1. Macroeconomic pressure
In the course of the quarter, the U.S. Federal Reserve carried out two aggressive rate of interest hikes to battle rampant inflation. That has sparked fears of a recession within the U.S. and other countries.
It has also hit stocks, specifically high-growth technology names. The tech-heavy Nasdaq Composite is down 22.4% for the second quarter, its worst quarterly performance since 2008.
Bitcoin has been closely correlated to the value movement of U.S. stock indexes. The stock sell-off has weighed on bitcoin and the crypto market as investors dump dangerous assets.
2. TerraUSD collapse
The primary major episode last quarter was the collapse of the algorithmic stablecoin terraUSD and sister token luna which sent shockwaves through the industry.
A stablecoin is a style of cryptocurrency often pegged to a real-world asset. TerraUSD, or UST, was speculated to be pegged one-to-one with the U.S. dollar. Some stablecoins are backed by real assets similar to fiat currency or government bonds. But UST was governed by an algorithm and a posh system of burning and minting coins.
That system failed. TerraUSD lost its dollar peg and brought on the demise of associated token luna which became worthless.
The episode reverberated through the industry and had knock-on effects, most notably on cryptocurrency hedge funds Three Arrows Capital, which had exposure to terraUSD (more on this below.)
3. Lender Celsius pauses withdrawals
Crypto lender Celsius paused withdrawals for purchasers in June.
The corporate offered users yields of greater than 18% in the event that they deposit cryptocurrency with Celsius. It then lent that cash to players within the crypto market who were willing to pay a high rate of interest to borrow the cash.
But the value slump put that model to the test. Celsius cited “extreme market conditions” as the rationale for pausing withdrawals.
On Thursday, Celsius said in a blog post that it was taking “necessary steps to preserve and protect assets and explore options available to us.”
These options include “pursuing strategic transactions in addition to a restructuring of our liabilities, amongst other avenues.”
The problems with Celsius exposed the weakness in most of the lending models utilized in the cryptocurrency industry that offered users high yields.
Three Arrows Capital is some of the distinguished hedge funds focused on cryptocurrency investments.
The last decade-old firm, also generally known as 3AC, began by Zhu Su and Kyle Davies, is thought for its highly leveraged bullish bets on the crypto market.
3AC had exposure to the collapsed algorithmic stablecoin terraUSD and sister token luna.
The Financial Times reported last month that U.S.-based crypto lenders BlockFi and Genesis liquidated a few of 3AC’s positions, citing people conversant in the matter. 3AC had borrowed from BlockFi but was unable to satisfy the margin call.
A margin call is a situation wherein an investor has to commit more funds to avoid losses on a trade made with borrowed money.
Then 3AC defaulted on a loan value greater than $660 million from Voyager Digital.
Consequently, Three Arrows Capital fell into liquidation, an individual with knowledge of the matter told CNBC this week.
The 3AC situation has exposed the highly leveraged nature of trading within the industry in recent times.
5. CoinFlex-‘Bitcoin Jesus’ spat
Cryptocurrency exchange CoinFlex halted customer withdrawals last month, citing “extreme market conditions” and a customers account that went into negative equity.
CoinFlex claimed that the shopper, whom it alleges is high-profile crypto investor Roger Ver, owes the corporate $47 million. Ver, who has the nickname “Bitcoin Jesus” for his evangelical views of the industry in its early days, denies that he owes CoinFlex money.
The exchange said that ordinarily, an account that goes into negative equity would have its positions liquidated. But CoinFlex and Ver had an agreement that didn’t allow this to occur.
CoinFlex issued a latest token called Recovery Value USD, or rvUSD, to lift the $47 million so it could possibly resume withdrawals, and is offering a 20% rate of interest for investors willing to purchase and hold the digital coin.
CEO Mark Lamb told CNBC this week that the corporate is talking to a variety of distressed debt funds to purchase the token. CoinFlex can be seeking to recoup the funds from Ver.