Cryptoverse: Farewell to the year that broke Bitcoin

Dec. 20 (Reuters) – Bitcoin reeled into 2022. It ends the year plunging into an alley, its mix of cheap money and leveraged bets robbed by the institution.

The prominent cryptocurrency has lost 60% of its value, while the broader crypto market has shrunk by $1.4 trillion, due to rising interest rates, fading risk appetite and the collapse of companies including Sam Bankman-Fried’s FTX.

Crypto funds saw net inflows of $498 million in 2022, versus $9.1 billion in 2021, according to data from digital asset manager CoinShares, reflecting how mainstream finance has drifted away from the market during the dreadful year.

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

Malcolm added that until last year, before the downturn began in November, cryptocurrencies were realistically seen as two or three years away from being accepted by major institutional investors.

“Now it is quite far into the distant future.”

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It wasn’t all bad for the cryptocurrency, though: 2022 was also the year the Ethereum blockchain finally pulled the massive “Merge” upgrade, which moved it to the less power-hungry “Proof of Stake” system in September.

“This event was a technical breakthrough and one of the only positive events in what has been a rather dark year for crypto,” said Anthony Georgiadis, co-founder of blockchain firm Pastel Network.

“These upgrades will make the Ethereum ecosystem much easier to use for people around the world. Because of all this progress, it is hard not to be optimistic about cryptocurrency going into 2023.”

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

“This is very optimistic for the ecosystem and something to watch over the long term,” he added. “We could see larger allocations of digital assets once risk appetite resumes in 2023.”

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Bitcoin faces a recession

Bitcoin reached a record high of $69,000 in November 2021, with the cryptocurrency market reaching $3 trillion, buoyed by fiscal and monetary stimulus from countries around the world trying to fend off economic damage from COVID lockdowns.

But as societies reopen, rising inflation has forced central banks to tighten prices and sent investors fleeing riskier assets — technology stocks and cryptocurrencies.

Bitcoin, long heralded as a useful store of value in times of inflation due to limited supply, has fallen during the test, as investors turned to tried-and-tested havens like the dollar as prices soared. It fell by about a third in January, outpacing an 8% decline in US stocks.

“2022 was a new environment for digital assets. Never before has it been in a recession or an environment where rates are rising,” said Katie Talati, director of research at digital asset firm Arca.

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With investors pulling money out of cryptocurrencies, major projects have come under pressure. The first to crack was terraUSD, supposedly a “stablecoin”, and its sister, Luna. The value of the coins plummeted in May, as investors globally lost an estimated $42 billion..

The shocks reverberated through the market: US crypto lender Celsius froze clients’ assets in June and exposed a $1.2 billion hole when it declared bankruptcy. Singapore-based cryptocurrency hedge fund Three Arrows Capital filed for bankruptcy in the same month.

Bitcoin and other tokens have been hit hard, dropping by more than half in just 49 days from the end of May. On a single day in June, bitcoin plunged more than 15%, its worst day since March 2020 when the coronavirus chaos gripped financial markets.

But the biggest cryptocurrency shock is yet to come.

In November, major stock exchange FTX crashed into sudden bankruptcy. Bitcoin fell by a quarter in less than four days as Bankman-Fried scrambled for funds to save the exchange.

The cryptocurrency is now hovering around $16,000. Overall, 2022 has been pretty much a crypto disaster.

Or, in the words of economist Noel Acheson, “the year the inflated leveraged bubble burst, exposing the structural weaknesses of an industry that has grown too big, too quickly.”

  • Roll in 2023? Cryptoverse will return on January 10th

Additional reporting by Tom Wilson in London and Medha Singh and Lisa Matakal in Bangalore; Editing by Praveen Char

Our Standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the opinions of Reuters News, which is bound by the trust principles of integrity, independence, and freedom from bias.

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