Bitcoin (BTC) posts worst quarter in over a decade: 5 reasons why

1. Macroeconomic pressure

During the quarter, the US Federal Reserve made two aggressive rate hikes to combat widespread inflation. This has sparked recession fears in the US and other countries.

It also hit stocks, especially fast-growing tech names. The tech-heavy Nasdaq Composite posted its worst quarterly performance since 2008, down 22.4% in the second quarter.

Bitcoin is closely associated with the price action of US stock indices. Stock sales weighed on bitcoin and the crypto market as investors abandoned risky assets.

2. TerraUSD crash

The first major event last quarter was the collapse of the algorithmic stablecoin terraUSD and sister token luna, which sent shockwaves through the industry.

A stablecoin is a type of cryptocurrency that is usually pegged 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 the UST was governed by an algorithm and a complex coin burning and minting system.

That system has failed. TerraUSD lost the dollar rate and brought the demise of its associated token luna, which became worthless.

The episode resonated with the industry and had on-chain effects, notably on Three Arrows Capital, cryptocurrency hedge funds exposed to terraUSD (more on that below).

3. Lender Celsius pauses withdrawals

Crypto lender Celsius paused withdrawals for customers in June.

The company has offered users more than 18% returns if they deposit crypto with Celsius. He then lent this money to players willing to pay a high interest rate to borrow money in the crypto market.

But the price drop has put this 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 was “taking significant steps to protect and preserve assets and explore the options at our disposal.”

These options include “restructuring our debts alongside strategic actions, among other avenues.”

The problems with Celsius exposed the weakness of many of the credit models used in the cryptocurrency industry, which offer high returns to users.

4. Three Arrows Capital liquidation

Three Arrows Capital is one of the foremost hedge funds focused on cryptocurrency investments.

The decade-old firm, also known as 3AC, started by Zhu Su and Kyle Davies, is known for its highly leveraged bullish bets in the crypto market.

3AC was exposed to the crashed algorithmic stablecoin terraUSD and sister token luna.

The Financial Times reported last month that US-based crypto lenders BlockFi and Genesis are liquidating some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but failed to meet its margin call.

A margin call is a situation where an investor has to commit more funds to avoid loss on a borrowed money trade.

Then 3AC defaulted on a loan of more than $660 million from Voyager Digital.

As a result, Three Arrows Capital went into liquidation, one person with knowledge of the matter told CNBC this week.

The 3AC situation has recently revealed the highly leveraged nature of trade in the industry.

5. CoinFlex-‘Bitcoin Jesus’ controversy

Cryptocurrency exchange CoinFlex stopped customer withdrawals last month, citing “extreme market conditions” and a client account that went into negative equity.

CoinFlex has claimed that the client, which it claims is high-profile crypto investor Roger Ver, owes the company $47 million. Nicknamed “Bitcoin Jesus” in its early days for his evangelical views towards the industry, Ver denies any debt to CoinFlex.

Normally, positions for an account that goes to negative equity will be liquidated, the exchange said. However, CoinFlex and Ver have reached an agreement that does not allow this to happen.

CoinFlex has issued a new token called Recovery Value USD or rvUSD to raise $47 million so it can continue withdrawals, offering a 20% interest rate to investors looking to buy and hold the digital currency.

CEO Mark Lamb told CNBC this week that the company has spoken to a number of distressed debt funds to purchase the token. CoinFlex is also looking to recoup funds from Ver.

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