Crypto's Very Bad, No Good Year

the Bahamas earlier this week. SPF, as he's known, has now been charged by pretty much everyone, including the Securities and Exchange Commission and the Department of Justice, on allegations of everything from defrauding investors to com England customer funds. While the following episode unpacks the year's biggest stories, I would be remiss not to admit that this is perhaps the biggest of them all. We'll be covering spfs arrest and these charges against him in much more detail in

other episodes this week. Thanks for tuning in. It's safe to say two wasn't the best year the crypto. By late January, bitcoin had already shed half its value compares to the old times high set previously in November, and that number, if you remember, was nearly sixty dollars. Bitcoin prices then stayed on a downward trend. That trend accelerated after the first major crisis of the collapse of an

algorithmic stable coin called terra USD. Now, the implosion of what was once considered an ambitious experiment for defy sent shock waves through the industry, triggering the collapse of a crypto hedphone called Three Arrows Capital, which then led to bankruptcies that companies called Voyage of Digital and Celsius, and frankly, it was starting to feel a little bit like the

Hunger Games. Crypto CEOs and other senior executives racing for the exit, true believers getting into Twitter fights about whether centralization was the real enemy, all against this weird backdrop of conferences and parties where people were trying to rekindle enthusiasm for their board actions. It was a weird time. And then, most recently, and for a lot of us, most surprisingly, you had the collapse of one of the

most significant crypto exchanges in the sector FTX. Quite the air has not even done here to break down the year's biggest stories with me are Bloomberg Reports, has Voldona Hark. Crypto people like the idea of becoming more mainstream or just being able to be part of your everyday conversation and Emilina Cole high yields that Crypto had been advertising during this period of low interest rates in the real

real world to entire small people into the system. Those frequently and in a big ways, started to show cracks. Emily Voldona, what a pleasure to have you on the show. Thank you so much for having us. Emily. Can you just remind everybody what your actual job is, because I

feel like it's it's a little complicated. Yeah, so I'm technically the Bloomberg Crypto blogger, which is a real nice phrase, but it basically means that, in addition to doing news coverage on Crypto, a lot of what I do is analysis in terms of exactly helping we just understand what happened in this year, in particular what went wrong um and who the players were and how that might all

be interlinked across the whole year. Basically reminding you about, like here's the big news today and here's what you've forgotten already happened. That should give you all the context. Good Please remind me. But Vildonna, welcome back. What do you do? I love to be on this podcast specifically, that's my main job now. I'm actually a cross asset reporter, which when I tell people that, they always say, what

are cross assets? And I don't have a very good answer except that we cover all kinds of markets, including for me, the crypto market, which has been actually very fun and very rewarding over the last four or five years or so, because the stuff that happened in stin crypto is sometimes so much wilder than anything you can find in the stock market or the bond market, and it's sometimes very painful to go through, obviously for a lot of people, but it's been very very rewarding to

be covering and writing stories about. And you say this as a person who's covered some wild rides in stocks and bonds. Right, So, and one of the things that we're going to do in this episode is talking a little bit about what was happening in crypto and how that was informed by that broader macro context. But first, let's do some like do Do Do Do Do? Go Back in Time music. That's a really good soundtrack. Our sound engine is gonna be mad at me, but let's

go back in time. Because I feel like to start and to talk about what happened, we have to go back and specifically, we need to go back to the coin base i p Yes, what was going on around the time of the coin based i pod we thought twin twenty two years. Wild one also was very wild because we had just from the pandemic a huge stock market rally. We had prices of all manner of crypto things, including n f T s and stuff that we had never heard of before, skyrocketing in value. Everybody had laser

eyes on their Twitter profiles, which they've since removed. And with the around the coin based i p O, I mean, there was just a lot of excitement around it's coming out to the public, so to say, it was just very exciting for a lot of crypto people because crypto people like the idea of becoming more mainstream or just being able to be part of your everyday conversation. And coin base and obviously a lot of other developments sort

of helped that. But we we had very low interest rates and there was just a lot of speculation, a lot of froth, game stop and all of those sort of meme stocks. Everything was skyrocketing, including so much stuff in crypto mm hmm. And that was you know, April, there was a sense of optimism. Yes to the moon. We were like, this is everything is going great, you know. Fast forward a couple of months or several months to September,

