Lesser Evil? Terra and FTX’s Role in Bringing Down the Crypto Market

• FTX and Terra’s downfall made 2022 a difficult year for the crypto sector.
• On May 7, 2022, the default algorithmic stablecoin terraUSD (UST) fell rapidly to 35 cents, starting the Terra crisis.
• Nansen identified seven addresses that exploited the Terra ecosystem’s weaknesses.
• The Terra collapse affected firms like Celsius, 3AC, Hashed, and more.
• Last November, FTX’s leaked balance sheet revealed its mismanagement, deceit, illicit business activities, and diversion of user funds.
• A number of firms were affected by the fall of  FTX, including BlockFi, Genesis, and Galois Capital.
• More regulations will emerge by 2023 that may stabilize the industry and protect investors.

2022 will be a year to forget for the virtual assets sphere. Following the industry’s impressive growth in 2021, many predicted 2022 would also be prosperous. Some analysts even tipped BTC to hit a $100k price mark. 

But, throughout the year, the sphere suffered numerous setbacks. Setbacks that held back the industry’s growth and placed one of the most challenging tasks before it – rebuilding investors’ trust.

Among the numerous crises that made 2022 a miserable year for the industry is the sudden collapse of Terra and FTX.

The demise of the two projects hugely impacted the virtual assets sector, almost crumbling it. This is due to the huge influence of the two projects and the dependency of numerous firms on Terra and FTX.

Firms Within the Blasting Radius of Terra’s Demise

The whole Terra crisis started on May 7, 2022, when the price of the default algorithmic stablecoin terraUSD (UST) fell rapidly to 35 cents. UST is supposed to maintain a $1 peg. This sudden fall led to UST’s companion token, LUNA, slipping from $80 to below $1. The decline of the two tokens of Terra labs initiated what turned out to be a massacre of crypto firms.

According to blockchain analytics firm Nansen, seven addresses exploited the Terra ecosystem’s weaknesses to take advantage of arbitrage opportunities due to the low liquidity of the Curve (CRV) pools supporting the TerraUSD (UST) peg.

The perpetrators transferred Terra UST to Ethereum and exchanged them for other stablecoins in Curve’s liquidity pools. 

Nansen noted that some of the discovered wallets were able to benefit from price disparities on Curve and decentralized and centralized exchanges throughout the collapse of UST.

With the fall of Terra, crypto lender Celsius halted withdrawals due to its heavy stakes in LUNA. However, before then, Celsius had already promised depositors a 17% annum return and hoped to realize a 20% interest with the investment.

Also, Three Arrows Capital (3AC), a cryptocurrency hedge fund based in Singapore, suffered due to the demise of LUNA as the firm invested more than $200 million in the token. According to Chainalysis, the collapse of Celsius and 3AC cost investors about $33 billion. Meanwhile, the 3AC collapse affected Voyager due to its unsecured loan to the former. 

Another victim of the demise was Hashed, a Terra-supporting venture fund in Seoul, South Korea. The estimated loss of the firm was about $3.5 billion. Further, BlockFi was on the verge of bankruptcy due to the crisis of 3AC, but the firm got a saving grace from FTX.

Crypto firms like Crypto.com, Bybit, CoinFLEX, Venus, and Blizz Finance also suffered due to the crisis of Terra.  

As the demise of LUNA and UST affected many firms, BTC and ETH also suffered. Before the crisis, BTC was worth $39,000; seven days after the inception of the crisis, it fell to $29,000. ETH, on the other end, plummeted from $2,600 to $2,000 within seven days.

Impact of FTX Crisis on Crypto Firms

A leaked balance sheet revealed FTX’s mismanagement, deceit, illicit business activities, and the diversion of users’ funds that led to its collapse. On November 11th, the crypto exchange filed for bankruptcy protection. 

Without a doubt, the collapse of FTX affected numerous firms in what turned out to expand the longevity of the crypto winter.

The crisis of FTX affected over one million users. The FTX collapse started after Binance announced the sale of its portion of FTT tokens, citing a deficit in FTX’s sister company, Alameda. Many firms halted withdrawals in their platforms after FTX mismanagement of funds became public. 

Further, BlockFi is another firm that suffered casualties due to the FTX collapse, as it had received a $400 million credit facility from the crypto exchange. Following the ill situation of FTX, BlockFi halted withdrawals from its platform and filed for bankruptcy on November 28. 

Genesis is another firm affected by the collapse of FTX and reported having $175 million on the crypto exchange as of November 10. In addition, FTX’s crisis affected firms outside the crypto space, including hedge fund Galois Capital. The firm had significant exposure to FTX, which amounted to a $100 million loss.

Galaxy Digital, Multicoin Capital, Voyager, CoinShares, Crypto.com, Coinbase, Pantera Capital, and Celsius are some of the firms that suffered from the collapse of FTX.

The Lesser Evil: Terra or FTX?

Considering the number of firms that have financial exposure to the two firms and the impact of their respective collapse on the generality of the crypto space, Terra’s collapse is more devastating than FTX’s. 

According to reports from the bankruptcy proceedings of FTX, it became established that the downfall of the cryptocurrency exchange claimed about $9 billion of users’ funds. As a result of the implosion of UST, holders of the stablecoin lost $20.5 billion, bringing the total amount lost to $53.5 billion due to Terra’s demise.

Future of the Crypto Space in 2023

The year should be a consolidating one for the industry. By 2023, more regulations protecting the industry and investors will likely surface. 

It is expected that more friendly regulations will lead to more institutional funding and growth in the number of long-term retail investors, thus stabilizing the industry. The crypto sphere will likely rebuild its revenue through due regulation, hopefully leading to a strong recovery in 2023.

On the Flipside

• While the crypto sphere has seen bankruptcies, hacks, and downfalls this year, it has also seen many positives. In 2022, Ethereum Merge was finally completed after years of anticipation. Further, the year saw more development in some countries and institutions adopting digital assets.

Why You Should Care

Investors lost vast amounts of money due to the collapse of Terra-Luna and FTX. The disasters called for a more rigid regulatory framework for this industry to prevent investors from losing their investments. 

Senator Elizabeth Warren, for example, is urging Congress to pass new bipartisan legislation in response to the FTX crisis that would require crypto firms to follow the same rules as corporations and banks to combat money laundering through digital assets. We may see more such proposals in the coming months.

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