To borrow a phrase from Britain’s Queen Elizabeth, the cryptocurrency world will not look back on 2022 with pure joy.
Crash, contagion, and collapse happened so quickly after each other that investors were asking serious existential questions by the end of the year.
After all, bitcoin, the biggest cryptocurrency, hasn’t stayed above water for more than a week at a time, and its price is down about three-quarters from its peak of $69,000 in November.
The market value of the 22,000 or so tokens and coins is now less than a third of their peak value of $3 trillion in November 2021, and many of them are dormant or dead.
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That was a harsh wake-up call for an industry that started 2022 with hopes of widespread mainstream institutional adoption, of bitcoin replacing even gold as the world’s inflation hedge, and of billion-dollar non-fungible tokens being celebrated with wild abandon.
Not only did the Fed’s extreme hawkishness hurt cryptocurrencies, but it also caused the crash of a stablecoin called TerraUSD. This led to a “Lehman moment,” when funds and brokers like Celsius and Voyager went out of business.
Some people thought that Sam Bankman-FTX Fried’s exchange going down last month was the last nail in the crypto coffin.
Why it matters
This time, there are a lot fewer crypto fans who are sure that bitcoin will bounce back. This is in contrast to 2017, when bitcoin also crashed in a big way.
Instead, 2022 has become an “I told you so” moment for regulators, who have mostly stayed out of the crypto world or even outlawed trading in cryptocurrencies.
The European Central Bank thinks that bitcoin’s small rise this month is a “man-made last gasp before the road to irrelevance.”
In fact, this year’s one bright spot has been that most of the financial problems haven’t spread to the mainstream. Most of the excess, unchecked lending, and faked billions of dollars have happened in the cryptocurrency ecosystem.
At the same time, it seems crazy to think that decentralised finance and private crypto coins can work well outside of the traditional banking system.
As retail and institutional investors lose trust in crypto operators, policymakers and even crypto barons like US SEC Chair Gary Gensler are calling for regulation.
What does 2023 hold?
James Malcolm, a strategist at UBS, says that the growing link between cryptocurrencies and micro-cap U.S. stocks shows that bitcoin and other tokens could stay around as a niche, diversified asset in investment portfolios.
“It’s wrong to say that this whole thing is going to fold up and die,” he says. “It has parts that can be useful in other areas, and there’s probably a small cryptocurrency market that will keep growing on the edges of financial markets.”
But the kind of regulation that investors need to feel safe dealing with crypto brokers and exchanges, like transparency or having enough capital, could take months or even years to put in place.
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In a note summarising the bank’s talks with the crypto industry, Morgan Stanley said, “Some asset managers think it will take 10-15 years for digital assets to become fully mainstream.”
The traditional financial world could use the crypto malaise to step up its game next year. For example, it could buy up platforms and assets in the blockchain world, issue tokenized bonds and stocks, or even roll out more digital currencies from central banks.
Malcolm from UBS says that this could show that crypto was meant to be “an evolutionary rather than a revolutionary change in financial markets.”
