This article aims to provide insight into the impact of the cryptocurrency contagion of 2022. If you are unfamiliar with cryptocurrencies, consider reading our introductory article on it. You might also want to read our articles on CeFi vs. DeFi, the UST depeg, and our Insights piece covering a wrap-up of 2022 and an outlook of 2023 in crypto.

Read Part 2 here!

The 2022 Crypto Contagion 

2022 saw the collapse of some of the largest players in the cryptocurrency space. In mid-2022, the crash of Terra LUNA triggered a domino effect that resulted in companies including Three Arrows Capital (3AC), Voyager Digital, and Celsius declaring bankruptcy. The market was recovering, but towards the latter half of 2022, FTX and Alameda Research’s collapse triggered a further domino effect. Companies like BlockFi have declared bankruptcy, while companies like Gemini and Digital Currency Group (DCG) are now facing liquidity issues.

timeline of 2022 crypto contagion

Terra LUNA 

Introduction to Terra 

Founded by Do Kwon and Daniel Shin in 2018, Terra was a Cosmos-based blockchain network that aimed to power the next generation of global payments through decentralized stablecoins, and applications built atop to drive demand for these stablecoins. LUNA, its native token, was used as the utility and governance token, as well as to maintain the price peg of the stablecoins.

Introduction to Terra Stablecoins 

The supply and peg of stablecoins on Terra were controlled and maintained algorithmically. Each stablecoin was backed by and exchangeable for LUNA, with Terra acting as a counterparty for anyone looking to swap their stablecoins for LUNA and vice versa. 

TerraUSD (UST)

UST, Terra’s USD-pegged stablecoin, quickly grew in popularity, reaching a market capitalization of ~US$19B before the crash and was the third-largest stablecoin after Tether’s USDT and Circle’s USDC. Users could mint UST by swapping an equivalent dollar value of LUNA, and these LUNA would be burned by Terra. Conversely, users could also mint LUNA with UST, where the UST will be burned. This exchange mechanism helped UST to maintain its price stability. Although UST was listed on all major exchanges, including Coinbase, Binance, FTX, and Kucoin, most of UST’s demand came from a single DeFi protocol on Terra, which held more than 70% of UST’s circulating supply—Anchor Protocol. 

Learn more about the role of stablecoins in crypto here.

Introduction to Luna Foundation Guard (LFG) 

LFG was a non-profit organization formed in January 2022, dedicated to supporting the advancement of open-source technology, facilitating the growth of the Terra ecosystem, and improving the sustainability and stability of Terra’s algorithmic stablecoins. In February 2022, LFG raised US$1B through a token sale of LUNA and a token swap of Bitcoin (BTC) for UST. The round, led by Genesis and Three Arrows Capital (3AC), was to supplement the UST Forex Reserve, a pool of BTC designed as an additional layer of support for UST. The reserve diversified the ecosystem from Terra assets, providing “a release valve for the redemptions of UST and allowing LFG to dip into it for market stabilization in case of sell-offs. 

The Crash of UST and LUNA

On 7 May 2022, Terraform Labs withdrew US$150M UST from a trading pool on Curve Finance in preparation for Curve’s 4pool launch. The moment they made that withdrawal, an unknown whale sold US$350M UST for USDC on Curve, pushing UST slightly below its peg. This led to individuals and institutions with UST exposure pulling their assets out of Anchor. A total of US$9B of the US$14B UST on Anchor was withdrawn within 48 hours of UST dipping from its dollar peg, causing UST to significantly lose its peg

Read more about the UST depeg here.

With UST trading below US$1, market participants started burning UST to mint LUNA, selling it immediately for a quick profit. Prior to this, LUNA had already been falling due to poor crypto market conditions. This additional sell pressure and increase in circulating supply caused its price to crash until its market cap fell below that of UST, kicking off the death spiral. LUNA’s freefall meant that Terra was under threat as attackers could act as validators to manipulate the governance proposals that were passed to stop the bleeding. Terra’s validators agreed to halt the chain to prevent governance attacks while LFG aggressively sold >80K BTC on the spot market in an attempt to restore UST’s peg. On 13 May 2022, both LUNA and UST flatlined, leading to an accumulative loss of US$40B.

