Crypto Markets 2022: A Year in Review

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It’s no secret that 2022 has been a tough year for global markets.

The US stock market fell more than 15% in value, bond markets fell more than 20%, and crypto markets fell more than 50% from their 2021 high.

At the beginning of 2022, central banks around the world began to raise interest rates in order to slow inflation and reduce the rate of economic expansion. The tightening of monetary and fiscal policies has significantly reduced investors’ appetite for risk and speculative investment strategies. Many investors have chosen to sell or exit speculative asset classes altogether. This macroeconomic pressure has affected traditional asset classes and put enormous pressure on emerging asset classes, including cryptocurrency.

The economic situation leading up to 2022 has allowed crypto to shine. Historically low interest rates, an expanding money supply, and a strong economy have all paved the way for record growth, both in price and adoption, in the crypto economy.

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Crypto proof of interest

Investor interest in crypto was evident as bitcoin (BTC) and ether (ETH) both hit all-time highs, decentralized finance (DeFi) protocols reached record size, market capitalization of crypto surpassed $3 trillion, the non-fungible token (NFT) market has grown exponentially, and venture capitalists have invested in many crypto ventures.

Centralized Financial Exchanges (CeFi) saw incredible growth as their services offered attractive returns to investors who were unable to find attractive returns in traditional financial markets. New crypto projects have garnered incredible attention and growth, including the Terra ecosystem, headlined by the algorithmic stable coin UST and sister cryptocurrency LUNA.

Investors’ appetite for risk and speculative asset investing was driven by economic policy that many believed would continue for years to come. Traders, institutional investors and speculators took leveraged positions, borrowing money at low rates, which added to the frenzy seen in the crypto markets.

The story continues

Watch: DeFi vs CeFi: The Search for Yield

Crypto Investors Retreat

As central banks reversed course, began to reduce market liquidity and raised interest rates, these speculative asset classes began to slow. As interest rates rose, investors saw opportunities to hold low-risk investments and earn attractive returns. As the prices of risky assets began to decline, the crypto market began to sell off. By the end of the second quarter of 2022, the crypto market cap had fallen by over $1 trillion. This selloff was accelerated when leveraged positions began to unwind.

Exciting new projects like Terra began to implode as traders exited the crypto markets. The UST stablecoin broke away from the US dollar. Investors lost billions of dollars in the UST explosion, and the global market came under even more pressure.

CeFi hunches were over-leveraged, having lent significant funds to hedge funds such as Three Arrows Capital, which lost a huge amount of capital in the sell-off that followed Terra’s failure. Three Arrows Capital, along with many other leveraged hedge funds, defaulted on loans owed to numerous CeFi companies and these CeFi companies were forced to file for bankruptcy. User funds held on CeFi platforms were frozen and retail investors were unable to withdraw their funds. Companies such as Celsius Network and Voyager Digital, which promised attractive returns to users, failed and users lost their funds.

Read more: The Fall of Terra: A timeline of the meteoric rise and crash of UST and LUNA

To pretend

By late summer, crypto markets were showing signs of stabilizing. Leverage in the ecosystem had apparently been purged from the markets and investor confidence began to return to crypto. The CoinDesk Market Index (CMI) hit a summer high of $1,092 on September 12. Confidence was returning to the markets, driven by FTX, a major exchange and depositary, which had stepped in to rescue major lender CeFi BlockFi from bankruptcy. The seemingly strong FTX, led by founder Sam Bankman-Fried, continued to invest in crypto companies, bailed out many struggling startups, and was considered the strongest company in crypto.

Confidence in the crypto markets continued into late fall 2022, until shocking revelations about FTX and sister company Alameda Research came to light in a November CoinDesk article. Binance CEO Changpeng Zhao immediately and publicly expressed concerns about FTX’s solvency and ability to maintain its self-issued token, FTT. Traders have started withdrawing funds from FTX. The FTT price dropped from around $26 to $1 in just a few days and FTX suspended customer withdrawals.

The previously healthy business turned out to be insolvent, after mixing deposits and customer funds. FTX filed for bankruptcy at the end of November. BlockFi’s previous bailout was reversed and BlockFi was back in bankruptcy court. Crypto markets crashed. The CoinDesk market index fell to a low of $795 as investors continued their exodus from the crypto markets.

Read more: Sam Bankman-Fried’s Epic FTX Exchange Collapse: A Crypto Markets Timeline

Possibility of recovery

It is important to note that none of the failures we saw this year were caused by a failure in the underlying blockchain technology. In fact, technical development has continued in the space, and this year has been a monumental time in the history of many blockchains. Ethereum underwent a successful upgrade in 2022 from a proof-of-work blockchain to a proof-of-stake blockchain. Ethereum’s tokenomics has also changed significantly, which many people believe will benefit the Ethereum ecosystem in the future.

The failures and bankruptcies seen in 2022 have led many to call for additional crypto regulation. Fraud, theft, as well as irresponsible lending and leveraged trading have created a difficult environment for investors, which many believe would not have been possible with proper government oversight and regulation.

As 2023 approaches, investors should be aware that the current macroeconomic environment, lack of regulation and confidence in crypto, and unclear regulatory frameworks will continue to put pressure on crypto. While these issues are significant and will not be easy to overcome, blockchain innovation and advancements continue to grow and use cases for the technology continue to be adopted. It is important for all investors to review their crypto portfolios, their investment thesis behind crypto allocations, and lay out a plan for proper crypto investing in the future.

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