Bitcoin (BTC) has the worst quarter in more than a decade: 5 reasons
Macroeconomic pressure
During the quarter, the US Federal Reserve implemented two aggressive rate hikes to combat sharp inflation. It has triggered fears of a recession in the United States and other countries.
It has also hit stocks, especially high-growth technology names. The technology-heavy Nasdaq Composite is down 22.4% for the second quarter, the worst quarterly result since 2008.
Bitcoin has been closely correlated with the price movement of US stock indices. The sale of shares has weighed on bitcoin and the crypto market as investors dump risky assets.
2. TerraUSD collapse
The first major episode last quarter was the collapse of the algorithmic stablecoin terraUSD and sister token luna that sent shock waves through the industry.
A stablecoin is a type of cryptocurrency that is usually linked to a fair value. TerraUSD, or UST, was meant to be linked one-to-one with the US dollar. Some stack coins are backed by real assets such as fiat currencies or government bonds. But UST was governed by an algorithm and a complex system for burning and minting coins.
That system failed. TerraUSD lost its dollar bond and led to the demise of the associated token luna, which became worthless.
The episode resonated throughout the industry and had spill-over effects, particularly on cryptocurrency hedge fund Three Arrows Capital, which had exposure to terraUSD (more on this below.)
Lender Celsius breaks withdrawals
Crypto lender Celsius stopped withdrawals for customers in June.
The company offered users a return of more than 18% if they deposit cryptocurrency with Celsius. They then lent the money to players in the crypto market who were willing to pay a high interest rate to borrow the money.
But the fall in prices put that model to the test. Celsius cited “extreme market conditions” as the reason for pausing withdrawals.
On Thursday, Celsius said in a blog post that it took “important steps to preserve and protect assets and explore options available to us.”
These options include “pursuing strategic transactions as well as restructuring our commitments, among other avenues.”
The problems with Celsius revealed the weakness of many of the lending models used in the cryptocurrency industry, which gave users high returns.
4. Three Arrows Capital Settlement
Three Arrows Capital is one of the most prominent hedge funds with a focus on cryptocurrency investments.
The ten-year-old company, also known as 3AC, started by Zhu Su and Kyle Davies, is known for its highly leveraged bullish games in 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 cryptocurrency lenders BlockFi and Genesis liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi, but failed to meet the margin requirement.
A margin call is a situation where an investor must commit to more funds to avoid losing a trade made with borrowed money.
At that time, 3AC defaulted on a loan worth more than $ 660 million from Voyager Digital.
As a result, Three Arrows Capital fell into liquidation, a person with knowledge of the case told CNBC this week.
The 3AC situation has revealed the highly leveraged nature of trading in the industry in recent times.
5. CoinFlex-‘Bitcoin Jesus’ spat
Cryptocurrency exchange CoinFlex stopped customer withdrawals last month, citing “extreme market conditions” and a customer account that went into negative equity.
CoinFlex claimed that the customer, who it claims is the high-profile crypto investor Roger Ver, owes the company $ 47 million. Ver, nicknamed “Bitcoin Jesus” for his evangelical view of the industry in its early days, denies that he owes CoinFlex money.
Oslo Børs said that usually an account that goes into negative equity will have its positions liquidated. But CoinFlex and Ver had an agreement that did not allow this.
CoinFlex issued a new token called Recovery Value USD, or rvUSD, to raise $ 47 million so it can resume withdrawals, 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 talking to a number of distressed debt funds to buy the token. CoinFlex is also looking to get the funds back from Ver.