El Salvador starts accepting bitcoin as legal tender. More enthusiasm, you know, the folks who were looking at bitcoin like, here's the first best example of an actual government, you know, a country taking this token seriously. Fast forward another couple of months, you have, as you mentioned, the hype around non fungible tokens culminated in every celebrity going on whatever nightly talk shows talking about how amazing their Ugo Labs board ape situation is. We get to November, bitcoin hits

an all time high. Yeah, and there was one more important thing that happened around then. In October, we had the first bitcoin futures et F and actually there are a couple of them, but when the first one debuted by pro Shares, it saw so much trade eating that it was just like for the record books basically, and it amassed more than a billion dollars in assets in

two days, which was also a record. So that also was you know, Bitcoin's price was hitting record highs around that time, and then in the weeks following it kept sort of hitting those highs until we got the almost sixty nine thou per coin number. So we're going into December. Everything in crypto is amazing, amazing crypto and the booming interesting look at bitcoins as well in the cryptocurrency space. Of course, this weekend, Emily, everyone paying attention to the

Super Bowl. It's super Bowl. One of the things that was remarkable is on hindsight is everything, but it was, you know, people were spending millions and millions of dollars on really splashy crypto advertising and the Super Bowl. Even if you don't care about football, American football specifically is a vehicle for kind of cultural commentary around ads, marketing, branding, sponsorship, and so much of that commentary was around crypto. Emily.

What happened right after that in March, I think probably the biggest thing that happened that month was the hack of a bridge connected to tax the Infinity, which was responsible for making sure that all the people who played Acts the Infinity, the boxing game could cash out their earnings because it was at that time very popular among people in lower income countries for earning a living, and for a long time they couldn't get any of their

money back. So that was the first I suppose ding on sentiment right, but it was because it was the first, it wasn't the worst. There was a sense of that seems bad. There's always stuff like that happening exactly, you know, it's like, well, yeah, it's a crypto hack. It's not ideal, but we'll we'll get through it. Then we started to have to know what an algorithmic stable coin is, and specifically terror u s D and its associated token Lunar terror USD and its sister token Luna lost their peg

to the dollar in the last few weeks. They had a spectacular meltdown, sending prices to near zero and their market value to a shadow of the combined Emily, why did so many folks need to care about that? So, Tara USC and Luna had been kind of the darlings of the defise sector for quite a few months eating up to that point, um there had been quite a

lot of noise going around about about Tara and Luna. Specifically, Galaxy Digitals billion I CEO Michael Neverbrat's got famously got a tattoo of a lunar wolf to show how much he cared about the cryptocurrency, and so when the two collapsed together in the space about a week, wiping about forty billion dollars in value, this was a sign that actually something in the market infrastructure in the way that crypto was being sold to people, as this like solve

all magical financial instrument, was not okay, and not everything was was going to be living up to the promises

that had been touted by its founders. So Terra as an indicator of sentiment was a huge deal, But it was also a huge deal in terms of the actual market consequences that accrued as this thing started to collapse, because it turned out, as we have reported, some of the biggest and supposedly smartest players in crypto were very very exposed to either the Terry USD stable coin itself, to other people who were exposed to the terror USD stable coin. Filed on and talk a little bit about

what it was like watching the collapse happen. After that, well, two things. Just one thing to just set the scene a little bit more. What we have happening this year, obviously, is the FED was raising interest rates, and that's really sort of put a damper on sentiment, not just in crypto,

but also in the stock market. The bond market also wasn't doing well at all during and so you had just people being very risk averse all year long, and that in particular, I would say, hit cryptocurrencies and all manner of cryptocurrencies and all manner of crypto offshoots and you know whatever else. And f t S also dropped,

