It comes as no surprise that 2022 has been a memorable year for the cryptocurrency markets. Everything that could go wrong did go wrong: the year the black swan became commonplace. Between macroeconomic factors, unstable stablecoins, and poorly managed exchanges, there was a lot to take away from this year.
So, let's review the major events of 2022 and assess the outlook for the asset class for 2023.
The 2022 review
Macroeconomic: Inflation, interest rates and war.
The year 2022 can be summed up as the year the money printer stopped working and the consequences became apparent. A year marked by the highest inflation rates in a decade, sky-high energy prices and some of the most significant interest rate increases in history.
How did the markets react to this?
Rising interest rates, high inflation, and rising energy prices do only one thing: they take money out of the hands of ordinary people.
- Increase in interest rates: Increase mortgage and credit card payments
- High inflation: Increases the cost of everyday goods and services.
- sky high energy prices: Contribute to higher fuel, electricity and food costs.
A perfect storm to decrease disposable and investable income...
When you are in these tight economic environments, where your disposable income is shrinking daily, it is hard to invest anything, and if you do, investors will be looking to preserve rather than increase your wealth. This is why investors will typically steer clear of high-risk investments in favor of "safe haven" investments.
We can see this effect in the stock market.
As of the close of December, the safe-haven asset gold outperformed the S&P 500, the riskier (tech-heavy) Nasdaq, and further down the risk scale, Bitcoin during calendar year 2022.
While cryptocurrencies are the riskiest of the assets and indices mentioned above, there is more to the crypto story and may explain the performance seen in 2022.
Cryptocurrencies: Unstable Stablecoins and Poorly Managed Exchanges
The unstable stablecoin
Terra LUNA and its algorithmic stablecoin, UST, were once an exciting new project on its way to becoming one of the largest stablecoins by market cap and the backbone of DeFi. However, a targeted attack on the UST peg caused the stablecoin to decouple from its $1 value, sending both UST and LUNA soaring to near zero. An ecosystem worth around $50 billion disappeared in a matter of days, causing investors to lose billions of dollars and the broader crypto market to suffer.
Mismanaged exchanges
A plethora of bankruptcies arose from the collapse of Terra LUNA. Many poorly managed institutions and funds were directly or indirectly exposed to the collapse of Terra LUNA.
Following the collapse, many companies that offer performance, including Celsius Network, Voyager Digital, Three Arrows Capital and many more, had to declare bankruptcy.
FTX
By the end of winter, crypto markets had begun to stabilize and investor confidence had returned. FTX, the ostensibly strong crypto exchange led by founder Sam Bankman-Fried, continued to invest in crypto companies, bailed out many struggling startups from Terra LUNA, and was regarded as the source of stability in the crypto market.
But just like that, another black swan struck.
In November, revelations emerged about the solvency problems of FTX and its sister company Alameda Research, the combination of client funds and strange transactions. As a precaution, crypto investors began withdrawing funds from FTX, resulting in a classic bank run and the demise of the cryptocurrency exchange titan. The previously known 'pillar of stability' in crypto filed for insolvency at the end of November, and FTX filed for bankruptcy.
What can we get out of this?
Crypto is still young.
Like any new technological advance, there will be volatility. A whole parallel financial ecosystem is being built, live, in front of your eyes. Of course, there will be growing pains, mistakes, and failures, but that is the price of true progress.
While this year has been difficult for cryptocurrencies, all the failures were due to two factors: a lack of regulation and, as a result, greed.
Many people have called for proper crypto regulation in response to the failures and bankruptcies seen in 2022. Without proper government oversight and regulation, fraud and theft, as well as irresponsible lending and leveraged trading, would not have been possible.
Despite this, crypto is still here, several blockchains are still operational, and billions of dollars are processed every day – the technology is winning.
2023: next year
As we move into 2023, investors should be aware that the current macroeconomic environment, confidence in cryptocurrencies, and unclear regulatory frameworks will continue to put pressure on cryptocurrencies.
While these are problems, 2023 offers a year to solve them.
Regulation
Due to the high number of bankruptcies and mismanagement of assets, regulation will undoubtedly knock on the door in 2023. While some will not like this idea, regulation is exactly what is needed to make it happen. true cryptocurrency adoption.
crypto market
The crypto market of 2022 has been through it all: scandals, fraud, bankruptcies, greed, and everything in between. Through it all, we have seen the power of DeFi and how it mitigates counterparty risk. We have seen how cryptocurrencies like Ethereum move towards a greener, less energy-intensive future and how cryptocurrency payments solve the problems of high bank fees and long settlement times.
The power of crypto investments in 2023
Although cryptocurrencies had a tough 2022, from an investment and long-term standpoint, there is no asset class that has performed as well as cryptocurrencies at any point in its history.
Over the course of the cryptocurrency's existence, Bitcoin has returned an average of +155.56% per year. What demonstrates the true power of Bitcoin as an investment class is that it has never had a 4 year period of negative returns. Better yet, even in its worst 4-year period, Bitcoin has managed to generate +30.03% every year over that 4-year period, peaking at a staggering +862.01% per year.
From this point of view alone, Bitcoin proves to be one of the most powerful portfolio enhancers of our generation.
Conclution
The 2022 cryptocurrency market has felt like a balloon that has been held underwater by bad news and bad actors, but we all know what happens when you release a balloon underwater: it immediately rises to the top. So what happens after those bad actors are gone? What happens when bad news turns into good news? And what happens when this asset class is finally back in the sun?
We could find out in 2023.
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