It's no secret that 2022 has been a difficult year for global markets.
The U.S. stock market is down more than 15% from its 2021 peak, the bond market is down more than 20%, and the crypto market is down more than 50%.
In early 2022, central banks around the world began raising interest rates to curb inflation and reduce the rate of economic expansion. Tighter monetary and fiscal policies have dramatically reduced investors' risk appetite and speculative investment strategies. Many investors are choosing to sell or exit speculative asset classes altogether. This macroeconomic pressure is impacting traditional asset classes and is also putting tremendous pressure on emerging asset classes, including cryptocurrencies.
The economic climate heading into 2022 has given cryptocurrencies a boost of shine. Record low interest rates, an expanding money supply, and a strong economy have all set the stage for record growth in both price and adoption in the cryptocurrency economy.
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Bitcoin (BTC) and Ethereum (ETH) both reach all-time highs, decentralized finance (DeFi) protocols grow to record sizes, and crypto market capitalization exceeds $3 trillion, making them irreplaceable. Investor interest in cryptocurrencies was clear as they became tokens (NFTs). The market has grown rapidly and venture capital firms have invested in many crypto businesses.
Concentrated Finance (CeFi) exchanges have experienced tremendous growth as they have provided services that provide attractive yields to investors who were unable to find attractive yields in traditional financial markets. New crypto projects have garnered incredible attention and growth, including the Terra ecosystem led by the algorithmic stablecoin UST and sister cryptocurrency LUNA.
Investors' appetite for risk investing and speculative asset investing was driven by economic policies that many believed would continue for years to come. Traders, institutional investors, and speculators took leveraged positions and borrowed money at low interest rates, further increasing the frenzy in the crypto market.
These speculative asset classes began to slow down as central banks reversed course and began reducing market liquidity and raising interest rates. With interest rates rising, investors saw an opportunity to hold low-risk investments and earn attractive yields. As the prices of risk assets began to fall, the cryptocurrency market began to sell off. By the end of the second quarter of 2022, the market capitalization of cryptocurrencies had fallen by more than $1 trillion. This deep decline accelerated as leveraged positions began to unwind.
New and exciting projects like Terra began to fall apart as traders exited the crypto market. The UST stablecoin has been unpegged from the US dollar. Investors lost billions of dollars in UST's collapse, and the overall market came under even more pressure.
CeFi's instincts were overleveraged, and it lent large sums of money to hedge funds such as Three Arrows Capital, which lost huge sums of capital in the collapse that followed Terra's collapse. Three Arrows Capital, along with many other leveraged hedge funds, defaulted on loans to a number of CeFi companies, forcing these CeFi companies to file for bankruptcy protection. User funds held on the CeFi platform were frozen and retail investors were unable to delete their funds. Companies such as Celsius Networks and Voyager Digital, which promised attractive yields to users, failed and users lost their money.
By the end of the summer, the cryptocurrency market began to show signs of stabilization. The influence in the ecosystem has clearly been cleared from the market and investor confidence has started to return to cryptocurrencies. The CoinDesk Market Index (CMI) rose to a summer high of $1,092 on September 12th. Confidence was returning to the market after FTX, a major exchange and custodian, intervened to rescue BlockFi, a major CeFi lender, from bankruptcy. Led by founder Sam Bankman Fried, the seemingly powerful FTX continues to invest in crypto companies, rescuing many troubled startups, and is considered the strongest company in the crypto space. was.
Confidence in the crypto market continued until the late fall of 2022, when shocking facts surrounding FTX and its sister company Alameda Research were revealed in a CoinDesk article in November. Binance CEO Changpeng Zhao immediately publicly raised concerns about FTX's solvency and ability to sustain its self-issued token FTT. Traders began withdrawing funds from FTX. FTT price fell from around $26 to $1 in just a few days, and FTX suspended customer withdrawals.
A previously healthy company turned out to be insolvent after commingling customers' deposits with funds. FTX filed for bankruptcy protection in late November. The previous relief for BlockFi was rescinded, and BlockFi was sent back to bankruptcy court. The virtual currency market has crashed. The CoinDesk market index plummeted to a low of $795 as investors continued to flee the crypto market.
It is important to note that none of the outages we witnessed this year were caused by failures in the underlying blockchain technology. In fact, technology development continues in this area, making this year a landmark year for many in blockchain history. Ethereum successfully underwent an upgrade in his 2022, moving from a proof-of-work blockchain to a proof-of-stake blockchain. Ethereum tokenomics has also changed significantly, which many believe will benefit the future of the Ethereum ecosystem.
The bankruptcies and bankruptcies seen in 2022 have led many to call for further regulation of cryptocurrencies. Fraud, theft, irresponsible lending, leveraged trading, and more have created a difficult environment for investors that many believe would not have been possible without proper government oversight and regulation.
Looking ahead to 2023, investors should be aware that the current macro environment, lack of regulation and trust in cryptocurrencies, and unclear regulatory frameworks will continue to put pressure on cryptocurrencies. Although these issues are significant and not 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 portfolio, the investment theory behind their crypto allocation, and plan for future crypto investments appropriately.
