Why did the Bitcoin price fall by more than 60% in 2022?

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Bitcoin has been the most popular cryptocurrency in the world for many years now. And, while crypto has seen incredible price increases in the past, 2022 was undoubtedly a disastrous year for the asset, which faced an overall price drop of over 60%. So why did the Bitcoin price drop so drastically throughout 2022?

The volatility of Bitcoin

Before discussing the factors that affected the value of Bitcoin in 2022, let’s quickly review the volatility of this asset.

Cryptocurrencies are, by nature, volatile. Most cryptos are not backed by any collateral, and the market is so exposed to supply and demand that price spikes and drops are commonplace. All cryptos will see minor fluctuations in their value on a daily basis, but this is usually not very large. When something happens that rocks the market, that’s when the big swings happen.

Bitcoin may be valuable and popular, but it is just as vulnerable to market changes as other cryptos. The price will likely decrease if the demand for Bitcoin is lower than the supply. However, if the drop in demand is extreme, the price may fall within a few days. So what caused the price of Bitcoin to crash in 2022?

1. The Collapse of Terra

In May 2022, we witnessed one of the most brutal crypto crashes ever. Terraform Labs has launched two popular cryptocurrencies – Terra Luna (LUNA) and TerraUSD (UST) – which have carved out a strong position for themselves in the market. While Terra Luna was a typical cryptocurrency, TerraUSD was a stablecoin pegged to the price of the US dollar (i.e. 1 UST = $1).

TerraUSD was an algorithmic stablecoin, meaning it relied on a computer algorithm to maintain its peg. This was done through his relationship with Terra Luna. Both assets were in a burn/mint mechanism, in which UST and LUNA were either burned or minted to keep the UST as close to a dollar as possible.

Many chose to place their TerraUSD in the Anchor protocol, which offered users an incredible 20% return on their UST deposits. This was one of the driving forces behind the strong demand for TerraUSD. But that all changed when Anchor decided to switch from its 20% rate to a floating rate, causing many people to withdraw their UST and sell it. At this point, the supply of UST exceeded the demand and Terraform Labs ran out of LUNA to burn to hold the peg at $1.

Thus, LUNA and UST crashed horribly, sending shockwaves of cynicism and doubt throughout the industry. As investors began to get cold feet about the trustworthiness of crypto, sell-offs began to take place in droves. Bitcoin was no exception to this, and so its demand dropped drastically. Then the price followed.

In May 2022, the Bitcoin price fell 20% in just one week. This was devastating for investors and platforms and fueled the sense of uncertainty people already felt about cryptocurrency.

2. Rising interest rates Image Credit: Jernej Furman/Flickr

During the COVID-19 pandemic, many countries around the world printed excess cash, known as stimulus funds, to support their economies amid the health crisis. But when more money is produced, inflation rises. To cover this, in 2022 the US Federal Reserve raised interest rates (as it did in many countries around the world). But this decision was catastrophic for the traditional and crypto markets.

In short, higher interest rates make borrowing more expensive and investing in stocks and crypto riskier. Thus, the recurring increases in interest rates in 2022 have pushed investors to opt for savings options as an alternative to cryptocurrencies. As a result, the demand for cryptos dropped sharply and prices quickly followed. This affected just about every cryptocurrency in the market, including Bitcoin, fueling further price declines.

3. Crypto crimes and scams

Crime is worrying and common throughout the crypto industry. Billions of crypto have already been stolen, and more and more investors are falling victim to scams daily.

A cybercriminal can exploit crypto holders in different ways. For example, they could steal their exchange credentials through phishing, trick them into investing in a fake project, or even hack into their wallet to get their private keys. Because many crypto investors are new to the market, they are simply unaware of how easily they can be scammed out of their assets.

Additionally, cybercriminals can exploit new platforms with lower levels of security. Since new projects and platforms are always being developed in the crypto arena, these aren’t exactly thin choices for malicious actors.

Moreover, many cybercriminals use crypto as a payment method on the dark web. Crypto is also used in fraud and money laundering simply because it is less traceable than traditional money. Bitcoin, Litecoin, and Monero are all popular currencies on the dark web, giving cybercriminals an extra layer of anonymity.

Because crypto is used in a crime, many assume that these assets are simply not safe. On top of that, the frequency of crypto-related scams also discourages people from investing. While financial crime is just as common with traditional currencies, people prefer what they know. And the simple fact is that with fiat currency, there is a chance that your bank may be able to recover stolen funds. With crypto, that’s out of the question. So in this case, traditional money wins.

The broader crypto market often suffers when a huge scam is uncovered, as it reinforces the idea that these assets are unreliable.

4. FTX Collapse image credit: Bybit/Flickr

After the May 2022 crypto crash, many thought the worst of 2022 was over. But that was definitely not the case. Instead, November 2022 awaited a particularly disastrous event: the collapse of FTX.

FTX was once an extremely popular crypto exchange used by traders around the world. Launched by Sam Bankman-Fried and Gary Wang in May 2019, this platform was a promising name in the crypto industry until it was revealed that there was a serious liquidity problem.

In November, FTX suspended withdrawals, meaning users could not withdraw their funds from the exchange. When this happens, it’s usually a bad sign. However, in the case of FTX, there was simply not enough money available to meet withdrawal requests.

So, the platform removed the ability to make these requests in the first place. Additionally, FTX was to be acquired by Binance, another crypto giant, but that deal fell through amid controversy surrounding FTX and allegations against Bankman-Fried.

Shortly after, FTX filed for bankruptcy. This was huge news, as FTX had established itself as a successful and reputable platform. This chilled investors and led to another market-wide crash, likely prolonging the so-called “crypto winter”. The price of bitcoin, already well below what it was at the start of the year, fell again, falling more than 25% in less than a week. This year 2022 has solidified as one of the worst years crypto has ever seen.

Will Bitcoin rise in 2023?

There is no way of knowing if the crypto market will recover in 2023, as many factors can play a role in its trajectory. Time will tell if the industry will have an easier time in the coming year or if we will suffer the same scandals and price cuts.

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