A Closer Look at The Crypto Crash of 2022

Despite games like Hate Race gaining traction, the crypto market took a downturn this year. Why did that happen? Should you be worried? We will tell you everything in this article, so strap in.

Why Did It Happen?

There was a general fall in the stock market, notably in the IT sector. With that, the crypto markets were already being impacted. As benchmark interest rates rise and the assets they’ve amassed over the last two years are sold, other investors are being prompted to sell more risky investments, such as cryptocurrencies.

UST, an algorithmic stablecoin, lost its dollar peg in early May as a result of this macroeconomic climate. Due to Terraform Labs’ backing and their use of Terra’s blockchain, UST and Luna were linked. The non-profit Luna Foundation Guard loaned out $1.5 billion in Bitcoin and UST to try to stabilize the currencies.

There was no immediate success with the UST rescue plan, but it contributed to the selling pressure on Bitcoin, which has been hovering around $30,000, significantly below its November top of $67,000 and 30% below its price in late April.

What Exactly Happened?

It’s important to understand that the dollar peg of UST will be supported by automatic trading systems that create and destroy UST and attempt to keep the currency’s value steady over time. As UST’s value declined, several programs aimed to produce more Luna. Terra’s blockchain, on the other hand, could not handle the volume of transactions required to keep the peg – a fact that traders took advantage of, driving Luna’s value lower.

As a result of the circumstances, the Terra blockchain shut down and restarted itself again and again, but it could not salvage the situation. Do Kwon, the co-founder of Terraform Labs, advocated restarting the project by turning over governance to UST and Luna shareholders.

The meltdown served as a stark reminder of the dangers of crypto-equivalent bank runs, particularly on stablecoins. Since regulators first raised the alarm about the potential for financial system instability, Treasury Secretary Janet Yellen has repeatedly brought up the UST issue during Senate hearings.

What Else Is at Risk?

It was a bumpy ride for Tether, the world’s most valuable stablecoin, recently, as it briefly lost its peg before rebounding. The second-largest stablecoin, USDC, has held its $1 peg. Both stablecoins are backed by substantial reserves, mostly commercial paper and U.S. Treasuries, unlike the UST. 

Critics have slammed Tether coin’s backers for not disclosing enough information about their holdings. Circle, a key contributor to USDC, has committed to disclosing information on its reserves and SEC filings as part of a bid to go public through a merger with another company called SPAC.

Are Regulations Gathering on The Horizon?

Cryptocurrency’s rapid rise has prompted regulators, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Treasury Department, to raise their concerns. The US president signed an executive order on cryptography in March that stated the need to safeguard consumers, investors, and businesses while noting that the United States must lead the world in blockchain and crypto technologies.

The SEC and other major authorities have begun enforcing new regulations and even threatening legal action against cryptocurrency companies. As a result, it is envisaged that the development of new regulations and even legislation relating to crypto would take years.

Regulation of the crypto industry is also being considered by various governments throughout the world, including the United Kingdom, the European Union, and others.

So, What’s the Outlook?

The tech industry as a whole is currently slowing down, and crypto is no exception. No matter how dovish the Fed becomes, the unwinding will continue for several more quarters. Experts have encouraged startups to have enough cash to endure at least two and a half years because the extent of the downturn is unknown at this point.

The topics of discussion have shifted substantially during numerous sessions of startup boards. Board meetings have already shifted from discussing slowing down their hiring to forcing layoffs to recuperate losses.

Even if there is more destruction to come, cryptocurrency will have a greater development potential than other sectors thanks to the innovative applications for it that may arise even in bad economic circumstances.

The Bitcoin network’s hash rate, a measure of the computer power used to verify and record transactions, has reached new highs despite the decline in Bitcoin’s price.

What Should You Do?

There hasn’t been a significant crypto winter since 2018 when Bitcoin dropped below $5,000, not $0. Bitcoin was mined in 2009, and the cryptocurrency market has been through multiple cycles since then. So, if you’ve been through all of those dips, you’ll make it through this one as well. Crypto is going nowhere.