LUNA, FTX & the Year Crypto Broke

LUNA died. FTX imploded. Trust in crypto hit rock bottom.

LUNA + FTX collapse

2022 was the year crypto discovered that its biggest enemies were already inside the building.

The crash didn't have one cause. It was a chain reaction. Dominos falling into dominos. Each collapse revealed the next fraud, and each fraud dragged down more companies.

It started with LUNA and UST in May. Do Kwon's algorithmic stablecoin lost its peg and entered a death spiral that erased $40 billion in value within 72 hours. That alone would have been the biggest disaster in crypto history.

But LUNA's collapse exposed Three Arrows Capital (3AC), a hedge fund that had borrowed billions from across the industry. 3AC had massive positions in LUNA that went to zero. When they couldn't meet their margin calls, they defaulted on loans from Celsius, Voyager, BlockFi, and a dozen other lenders.

Celsius froze customer withdrawals on June 12. Voyager filed for bankruptcy on July 5. BlockFi scrambled for a bailout and got one from FTX. Which would have been fine, except that FTX itself was a house of cards.

On November 2, CoinDesk published a leaked balance sheet showing Alameda Research, SBF's trading firm, was insolvent and propped up by FTT, a token FTX had created. Binance's CZ announced he was dumping his FTT. The bank run started. Five days later, FTX was bankrupt and $8 billion in customer funds were gone.

Bitcoin went from $48,000 in January to $15,500 in November. A 68% crash. But the price drop was almost secondary to the damage to trust. Every major lending platform had failed. The second-largest exchange was a fraud. The "next generation of finance" looked like a series of interconnected Ponzi schemes.

It took 14 months for the market to recover. When it did, the catalyst was something nobody in crypto had expected: a Bitcoin ETF approved by the SEC. Wall Street saved crypto from itself.