Three Arrows Capital (3AC)

Introduction to 3AC

Founded in 2012 by Su Zhu and Kyle Davies, 3AC was a crypto hedge fund that aimed to “provide superior risk-adjusted returns”. In 2018, the crash of BTC from an all-time high of US$20K (in 2017) to US$3K pushed 3AC to switch its focus from foreign exchange derivatives to crypto. At the end of 2020, the fund oversaw US$2.6B in assets with US$1.9B in liabilities. 

3AC’s Investments 

Grayscale Bitcoin Trust (GBTC)

3AC was a major investor in Grayscale’s GBTC. Grayscale’s parent company, DCG, is a conglomerate with subsidiaries, including CoinDesk and Genesis Trading. GBTC was created for investors to gain exposure to BTC without owning it. In 2022, Grayscale submitted an application to the U.S. Securities and Exchange Commission (SEC) to turn GBTC into an ETF. 

GBTC was not based on BTC’s price but instead on the net asset value (NAV) of BTC. Hence, there was a price difference between GBTC and BTC, with GBTC trading at a premium to BTC. 3AC used arbitrage to profit from this price difference and borrowed BTC from Genesis Trading to attain 6.1% ownership of GBTC. Genesis Trading approved the loan as Grayscale, its sister company, would receive 2% of the total assets under management (AUM) in management fees. 3AC deposited this borrowed BTC into GBTC and waited six months before being issued new shares of GBTC. Then, they sold these GBTC shares to institutions, essentially, buying BTC at the spot price and selling GBTC at a premium. 3AC also used their GBTC shares as collateral to take out margin loans to invest in BTC and Ether (ETH). This worked out well until GBTC started trading at a discount to BTC at the start of 2021.

how 3ac invested in gbtc


As GBTC started trading at a discount to BTC, 3AC began to invest in more risky altcoins in November 2021, further exposing itself to the volatility of the crypto market. 3AC invested US$230M in Avalanche (AVAX) and other “Ethereum killers” that sought to replace ETH. In March 2022, the fund invested US$200M in Terra’s LUNA through swaps with BTC. 

3AC’s Collapse 

In February 2022, inflation surged 7.5% on an annual basis, leading to a rise in interest rates by the Fed. By May 2022, BTC and ETH fell over 60%, and AVAX and LUNA were down by 80% from their all-time highs, all of which were part of 3AC’s portfolio. Despite these illiquid assets, 3AC took on leverage from Voyager and BlockFi to double down on its crypto investments. 

In June 2022, the SEC rejected GBTC’s ETF proposal. At the time, GBTC was trading at a discount of 30% to BTC, which meant that 3AC could only access 70% of its BTC collateral. On 15 June 2022, 3AC failed to make payment on its margin loans and was liquidated by BlockFi. In addition, 3AC also invested in volatile altcoins, which depreciated massively in value, using borrowed funds. As a result, 3AC filed for Chapter 15 bankruptcy, leading to its collapse.


Introduction to Celsius

Celsius was a crypto lending company that allowed users to take loans by pledging their crypto as security and earn yield by depositing various digital assets, including BTC and ETH. Celsius depended on a steady inflow of deposits from individual investors, which allowed Celsius to lend funds to major crypto firms and make risky investments. Celsius guaranteed very high interest rates while asserting that the risks were minimal. In 2021, Celsius started taking larger risks to generate income as demand for loans from institutional investors dwindled. In August 2021, Celsius became the first crypto platform to cross US$20B in AUM, from just US$1B in mid-2020.         

Poor Management

Poor Internal Controls

Internal records and testimonies from former Celsius personnel, customers, investors, and industry leaders, reveal that the firm was ill-prepared to weather market volatility. Celsius’ compliance department warned of insufficient supervision, weak internal procedures, and possible falsification of financial information. The department eventually claimed that a reckless chase of large profits and losses from a run of disastrous bets caused the company’s decline. According to company reports and former employees, Celsius boosted its earnings by trading client cash and investing in obscure, hazardous, and creative DeFi initiatives. However, Celsius denied trading consumer assets.

