The cryptocurrency hype that surged in 2021 came crashing down in 2022, largely due to two major failures.
In May, the algorithmic stablecoin UST from Terraform Labs lost its $1 value, causing hyperinflation of its cryptocurrency collateral. This event resulted in an estimated $40 billion loss in the cryptocurrency market. The fallout contributed to the bankruptcies of several cryptocurrency firms, including Voyager Digital and BlockFi.
The legal system took some action. Do Kwon, co-founder of Terraform Labs, admitted guilt to charges of fraud for misleading investors about UST’s stability. He received a 15-year prison sentence in December, after victims shared accounts of the extensive harm caused. Sam Bankman Freed was convicted of seven fraud-related charges at FTX, including wire fraud and securities fraud. A judge sentenced him to 25 years in prison in March 2024 and ordered him to forfeit $11 billion.
Lawyers representing both Bankman Freed and Terraform Labs are now attempting to reshape their narratives regarding the collapse.
Did FTX actually go bankrupt?
Bankman Freed posted on X from prison asserting that FTX was never technically bankrupt. He recently claimed in a thread that the platform possessed more assets than liabilities and could have repaid clients, currently achieving recovery rates between 119-143%. He criticized bankruptcy attorneys for hastily filing for Chapter 11, claiming they charged over $1 billion in fees and dismantled assets without properly winding down.
This viewpoint is largely dismissed by many in the crypto industry, who regard Bankman Freed as a prominent villain. If the resources were truly sufficient, why were withdrawals halted? Austin Campbell, an adjunct professor at NYU, noted that being solvent for a crypto exchange means being able to return customer assets in their intended form, which FTX failed at. He stated simply, “They were insolvent.” Alex Thorn, head of corporate research at Galaxy, pointed out that misusing deposits for illiquid investments is akin to theft, and when redemption requests fail, insolvency follows.
Although it’s true that bankruptcy processes can be inefficient and that creditors are facing legal fees approaching $1 billion, the core issue remains the unauthorized misuse of customer funds.
Bankman Freed is even trying to use his position to seek a pardon from President Trump, but the White House has stated that no pardons are in the works.
Terraform Labs Blames Insiders, Not Model Failures
Regarding the other significant collapse in 2022, Terraform Labs’ liquidation administrator has sued trading firm Jane Street, claiming insider trading contributed to the UST crash. While there may have been informed trading, the fundamental flaw lay in the stablecoin’s design itself. A pseudonymous crypto advisor stated emphatically that UST was essentially a pyramid scheme, attracting deposits with unrealistic promises of high returns. Such setups are bound to fail.
The new lawsuit accuses Jane Street of receiving confidential information from Terraform insiders through private channels established by a former employee. Specifically, it mentions Terraform Labs withdrawing 150 million UST from Curve3pool on May 7, 2022, and shortly afterward, a Jane Street wallet withdrew 85 million UST from the same pool.
Bitcoin did eventually rebound from its 2022 lows, reaching around $125,000 by October 2025. However, other segments of the crypto market haven’t shown as strong a recovery, with altcoins often outperforming Bitcoin markedly during bullish phases. Ethereum, for instance, gained significant attention in the last cycle for its potential in DeFi and its shift towards “ultrasonic money.” Compared to prior cycles, current trading volumes against Bitcoin are considerably lower, signaling a growing divide between Bitcoin and more speculative blockchain applications.
Several cryptocurrencies have recently outperformed, primarily those that showcase centralized technology or rely on centralized stablecoins. Discussions surrounding non-Bitcoin cryptocurrencies are increasingly leaning towards stablecoins, which frequently resemble centralized financial products more than decentralized protocols. Just this week, it was reported that Meta plans to integrate stablecoins into its offerings later this year, highlighting the company’s earlier attempts at creating a digital currency in 2019 that were halted due to regulatory issues.
Bitcoin itself has recently faced a downturn, dropping around 50% since its peak in October. This decline began with a deleveraging event on October 10 and was influenced more by minor altcoins than by Bitcoin. The current situation underscores the ongoing debate regarding Bitcoin’s status as “digital gold.” Speculations about Bitcoin’s viability have re-emerged, especially with physical gold performing well amid geopolitical tensions. Yet, it’s worth noting that similar doubts arose after the March 2020 market crash at the onset of COVID-19, before Bitcoin experienced a subsequent surge.
