Cryptocurrency had a tumultuous year in 2022, with some economists observing a roller-coaster ride for the industry. Prices for certain digital assets dropped significantly, causing some companies to declare bankruptcy and others to face legal action. Here are the major events that rocked the crypto world in 2022.
Digital Assets Take a Plunge
David Yermack, a professor of finance at the New York University Stern School of Business, told ABC News that the crypto market started to collapse after investors began selling off digital assets in response to the Federal Reserve raising interest rates. One example of this trend was Celsius Network, a former coin lending company that announced it would suspend all withdrawals and transfers between accounts.
Celsius had more than $10 billion of assets under management and approximately 1.7 million customers, as reported by the Associated Press.
Yermack noted that it is not uncommon for the crypto market to dip during the first half of the year. He also pointed to the crash of TerraUSD, a payment platform for so-called stablecoins, as a contributing factor.
“Cryptocurrency has been volatile throughout its history and has experienced a large number of sharp rises and falls,” he said.
Stablecoins Suffer a Major Blow
Stablecoins are digital currencies backed by another currency, like the U.S. dollar, or a commodity, like silver. The intention is for them to be more stable than other forms of cryptocurrency, but some of the most valuable stablecoins endured a massive drop in value in 2022.
The most significant blow was the fall of the Luna token and its associated TerraUSD stablecoin. Yermack noted that the price of TerraUSD “fell from $116 in April to a fraction of a penny.” CNET reported that the company’s market capital was over $40 billion.
Yermack also attributed the crash to the interconnections between Luna, TerraUSD, and other investments. Many people on the Terra platform had taken out loans in the stablecoin and posted the Luna tokens as collateral. When Luna’s value dropped, it impaired the collateral for these loans, causing borrowers to be unable to repay them.
Bill Starkov, founder of NFT and crypto entrepreneur Apocalyptic Apes, LLC, also known online as Fity.eth, stated that Luna’s downfall was inevitable. “If you looked at Luna and you watched it and you understood what it does, it was inevitable that it was going to die,” he said.
The year 2022 was a tumultuous one for cryptocurrency. With massive bankruptcies and layoffs, many investors were left wondering if the industry had a future. Economists, stockbrokers, and other experts weighed in on the future of cryptocurrency and whether it would survive the crisis.
One of the most damaging collapses of the year was that of FTX, a popular cryptocurrency exchange platform. According to the U.S. Securities and Exchange Commission, FTX raised billions from investors, only to be accused of defrauding them. The company’s founder, Sam Bankman-Fried, was arrested and the U.S. brought multiple charges against him. The company’s losses totaled $8 billion, leaving many victims in its wake.
It wasn’t the only cryptocurrency company that went bankrupt in 2022. BlockFi, a cryptocurrency lender, also filed for Chapter 11 bankruptcy protection. Additionally, Kraken, a former high-valued bank and cryptocurrency exchange, announced in November it would be cutting its workforce by 30% to “adapt to current market conditions.”
Peter Schiff, Chief Economist and Chief Executive Officer at Euro Pacific Capital Inc, weighed in on the situation. “I don’t think they have any underlying value,” he said. “Money is just transferring from the people who buy it to the people who sell it. And it’s not even a zero-sum game. It’s a negative game, because there’s so much cost, you know, that’s involved in the process.”
David Yermack, Professor of Finance and Business Transformation at NYU’s Stern School of Business, offered a different perspective. “It’s important to not confuse crypto for FTX,” he said. “FTX is an offshore operation run by very inexperienced people who seem to have behaved very badly. The fact that they were trading crypto is a little bit beside the point. They could have been trading real estate or stocks and bonds, or whatever.”
Alexander Starkov, head of FTX, also contributed his thoughts. “The crisis in FTX is unfortunate because a lot of people got hurt,” he said. “But people have made money using it and that they will continue to attract investors.”
Despite the turbulence in the industry, the experts agreed that cryptocurrency was still a viable investment, albeit a risky one. Yermack noted that if you had purchased cryptocurrency at specific prices, you were still in the green. “If you look at where people bought [cryptocurrency] in from, they’re still on profit,” he said.
At the end of the day, cryptocurrency is still a volatile and uncertain market, but one that has shown potential for profit. As with any asset, it’s important to do extensive research before investing.
