The year that nearly broke crypto

Laddered bitcoin in 2022. He ends the year slumped in an alley, stripped of his cocktail of cheap money and leveraged bets, shunned by the establishment.

The preeminent cryptocurrency lost 60% of its value, while the broader crypto market shrank by US$1.4 trillion, crushed by rising interest rates, fading appetite for risk and corporate meltdowns, including Sam Bankman-Fried’s FTX.

Crypto funds saw net inflows of $498 million in 2022, up from $9.1 billion in 2021, according to data from digital asset manager CoinShares, reflecting how traditional finance has pulled away from the market thanks to his Annus horribilis.

James Malcolm, head of FX strategy at UBS, said that in the first half of the year he spent 70% of his time with clients talking about crypto. In contrast, for 10 days in North America last month, from Montreal to Miami, “I spent less than 2% of my time discussing crypto.”

Even last year, before the decline began in November, cryptocurrencies were realistically seen as two to three years away from gaining acceptance from mainstream institutional investors, Malcolm added. “Now it’s completely in the distant, distant future.”

It hasn’t been all bad for crypto: 2022 was also the year the Ethereum blockchain finally rolled out its mega-upgrade “Merge,” which moved it to a “proof of proof” system. less energy-intensive ‘issue’ in September.

“This event was a technological feat and one of the only positive events in an otherwise bleak year for crypto,” said Anthony Georgiades, co-founder of blockchain Pastel Network. “These upgrades will make the Ethereum ecosystem much easier to use for people around the world. With all of this progress, it’s hard not to be a crypto optimist in 2023.”

Investors flee

Ben McMillan, Chief Investment Officer at IDX Digital Assets, said the growing popularity of blockchain-based tools, including decentralized exchanges and decentralized finance, has also been an important development this year.

“So it’s very optimistic for the ecosystem and something to watch for the long term,” he added. “We could see larger allocations to digital assets once risk appetite picks up in 2023.”

Bitcoin hit an all-time high of $69,000 in November 2021, with the crypto market hitting $3 trillion, buoyed by fiscal and monetary stimulus from countries around the world trying to stave off the economic damage wrought by the Covid lockdowns.

But as societies reopened, soaring inflation forced central banks to tighten rates and led investors to flee higher-risk assets – tech stocks and cryptocurrencies.

Bitcoin, long heralded as a handy store of value in times of inflation due to its limited supply, crashed during the test as investors turned to tried havens such as the dollar as rates rose. It fell about a third in January, outpacing the 8% drop in US stocks.

“This year has been a new environment for digital assets. They’ve never been in a recessionary or rising rate environment,” said Katie Talati, director of research at digital asset firm Arca.

As investors squeezed money from crypto, big projects came under strain. The first to crack was terraUSD, supposedly a “stablecoin”, and its sister luna. Coins lost value in May, with investors losing around $42 billion globally.

The shockwaves rippled through the market: US crypto lender Celsius froze client assets in June and exposed a $1.2 billion hole by declaring bankruptcy. Singapore-based crypto hedge fund Three Arrows Capital went bankrupt the same month.

Bitcoin and other tokens have suffered a hammer blow, falling by more than half in just 49 days from the end of May. In a single day in June, bitcoin fell more than 15%, its worst day since March 2020, when the Covid chaos rocked financial markets.

But the biggest crypto shock was yet to come.

In November, the major exchange FTX collapsed in sudden bankruptcy. Bitcoin fell by a quarter in less than four days as Bankman-Fried sought funds to bail out its exchange.

The cryptocurrency is now hovering around $16,000. All in all, 2022 has been pretty much a crypto calamity.

Or, as economist Noelle Acheson puts it, “the year the leverage-inflated bubble burst, exposing the structural weaknesses of an industry that had grown too big, too fast.” — Tom Wilson, Medha Singh and Lisa Mattackal, (c) 2022 Reuters

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