What Happened in the Crypto Market Crash and What Now?
The Tumultuous Crypto Landscape: Trapped Capital and Financial Turmoil
The crypto market has had a tumultuous history, with numerous exchange collapses, stablecoin collapses, hacks, and other adverse events that have contributed to the market's current state. The result of these damaging events is that retail investors, companies, and full institutions have capital either entirely lost or trapped within one of the failed exchanges. This post aims to provide a brief overview of where we are now, and how we got here.
FTX Collapse and the Domino Effect on the Crypto Industry
One of the most significant recent events was the collapse of FTX, an exchange operated by Sam Bankman-Fried, who also runs a separate firm called Alameda Research. A balance sheet released in November 2022 revealed that many of Alameda's purchases were made using FTT, a cryptocurrency created and operated by FTX, which meant that Bankman-Fried was essentially gambling with his customers' money.This revelation prompted a sell-off of FTT assets by Binance, FTX's biggest rival, and other FTT owners, leading to a bank run scenario. As a result, more than a million FTX customers have been unable to access their money since November 8, and FTX filed for bankruptcy on November 11.
However, FTX's collapse was not an isolated event, and it triggered a domino effect on other exchanges and cryptocurrencies. For example, crypto lender BlockFi filed for bankruptcy in November 2022, and the Kraken crypto exchange had to cut about 30% of its staff to avoid bankruptcy. This market crisis is likely to continue well into 2023.
An additional contributing factor in the 2022 crypto crash was caused in part by the United States Federal Reserve's efforts to control inflation. When the Fed raises interest rates to make saving more attractive than spending, investors move their money from risky bets like crypto to safer bets like U.S. treasury bonds. Even stablecoins, which are supposed to be a safer form of cryptocurrency, come with risk. One popular stablecoin, TerraUSD, was supposed to always be worth exactly the same as the U.S. dollar, but its complicated algorithmic background still caused it to crash.
It is too soon to say what knock-on effects the FTX collapse will have on crypto as a whole. Some experts believe that it will have a limited impact, while others suggest that it could serve as crypto's "Lehman Brothers" moment. The collapse could benefit crypto if it forces the industry to accept regulations that bolster consumer confidence. What we do know is that the cryptocurrency market cap has fallen from a high of over $3tn in November 2021 to $904bn in November 2022.
Recovering Lost Capital through Claims Markets
However, despite the market's decline, people with money trapped in exchanges still have recourse for their capital through claims markets. These markets allow people to buy and sell claims to lost or trapped assets, which can help them recoup some of their losses. One such platform to easily get an assessment on the value of your claim and begin the process of selling it is claimsfix.com, a subsidiary of web3 studios. Feel free to reach out if you have any questions.
