Arguably the most exciting asset space since the Covid pandemic disrupted life, cryptocurrencies and other crypto assets have endured a rather long crypto winter all through 2022.
This is against the backdrop of a spectacular 2021 in which leading cryptocurrencies like Bitcoin reached dizzying heights, before steadily correcting to levels last seen in 2020.
Let us look at how the crypto bull run ended in 2022, the key events that precipitated the fall, and what lies ahead for the crypto industry in the new year.
Soaring inflation and geopolitical tensions derail 2021’s golden run
After nearly two years of stimulus money finding its way into financial markets across the globe, rising household inflation reared its ugly head by the end of 2021.
In stark contrast to what central banks believed to be just a transitory phase of high inflation, 2022 saw inflation soaring to 20-year highs that forced them to increase interest rates to suck excess liquidity out of the market.
The increasing interest rate regime, and the Russia-Ukraine war that commenced early 2022, have led to the total assets under management (AUM) of digital-asset funds dropping to a two-year low of $22.2 billion.
Moreover, from a peak valuation of $2.9 trillion in mid-November 2021, the total cryptocurrency market capitalisation has dropped by more than $2 trillion to just $800 billion as on December 17, 2022.
Representing a 72 percent erosion of investor wealth, the rout in crypto markets has weighed heavily on the estimated 320 million global crypto investor base.
The resulting impact on the crypto industry has been equally disconcerting, with a spate of large crypto firm collapses that have highlighted systemic issues within the broader crypto ecosystem.
A stream of large failures that undermined crypto stability
Even though crypto companies continued spending heavily through the first few months of 2022 to attract new investors, falling cryptocurrency prices had stressed crypto lenders and hedge funds to the brink of collapse.
So much so that the Terra-Luna token collapse in May 2022 led to a string of bankruptcies that were in the offing.
The month of June saw top crypto hedge fund Three Arrows Capital (3AC) filing for bankruptcy, wiping out $4.2 billion in investor funds.
This was followed by crypto lenders Voyager Digital and Celsius Network shuttering operations in July, leading to widespread fears of the contagion spreading to other entities within the emerging decentralised finance (DeFi) sector.
However, leaders of top crypto firms continued to stress upon the industry’s long-term potential and brushed aside apprehensions of a broader market collapse.
Cryptocurrency prices dithered for a few more months till media reports about the worsening financial health of the world’s third-largest cryptocurrency exchange rocked the crypto community in the first week of November.
Helmed by 30-year-old crypto poster boy Sam Bankman-Fried, FTX and its sister firm Alameda Research crumbled in a span of two weeks and threatened to swallow a few more crypto firms in its wake.
Crypto lender BlockFi was its first victim. Although it had received a $400 million credit facility from FTX earlier, it filed for bankruptcy only two weeks into the FTX debacle.
This has led to renewed fears that the crypto industry is just one bankruptcy away from implosion, due to unscrupulous business practices and financial dealings.
Industry leaders pledge stronger self-regulation
Curiously, the founder of the world’s leading cryptocurrency exchange, Binance, has stepped forward to hold the industry together in this time of crisis.
Changpeng Zhao, or “CZ” as he is popularly known, has called for clear regulations for the booming crypto industry, while also calling on crypto leaders to adopt robust self-regulation measures.
Ostensibly intended to prevent another FTX-like mishap, CZ has also announced the formation of an industry recovery fund to provide critical financial support for fundamentally sound crypto projects that are reeling under the current liquidity crunch.
While CZ and his firm Binance are themselves being investigated for money laundering and criminal sanctions violations, the prolific founder has warned U.S. regulators that the crypto industry would do well without any aggressive regulation.
That said, even his latest effort to make public the exchange’s proof-of-reserves has been met with more questions, as audit firm Mazers that published the report severed ties with all its crypto clients, including Binance.
Will 2023 herald a new crypto bull run?
With Bitcoin staring at another dash toward its key support level of $12,300, crypto investors are hoping that improving macroeconomic forces would propel the world’s leading cryptocurrency toward new highs.
This would require a resurgence in investor demand as also more positive crypto news in a market that has already spent nearly 13 months in constant decline.
In fact, Bloomberg’s senior commodity strategist Mike McGlone believes Bitcoin could reach $100,000 by 2025, although he remains sceptical about Ethereum’s short-term price prospects.
With the crypto industry witnessing new innovations and sustained venture capital (VC) investments in 2022, it is not prudent to dismiss a revival in cryptocurrency prices in 2023.
Not only is crypto adoption on the rise, with many countries like India, Vietnam, Russia, and Thailand reaching double-digit adoption rates, but bear markets have time and again proven their inability to curb an underlying bullish trend.
Although it remains to be seen how this new-age asset class and the crypto industry per se perform in 2023, do not be surprised to see another classic crypto revival along the lines of what was witnessed in 2020.