinking it was. Yuga Labs launched its Otherside metaverse, crashing Ethereum as it did; Starbucks, Instagram and Ebay went into NFTs; several crypto companies announced hiring freezes as expectations of a crypto winter increased; and Moneygram launched its USDC settlement platform on the Stellar blockchain.
Really, though, May was all about Terra, LUNA, and the brazen narcissism, and rapid fall, of Do Kwon.
June
June marked the start of something that no one who had joined the crypto space since mid-2020 had experienced – a crypto winter. With Bitcoin unable to break above the $30,000 level, the extent of the Terra collapse not yet known and the wider macro picture of the global economy looking as fragile as a gingerbread house in a bull ring, it was becoming more and more evident that crypto was in for a lengthy period of hibernation.
Crypto exchanges were the first to take steps to weather the storm, with several cutting staffing levels in the early days of June in order to preserve precious capital. This included Coinbase rescinding job offers to those it had already not just promised jobs to but promised not to rescind.
It wasn’t all doom and gloom at the start of the month however, with Ethereum’s test merge to proof-of-stake going live and PayPal being awarded a New York Bitlicense. These were to prove nothing but temporary glimmers in the dark tunnel that was June, however.
Crypto officially entered a bear market in mid-June, with the news that huge lending platform Celsius had halted withdrawals owing to its exposure Terra and hedge fund Three Arrows Capital, which was turning out to be the next target of insolvency rumours. Bitcoin responded by crashing to $17,600 within a week, its lowest point since December 2020, the price drop exacerbated by billions of dollars in liquidations.
‘Crypto contagion’ quickly became the new buzzphrase in the sector, as June saw more exchanges and lending platforms exposed to the crypto credit crunch – BlockFi and Voyager Digital both suffered, halting withdrawals and locking billions of dollars of customer funds on their platforms.
One of the most intriguing situations was with lending and yield platform Coinflex, who revealed a $47 million black hole in their accounts, which led to them having to pause operations, was all down to one man – Roger Ver, who had not paid his dues on a failed margin trade. Ver denied this and got lawyers involved, throwing shade at Coinflex and saying that, in fact, they owed him.
A bad month, and a bad quarter, ended in the worst way possible as Three Arrows Capital was forced into liquidation by a British Virgin Islands court, leading it to file for bankruptcy owing money to just about every crypto lending platform or exchange in town.
The full extent of the Three Arrows-induced crypto contagion wouldn’t be known for some time, but it had already claimed several high profile victims. The crypto market ended the halfway point of the year just 8% higher in total market cap than at the end of the 2016/17 bull run, illustrating the extent of the losses taken since November 2021, with Bitcoin barely able to keep up with the $20,000 high of that time.
The Era of Contagion
Q2 of 2022 will be remembered for the speed and scale at which the cryptocurrency ecosystem collapsed, spurred on by leverage trading and excessive risk. The space hadn’t seen anything like it before, and likely never would again, with the ramifications of the Terra fiasco being the straw that would break more than one regulator’s back in the months to come.
Check back tomorrow for part three of our four-part review of cryptocurrency in 2022.
