What is happening with cryptocurrencies?

The cryptocurrency market is in a major slump. After a series of previous setbacks, FTX’s fall destroyed confidence in the market and evaporated billions in investments. What happens?

Anyone even remotely involved in cryptocurrencies has noticed that the market has taken a big hit this year. Last summer, a decline was already noticeable after the implosion of algorithmic stablecoin TerraUSD. This was used by investors in, for example, decentralized finance (DeFi). Therefore, the currency was of great importance to investment parties who see a future in DeFi.

Spectacular autumn

The stablecoin proved to be built on a quagmire when the underlying token, Luna, began to falter. TerraUSD fluctuated just below the dollar, as it should with a stablecoin. But in May the currency fell to around ten cents. Underlying token Luna experienced a spectacular decline. Luna was worth more than 100 euros at its peak, but now trades for a fraction of a cent.

The market impact was dramatic: all cryptocurrencies were hit, from stablecoins to figureheads like bitcoin (BTC) and ether (ETH). The founder of TerraUSD dismissed critics of the algorithmic system, which has never worked in practice, as stupid people who did not sufficiently understand the project. South Korea has issued an arrest warrant, but founder Do Kwon has since gone into hiding. A co-founder’s assets, reportedly about $100 million, have been frozen pending legal action.

Concern about Tether

At the beginning of May, bitcoin was worth around 36,000 euros. After TerraUSD’s fall shook the entire market, bitcoin hovered around 20,000 euros after the summer until this month. One of the consequences of the crash was that crypto lender Celcius went under last summer. And Celcius had another billion-dollar line of credit with the company behind another major stablecoin, Tether. But that loan was quickly liquidated without loss, said the CTO.

Exactly how this happens is unclear. Owner Bitfinex is never generous with information or transparent in its actions. Bloomberg did extensive research into Tether last year and discovered that a company running would have its affairs in order according to anecdotes from those involved, but that cannot be verified numerically. Bloomberg wondered about people’s willingness to invest in such an opaque venture. “It was hard to believe that people were pouring $69 billion into a company that was almost riddled with red flags,” the news site wrote. Tether’s evasion is making investors nervous as any fall in Tether would be a very hard blow to the crypto services ecosystem.

Crypto exchange is disappearing

The market remained fairly stable during the months of July to October, but it remained a bearish market. At the beginning of November, there was another bigger dip than the normal up-and-down. At the time of writing, one bitcoin costs around 16,000 euros. This has to do with the bankruptcy of major cryptocurrency exchange FTX. Blockchain-based currencies were traded on FTX. Not only that, FTX was seen as the largest, stable, future-oriented organization in the sector and attracted media attention and large investment lots.

FTX was previously valued at around $32 billion and was the figurehead of a new kind of economy. The unexpected drop in FTX came as a big shock and again this year the market took a beating. The end of that shock wave is not yet in sight. Crypto trader Genesis Global Capital, also an established party among major investors, is looking for a billion dollar capital injection to keep its doors open. The collapse of FTX caused an acute liquidity problem at Genesis. Analysts believe that if Genesis goes down, it will be an even bigger blow to the crypto market than the FTX debacle.

Founder in trouble

Much has been said and written about FTX in recent weeks. Most notable is Sam Bankman-Fried, the founder who is now often mentioned in the same breath as tech founder Elizabeth Holmes. This month she was sentenced to 11 years in prison for fraud. She was also seen as a genius in the tech sector before everything collapsed like a house of cards. Bankman-Fried, also known as SBF, seems destined for that fate. Public prosecutors are already sharpening the knives, and the stock market watchdog SEC is investigating how the company handled customer funds. Stories of large amounts of money being siphoned out of the company just before bankruptcy trickle out, shady loans for flashy details of a luxurious lifestyle trickle out.

Sam Bankman-Fried, a graduate of the prestigious MIT University of Technology, has been hailed as a crypto genius and by Forbes as the new Warren Buffet. Big investors invested hundreds of millions in the stock market because vision of the future of money van Bankman-Fried convinced many serious parties. But now there is very little left of it. “A closer look reveals that the entire front basically amounts to three children in overcoats pretending to be adults,” British newspaper The Guardian wrote in its analysis.

No due diligence

Investment firm Sequoia invested $2 billion in FTX and was forced to write off $150 million earlier this month when the exchange filed for bankruptcy. Customers were outraged and wondered how such a serious party had not carried out due diligence that would have revealed the solvency problems sooner. According to Sequoia, due diligence had indeed been carried out, but it did not show what FTX had been up to.

But the famous investment firm is said to have been too eager to invest in the cryptocurrency king and neglected internal controls or external oversight. After all, Sequoia was forced to put on the penitent just days after defending itself against allegations of ignoring financial regulations. The investment company promised to do due diligence for investments in startups from now on with one of the big four accounting firms.

Complete failure of company control

The CEO who succeeded Bankman-Fried says in a bankruptcy filing that all internal and external control resources were lacking. “Never in my career have I seen such a complete failure of corporate control and such a complete absence of reliable financial information as occurred here,” said John J. Ray III. He has previously handled the infamous downfall of the energy company Enron. That company was followed by accounting scandals, but it was apparently nothing compared to the general lack of financial responsibility at FTX.

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