The cryptocurrency market was rocked in 2022, leading investors to ask some difficult questions about the future of the industry.
It was not a year that many crypto-enthusiasts will remember fondly. The market crashed, contagions spread, and many coins and tokens have been left lifeless.
The most popular digital asset, Bitcoin, has not been able to remain above the water for more than a week, and its value has dropped around 75% since its November peak of $69,000.
The market value of the 22,000 coins and tokens has shrunk to less than a third of $3 trillion, which it was in November 2021. Many of them have become dormant, or worse.
This was a stark reality check for a sector that started 2022 with the hope of widespread institutional adoption, as a hedge against inflation, and the wild celebration of billion dollar non-expendable tokens.
The fallout from the Federal Reserve’s hawkish stance and the bankruptcy of companies like Celsius and Voyager led to the collapse of TerraUSD, a stablecoin. This became known as the ‘Lehman Moment’ in the crypto world.
For some, this was the last straw and signalled the death of the crypto market. Sam Bankman-Fried, CEO of FTX Exchange, commented last month.
IMPORTANCE OF THIS MATTER
The crash was a spectacular one, much different to the 2017 one, and it has given fuel to the regulators who have largely stayed away from cryptocurrency and even banned it in certain places.
The European Central Bank has been cautious, but some saw the modest rise in Bitcoin’s price this month as a potential for growth, albeit an artificially induced one, before its potential irrelevance.
Unlike the 2017 crash, mainstream finance has mostly been unscathed. Excessive lending and counterfeiting of billions of dollars have been commonplace in the crypto ecosystem.
The idea, however, that private cryptocurrencies and decentralized finance can thrive in the shadows of traditional banking is wishful thinking.
Institutional and retail investors have lost trust in crypto traders and there are many voices from policymakers, as well as crypto moguls, joining US SEC Chairman Gary Gensler in calling for regulation.
WHAT DOES 2023 HOLD?
UBS Strategist James Malcolm has highlighted the correlation between cryptocurrencies, micro-cap US stocks and cryptocurrencies, suggesting that Bitcoin and other tokens could be sidelined as a niche asset in investment portfolios.
“It is wrong to say that this will die out completely because there are elements that can be useful in other areas, and there is likely to be a modest crypto market that will continue to thrive on the fringes of financial markets”, he said.
It could take months or even years for the regulations to come into action in order to make investors feel secure when dealing with crypto brokers and exchanges.
According to a note summarizing conversations with the crypto industry by Morgan Stanley, some asset managers are viewing this as a ten to fifteen year journey for digital assets to become mainstream.
In the meantime, traditional finance could take advantage of the crypto malaise in order to improve their own operations. This could include acquiring blockchain assets and platforms, issuing tokenized bonds and stocks, or even implementing more central bank digital currencies.
UBS’s Malcolm stated that this could be a sign that cryptocurrencies are intended to be more “an evolutionary rather than a revolutionary development in financial markets”.