I mean plummeted in in value. But to to your point about the interconnectedness and the big players that have been involved, these are people who had huge followings on Twitter, where a lot of crypto discourse happens, and they tweeted quite a bit about all kinds of stuff, sometimes sometimes at each other, and sort of started these feuds, which I'm sure we will talk a little bit more about as regards f t X, But it sort of just

started showing people just how interconnected all of these different companies were. Who was loaning money to whom, vice versa, who was buying what, And then once one sort of block in the domino fell, how it started impacting all sorts of other companies and everything was just very to Wolf, I can't believe you didn't go for one block in the chain, Oh gosh, this opportunity. Gosh, I'll kick myself

forever for that. Up next, more from Bloomberg reporters Voldana Harrig and Emily Nicole on the year's biggest headlines and what all of this news could mean for three We'll be right back, so, Emily, you know, to to Vldona's points, you have this interconnected web of relationships, many of whom are people who actively hate each other. What does that have to do with three Hours Capital? They had made some rather sizeable bets when it came to Tara and Luna.

So when the value of those holdings went to zero, um, the loans that have been extended to three Hours Capital, with which it made most of its trading, they were no longer able to meet those loans, and so when the margin calls came in, everything just basically collapsed and and that went down too. But being a hedge fund of thoughts at three hours Capital had clients. Many firms had either lended loan money to three hours or had

invested in it. And so therefore, as fil Downa described it as dominos, those sides fall too, and we get to now see the beginnings of this ripple effect that spreads out from almost like terrors the start of it, although obviously the market had already started to show signs of weakness before then. But as we go further and further out, even as far as like this month alone, we still have people saying, oh, and the knock on the market that happened with Terror is the reason why

we have losses today. Um, and that slowly started the web of bankruptcies that we're currently in. And when you talk about things like margin calls, counterparties, what you're describing is the fact that so many of these players all each other money. So you know, you could be hedge fund and you borrow money from this lender over here in order to do a trade on this other thing over here, and in order to do a trade on that thing, you had to put up some collateral. So

Three Arrows Falls files for bankruptcy in their week. A couple of other companies, one called Voyager, one called Celsius also file for bankruptcy, Celsius being perhaps the most consumer facing of the entities that have been caught up in this so far, because well, what was the Celsius business model? What did they do? So Celsius was in the business of giving people yields if you promised to lock up

your tokens with them. So if you think about it a little bit like a savings account, but you know, just without any of the banking licenses or regulators or any of the bits to protect you if the company goes under UM. And what it turned out is that if people had read the terms of service, they would have seen that. And actually this is pretty common and a lot of crypto company's terms of service as we

now know UM. If you gave your assets to Celsius, Celsius reserve the right to do or whatever it wanted with those assets. They no longer really belonged to you in any sense of the word. So when what they had done in order to generate those yields that it could pay back out was invest those tokens elsewhere rehypothication UM. And as a result, if some of that went in lunar,

that all went. If some of it went in something that was called staked ether um, that also started to show slight signs of discount from the price of main Either I won't get into the actual mechanics of it,

but basically that was unstable too UM. And so Eventually, the high yields that crypto had been advertising during this period of low interest rates in the real real world to entire small people into the system, those frequently and in big ways started to show cracks and signs of that they weren't able to sustain offering those yields anymore.

And now if you see platforms offering yields of I mean, eight percent is probably about the average now, but back then it was um that's also a massive warning sign to consumers that this is probably not something that can guarantee that yield for very long. And was on this how does this fit into the rising interest rate environment

that you described? Well, I think from because I talked to a lot of rad five people, traditional finance people too, and all along what they sort of as onlookers into the crypto world had been saying is these are warning signs. You can't just earn eight, ten, twenty percent just lending out your crypto holdings, that we're putting your money in some of these bank like products without there being just so much risk involved. And this sort of kept playing

out throughout the year. So we we saw it with Celsius and Voyager. Obviously, both of them going under, but then also later on with Gemini, and that also was a yield earning product where people had put in bitcoin or ether or some sort of stable coin and then the gem it was called Gemini earned, Gemini earned, would lend out those holdings and try to earn an interest in return for themselves. And those also have the withdrawals have been halted and book can't get their money back.

