There are two words on every investor's lips.
Since the start of the year, Cryptocurrencies have lost $2 trillion in value.
The world's biggest digital coin is off 70% from its all time high.
Many experts have warned of a bear market known as the "Crypto winter". There was a last event between the years of 2017:
There is something different about the latest crash that makes it different from previous downturns in the industry, because of the nature of the events that have happened.
After a steep climb in the beginning of the year, the value of bitcoin and other token plummeted.
The market was flooded with initial coin offerings, where people poured money into projects that ended up failing.
According to Clara Medalie, research director at Kaiko, the crash was caused by the burst of a hype bubble.
The current crash began earlier this year as a result of macroeconomic factors, including rampant inflation that has caused the U.S. Federal Reserve and other central banks to raise interest rates. In the last cycle, these factors were absent.
The market forcryptocurrencies has been correlated with other risk assets. The second quarter of the year was the worst in more than a decade for the digital currency. The tech-laden index fell more than 22%.
Many in the industry were surprised by the sudden reversal of the market.
As markets started selling off, it became clear that many large entities were not prepared for the rapid reversal
Carol Alexander, professor of finance at Sussex University, said that there weren't big Wall Street players using "highly leveraged positions" in the past two years.
The most significant losses suffered by novice traders were caused by promises of high returns.
Since the last bear market, a lot has changed.
We don't know how we got here.
TerraUSD was a type of coin that was supposed to be pegged to the US dollar. A complex mechanism governed by an algorithm was used to work. The collapse of luna was caused by the loss of the dollar peg.
This sent shock waves through the industry but also had knock on effects to companies that are exposed to UST.
The collapse of the Terra and UST stable coins was a surprise.
The emergence of centralized lending schemes and so-called "decentralized finance" helped build up huge amounts of leverage for cryptocurrencies.
The nature of leverage has changed. Martin Green, CEO of quant trading firm Cambrian Asset Management, said that leverage was mostly given to retail investors via derivatives on cryptocurrencies.
Retail investors were forced to sell their positions on exchanges because they couldn't meet margin calls, which caused the decline in the market.
The forced selling that took place in Q2 2022, was caused by retail depositors who were investing for yield, according to Green. There was a huge build out of yield-based DeFi andcryptocurrencies.
There was a lot of undercollateralized lending as credit risks were not assessed with vigilance.
An investor has to commit more funds to avoid losses on a trade made with borrowed cash.
The inability to meet margin calls has lead to further spread.
The recent turmoil incryptocurrencies is due to the exposure of many firms to risky bets that were vulnerable to attack, according to Alexander.
There are some high-profile examples of how this can play out.
The company paused withdrawals for customers last month because they offered users yields of more than 18%. Celsius was similar to a bank. It would lend the money to other players at a high rate. It would be used by the other players. The profit from the yield would be used to repay investors.
The business model was tested when the downturn hit. In order to stop a bank run, Celsius has had to stop withdrawals.
The lending platforms used the funds they raised to make highly risky investments and how else could they pay such high interest rates?
There is a problem that has become apparent recently, which is how much loans are taken from each other.
One of the biggest victims of the market downturn has been Three Arrows Capital. 3AC lost money after the collapse of UST. According to the Financial Times, 3AC failed to meet a margin call from BlockFi and had its positions liquidate.
The hedge fund was in default on a large loan.
3AC went bankrupt under Chapter 15 of the U.S. Bankruptcy Code.
During the market crash, Three Arrows Capital's highly-leveraged and bullish bets oncryptocurrencies came undone, showing how business models come under the pump.
There was more of a spread of the disease.
According to the firm, it owes Sam Bankman- Fried's Alameda Research $75 million and also $377 million.
Alameda has a stake in the company.
Kaiko's Medalie said that June and Q2 were difficult for the market due to the collapse of 3AC and poor risk management.
Nearly every large centralized lender failed to properly manage risk, which led to the collapse of a single entity. Following the collapse of the market, 3AC took out loans from nearly every lender they could not repay.
It is not known when the market turbulence will end. Analysts think that there will be more pain in the future as firms struggle to pay down their debts.
James Butterfill is the head of research at coinShares.
Butterfill said that they felt that this pain would spill over to the exchange industry. The crowded market and the exchange's reliance on economies of scale are likely to highlight further casualties.
The decline of the markets has impacted established players. The company laid off 18% of its workers last month. There has been a collapse in trading volumes on the U.S.cryptocurrencies exchange.
Butterfill said that specialized computing equipment used to settle transactions on the block chain could be in trouble.
He said in a note last week that there have been examples of potential stress where miners have not paid their electricity bills.
Some miners are selling their holdings
The role played by miners comes at a heavy price, not just for the gear itself, but for a continuous flow of electricity needed to keep their machines running.
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