Poor Investment Decisions and Systemic Risks

As the crypto market fell into poorer conditions, the after-effects of falling prices and systemic risks were accentuated by unfortunate investment decisions made by the firm. One example would be their choice to stake customers’ ETH on Lido for stETH, guaranteeing 6% to 8% returns. Due to poor market conditions, stETH depegged from ETH, which led to the dumping of stETH by holders. Because of that, Celsius struggled to convert stETH to ETH in order to satisfy customers’ withdrawals. It was also revealed that Celsius lost US$54M in BTC investments due to the BadgerDAO hack in 2021. These investments contributed to Celsius’ eventual insolvency.

Celsius’ Collapse and Intervention


Poor market conditions and increased interest rates pushed investors to cash out of Celsius, leading to a “bank run” as even more investors withdrew their crypto for fear of Celsius’ impending insolvency.  

On 12 June 2022, Celsius froze all withdrawals due to “extreme market conditions”. On 13 July 2022, Celsius declared bankruptcy. According to court documents, Celsius has an estimated US$1.2B in debt, with US$5.5B in liabilities and US$4.3B in assets. Customers may also face the brunt of Celsius’ demise since the US$4.7B liabilities also consist of client holdings. Celsius’ downfall was one of the primary drivers of the 2022 crypto meltdown.

FTX’s Bailout?

After securing the winning bid worth US$1.4B to acquire Voyager Digital, FTX CEO Sam Bankman-Fried (SBF) announced considerations of acquiring the lender. This was announced on the same day as Alex Mashinsky’s resignation as CEO of Celsius. As negotiations continued, the FTX team was astonished by the extent of the issues, even discovering a US$2B balance sheet hole. FTX eventually passed on the Celsius deal.

Key Employee Retention Program (KERP)

After filing for Chapter 11 bankruptcy in July 2022, Celsius saw an exodus of employees. In an attempt to boost talent retention, Celsius applied for a KERP grant. On 5 December 2022, Celsius was granted US$2.8M for its employee bonus plan by the US bankruptcy Judge Martin Glenn. 

Reimbursement for Customers

On 7 December 2022, Judge Martin Glenn ordered Celsius to refund crypto worth US$44M to its customers. This order was, however, only confined to consumers with non-interest-bearing custodial accounts. In August 2022, it was reported that Celsius held over US$210M in custody accounts, showing that the requested amount was only a small fraction of the total amount owed.

Voyager Digital 

Introduction to Voyager Digital

Voyager Digital was a retail-facing crypto brokerage that generated interest on deposits by loaning crypto assets to traders and institutions. Many of these institutions borrowed money to invest in risky assets to earn high returns. A part of these returns went back to Voyager as interest, and Voyager, in turn, shared this interest payment with its customers. 

In mid-2021, the company had 3.5M customers and US$5.9B in assets. 97% of the customers stored less than US$10K on the platform. These assets were loaned to counterparties, with 3AC being the biggest with US$650M in loans (US$350M in USDC and 15,250 BTC). Although this loan was unsecured, Voyager gave lower interest rates to 3AC compared to other counterparties.

loan counterparties to voyager digital

Collapse of Voyager Digital 

With the collapse of 3AC, Voyager was unavoidably impacted. In late June, Voyager made multiple demands for repayment from 3AC but was met with no response. With the ongoing contagion and demise of other crypto entities, Voyager received an “influx of customer withdrawals”. On 23 June 2022, Voyager lowered daily withdrawal from US$23K to US$10K. On 1 July 2022, customer withdrawals were halted. On 6 July 2022, Voyager filed for Chapter 11 bankruptcy

On 16 September 2022, FTX won the bid to acquire Voyager for US$1.4B in the US bankruptcy auction. However, this deal dissolved after FTX’s bankruptcy. On 18 December 2022, Binance US won the bid to acquire Voyager for US$1.022B.

Enjoyed this piece? Read Part 2 of this article! In the second part, we provide further insight about the crypto contagion, more specifically, with respect to FTX, BlockFi, DCG, Genesis, and Gemini.


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