1. Macroeconomic pressures
During the quarter, the US Federal Reserve made two aggressive interest rate hikes to combat rampant inflation. This raised fears of a recession in the US and other countries.
It also hit stocks, particularly high-growth tech names. The tech Nasdaq Composite fell 22.4% in the second quarter, its worst quarterly performance since 2008.
Bitcoin is closely linked to the price movements of US stock indices. A selloff in stocks weighed on the bitcoin and crypto markets as investors dumped risky assets.
2. TerraUSD crash
The first major episode last quarter was the collapse of algorithmic stablecoin terraUSD and sister token luna, which sent shockwaves through the industry.
A stablecoin is a type of cryptocurrency, usually tied to a real-world asset. TerraUSD, or UST, was supposed to be pegged one-to-one with the US dollar. Some stablecoins are backed by real assets such as fiat currency or government bonds. But UST was governed by an algorithm and a complex system of burning and minting coins.
This system has failed. TerraUSD lost its pegged dollar and led to the death of the associated luna token, 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 that below.)
3. Lender Celsius stops withdrawals
Crypto lender Celsius paused customer withdrawals in June.
The company offered users a return of over 18% if they deposit cryptocurrency with Celsius. It then lent that money to crypto market players who were willing to pay a high interest rate to borrow the money.
But falling prices put that model to the test. Celsius cited “extreme market conditions” as the reason for halting withdrawals.
On Thursday, Celsius said in a blog post that it was taking “important steps to preserve and protect assets and explore the options available to us.”
Those options include “pursuing strategic transactions as well as restructuring our liabilities, among other avenues.”
The problems with Celsius exposed the weakness of many of the lending models used in the cryptocurrency industry that offered users high returns.
4. Liquidation of Three Arrows Capital
Three Arrows Capital is one of the most prominent hedge funds focused on cryptocurrency investments.
The decade-old firm, also known as 3AC, founded by Zhu Su and Kyle Davies, is known 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 US-based cryptocurrencies BlockFi and Genesis had liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC borrowed from BlockFi but failed to meet the margin call.
A margin requirement is a situation where an investor must commit more funds to avoid losses on a trade made with borrowed money.
3AC then defaulted on a loan worth more than $660 million from Voyager Digital.
As a result, Three Arrows Capital went into liquidation, a person familiar with the matter told CNBC this week.
The 3AC situation exposed the highly leveraged nature of industry trading in recent times.
5. CoinFlex – “Bitcoin Jesus” spit
Cryptocurrency exchange CoinFlex suspended customer withdrawals last month, citing “extreme market conditions” and a customer account that went into negative equity.
CoinFlex claims that the customer, who is said to be high-profile crypto investor Roger Ver, owes the company $47 million. Ware, nicknamed “Bitcoin Jesus” for his evangelical views on the industry in its early days, denies owing CoinFlex any money.
The exchange said that normally the positions of an account that goes into negative equity will be liquidated. But CoinFlex and Ver had an agreement that prevented that from happening.
CoinFlex issued a new token called Recovery Value USD, or rvUSD, to raise $47 million to be able to resume withdrawals, and is offering a 20% interest rate for investors willing to buy and hold the digital coin.
CEO Mark Lamb told CNBC this week that the company is in talks with a number of distressed debt funds to buy the token. CoinFlex also seeks to recover funds from Ver.