Will cryptos sink or swim?
2022 was a rollercoaster year for DeFi. Tokens crashed in value, companies came to grief, regulatory crackdowns occurred, and even a few arrests were made. According to the US Commodities Futures Trading Commission (CFTC), more than $8 billion of FTX customer funds are still missing. Sam Bankman-Fried, FTX's founder and once worth over $20 billion, officially filed for bankruptcy protection whilst being charged with eight counts of fraud. Cryptocurrencies had been fledgling in the earlier parts of the year but with the news of the crashes of platforms such as FTX and crypto-lender, Celsius, it appeared that crypto was permanently doomed.
The following gives a rundown of some of the disasters that happened in crypto in 2022:
But, despite all the doom and gloom that 2022 may have suggested, in 2023 cryptocurrency is showing a little more nuance and doggedness than predicted. Brian McGleenon of Yahoo Finance noted that 2022 was a “crypto winter” like no other. Yet, the asset class might well be on its way to recovery. Bitcoin has spiked nearly 69% this year, jumping from as low as $16,604 in December 2022 to over $28,000 in March of this year. Ethereum, the second most popular cryptocurrency asset, is also up 49% this year, currently trading at around $1800 per coin. Whilst these values are nowhere near their all-time highs, the remarkable recoveries that these coins have shown demonstrate their resilience. It is of interest, therefore, for retail investors and companies to understand the fate of the cryptocurrency market as time progresses.
Why did crypto slump in 2022?
Cryptocurrency was designed to work on a trustless system (using blockchain technology) which is known for the transparency and immutability of its transactions. The value of the tokens or coins themselves, which constitute the currency of these transactions, has been designed to work on user-trust or faith. Because the number of coins in circulation (for at least some) is fixed, then the more the demand for the currency rises, the higher the currency goes in value. So, for early investors, this represents an opportunity to make massive profits from having bought cryptocurrency assets at the time when they were less valuable. From the first principles, the 2022 fall of cryptocurrency may have been triggered by a series of events that gradually broke investors' faith in crypto assets. Unlike traditional investments with a commodity or product on which they are based, Bitcoin has no underlying asset - meaning that its price is purely based on investors' speculation or, as some would say, sentiment. However, the fall of Bitcoin, Ethereum and other cryptocurrency assets happened in multiple stages, with several actors involved in the fray besides retail investors and crypto owners. For one, global stocks declined in 2022 with the invasion of Ukraine by Russia on February 24 that year and also the rising prices of oil and commodities. In March 2022, JP Morgan predicted: “The Russia-Ukraine crisis will slow global growth and raise inflation as global growth risk is linked to Russia's energy supply disruption.” This slowing of growth led to increased interest rates and inflation so reducing the disposable income that people and businesses had to spend on investments such as stocks, which spilled over into crypto assets too. Other factors also contributing to the cryptocurrency market experiencing a slump in 2022 included regulatory changes and crackdowns whereby striking fear in investors' minds and further spreading FUD (a crypto community slang meaning 'fear, uncertainty and doubt') in the market. China was one of the more popular 'culprits,' enacting policies against the proliferation cryptos in June 2021 ordering financial institutions to stop enabling crypto transactions and, in September 2021, it declared crypto transactions completely illegal. The US has not been entirely exempted from this crackdown on crypto either; Gary Gensler, head of the Securities and Exchange Commission has long been a vocal critic of cryptocurrencies. More recently, New York's Department of Financial Services ordered blockchain company, Paxos, to cease minting BUSD, the third most popular stablecoin. The rise and fall of meme coins, several ‘rug pulls’ and multiple warnings from the formal financial sector may also have contributed to the dip in cryptocurrencies' value. But the most prominent historical events in the crypto sector were the collapse of several large crypto exchanges and lending companies. Following the decision of Celsius Network to halt withdrawals in June 2022, Bitcoin dropped below $20,000 for the first time in two years. November 2022's further slump was triggered mainly by the collapse of FTX, one of the world's largest crypto exchanges.
Will crypto rise again and what will it take?
Cryptocurrency is incredibly volatile and while it has taken a massive dip recently, there is still much reason to be optimistic about its future. In spite of this, though, the opinions of analysts remain mixed. Currently serving as head of digital assets research at VanEck, Matthew Sigel expects Bitcoin to plummet to $12,000 in 2023. But, several other events and indicators point to a possible rise of cryptocurrencies experiencing a significant recovery in 2023 and beyond. Historically, Bitcoin's halving events have been excellent predictors of bullish runs for the asset and 2024 is the year for Bitcoin's next halving event - which may drive further momentum for the asset. In addition, data from Santiment (a behaviour analytics platform for cryptocurrencies) shows that investors have begun filling their wallets with BTC, which might indicate a recovery for the cryptocurrency. A few players in the industry, such as Gemini's Marshall Beard, believe the asset has the potential to reach new highs in 2023. Former Coinbase CTO, Balaji Srinivasan, has staked $2 million on Bitcoin reaching $1 million. In short, it appears that Bitcoin and other cryptocurrencies will have a market for quite a while. With supporters backing its value as a hedge against the traditional market and clear, regulatory frameworks being advocated for in various jurisdictions globally, the cryptocurrency sector promises significant potential. Ultimately, only time will fully reveal the fate of the crypto market but if we see further trouble in the banking sector, investors may well seek out other alternative investments.
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