So another example of the ways in which the main streaming of crypto that you referred to at the beginning turned out to have pretty serious consequences for people in ways that they weren't necessarily expecting or hoping for. Now, in around October two, you know, a couple of months after these various thirty years ago, after these bankruptcies start getting filed, we published a story about the wave of

high ranking you know, executive suite departures. Vasan, I don't even know if you even remember, but you were like one of the people who wrote the story because like dozens of whether they are crypto CEUs or people in risk or heads of trading were either being downsized, right, so there were layoffs and they were part of them, or they were like I'm gonna go spend some more time with my yacht. YEP, that is a real thing

that I would love to not making that up. So, you know, you start to see this um sinking ship feeling sentiments and that that in and of itself. People are looking around and they're like, hang on a minute, why are all these people losing their jobs? Why are all these people quitting? There were very, very significantly off

at a lot of places. And then less than a month later is when we perhaps get into the part of the crisis that I'm not sure most people would have said, this is the next shoe to drop, and that shoe was the collapse of f t X and it's CEO and it's CEO Sam Bankman freed emily. If it were possible to summarize the state of things about how we got there, what would you say? So hind signe. So now my explanation will be covered by the facts that we know now compared to what we knew before.

F t X had its own native token called ftt and it appears that f t X belong with its sister trade platform, Alameda Research had been using that token for various purposes, but mainly one of those was at least at Alameda as collateral for loans that it had taken out to fund its trading activities. There are also some suggestions now and these are being investigated to the present as to whether or not f t X commingled customer assets with Alameda assets not to be able to

fund some of these trades as well. Um But in October some of this information was leaked into the press, and Finances CEO shangqung Zhao said that he would sell a very large portion of FTT because Finance was concerned

about how how stable that business was. And from there it took oh, i'd say less than two days until ft X then said okay, we are selling ourselves to Finance, and then less than twenty four hours again until Finance said sorry, no, we don't want that deal, and then another another twenty rouse until Alamidas Sam bankmin Freed said Alameda would wind itself down, and then another twenty four

hours until FTX was in bankruptcy. So between Sunday and Friday, one of the largest crypto exchanges that we have was gone. In other words, thirty years went by. That was during that week. That was quite a week. That was quite

a week. And you know, the thing, just the gloss I want to put on top of all of this is like, while all of this was happening, everything that we've just described, bank when Freed had been playing the part of rescuer in chief, right, So when the collapse of three Hourrows triggered the collapse of Celsius and Voyager and other companies, bankman Freed emerge and he's like, I will buy everyone, or at least you know, he will buy the ones that he could Abriese financing for and

be he thought was worth his and f t X as time. This was also a period in which there were intensive discussions around the world about how best to regulate crypto, and various crypto ceo saying all we want is notory clarity. Please give that to us. Here. We've written you proposals, so you know of which exactly of

which Sam was the face. You know, obviously you also had Brian Armstrong coin Base CEO being you know, represented in these conversations, and in the US, you have um CC of Finance being represented not in the US, but certainly in conversations and many other countries around the world. And now it's almost as if none of that happened. I think that the sort of the strangest thing about twenty two. It's not even that we're back where we're started.

It's like we're back into before the coin base. I P. Well, one, there's a lack of liquidity, Like the amount of trading that's happening in crypto has essentially fallen off a cliff, partly because some of the places people were trading on went bust. There is a real noticeable, shall we say, vibe shift in the sentiment for an industry that not super long ago was having debauched parties in Miami and now they're worrying about being summoned in front of you

senators and other types of investigators. And we have a definite change and tenor of the regulatory conversation because it's gone from how can we help this industry to succeed to how can we protect consumers? Emily, I want to make sure that you know, we don't only talk about what's been happening in the US. Tell us a little bit about how some of these things played out in the UK and Europe. Let's start with Europe because that's

the that's a little bit easier. The European Union has been working on a comprehensive crypto regime for a long time, and that was partly the the criticism of the EU earlier this year was that it had taken them so

long to get here UM. But in June they agreed the provisional steps for MIKA as it's known UM that would put in place some level of oversight of crypto companies and maybe a little bit of protection for for consumers in terms of just helping make sure that companies do as they say they do and are overseen properly

by local regulators. UM. There are things that are not included in there, which were some of the things that went wrong this year, like defy and staking and particular types of crypto assets, and so that will all have to come later, but the basics right UM, and that is due to be going through final agreement in February and come into force in mid four In the UK. However, there was some echoing at the start of this year about how, yes, crypto is going through a rough patch,

but you know there's there's still a dream to be had. UM. So we're going to become a global crypto hub and this was all in April under the chancellor at the time, Rasci Studac, and probably thereafter Rashi Sack resigned because there

was a very big political the government collapse. I'm trying to be polite about it, but basically we had no government for most of the summer UM and that meant that everything that had been suggested up until that point in terms of crypto regulations, so that's things like putting in place an oversight regime, UM, financial promotions rules, all of that got kicked to the side, including an n f T made our Royal mint who make our money UM.

And it's only now in November December time that we are starting to get back on track with the government that's in place, who looks to be staying around for more than forty four days, where we might be starting

to push ahead with some of that. So by the time this episode goes out, there will have been discussions in Parliament about the Financial Services a Market's Bill, which will put in place powers for our regulator to start thinking about how it can properly overseecrypto companies more than just checking they're not terrorist financing. And and next year we will start getting proposes as well on stable coins and other bits. But that's where we're at. We'll be

right back. The question that everybody asks me when they extract the information that I cover crypto for a living

is like, what's going to happen next? My my go to answer is if I knew that I would work for a hedge fund exactly, we'd also be parting on a yacht for sure, um in the Bahamas with everybody else who's parting on the yachts before those yachts get seized by the US government of the Singapore in the But I do think it is it is reasonable and Volton I will asked this, have you've just given the work that you do on the Crossassa team, what are like the big macro economic things that are on the

horizon ine that may inform, if nothing else at least the overall market environment that crypto folks are about to encounter.

Well for a long time, and we've talked about this before in this podcast, crypto and stocks basically traded the same way, So if one went up one day, likely the other one was also going up and vice versa, and the correlation was extremely high, and people basically talked about is about this all all year long, and then what has happened with f t X and the aftermath of that is that those correlations actually became a bit uncoupled, so they're not necessarily eating in the same way. They're

not treating in tandem anymore. And the idea is just that the trust within crypto has really broken. People just have much less faith in the system. They have less faith in I mean just about anything within crypto. They're just less trustworthy and and potentially like going forward, people will once again start thinking about some of the macro forces that are impacting both markets, both the stock market

and the crypto market. But right now it seems to be sort of on its own, as everybody's just waiting to see what the next thing to happen will be.

If we do return to this idea that macro forces are impacting crypto in the same way that they did for most of two then again we'll have to go back to the FED and what the FED is going to be doing, where they've sort of signaled to markets that they'll just be less aggressive than they've been earlier this year, where they were doing these jumble interest eight hikes, and that really was putting a damper on sentiments. So if they're less aggressive, potentially you could have riskier assets

doing a little bit better. But there is so much more that people are waiting to unfold it within crypto itself that could really impact prices. Still, well, thank you, Emily, Thank you Aldana. See you in another thirty years or so. Yeah, that sounds great, Thanks so much for having it. You can find more of Vildonna and Emily's reporting on the Bloomberg Terminal and on Bloomberg dot com, and definitely be sure to check out for and subscribe to it twice

weekly news lesso, which is also called Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Vergolina. Our senior producer is Janet Babin. Our producers are Mohammed Farouk and

Sharon Barriro. Our associate producers are Ty Butler and Moses on them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie schmal We'll be back tomorrow.