Bitcoin capsized in 2022, ending the year in an alley and losing its reputation for easy money and leveraged betting, and avoided by investors.
The cryptocurrency has lost 60% of its value, while the broader market has shrunk by $1.4 trillion, squeezed by the increase in interest ratesin addition to the disappearance of interest in risky enterprises shaken by the collapses of companies in the sector it included Sam Bankman-Fried’s FTX.
Cryptocurrency funds saw net inflows of $498 million (R$2.6 billion) in 2022, versus $9.1 billion (R$47.3 billion) in 2021, according to data from the cryptocurrency manager. digital assets CoinShares, reflecting how conventional finance has moved away from the market.
James Malcolm, director of exchange strategy at UBS, said that during the first half of the year, he spent 70% of his time with clients interested in cryptocurrencies. In contrast, last month during a 10-day trip from Montreal to Miami, “I spent less than 2% of my time discussing cryptocurrencies.”
Even last year, before the meltdown began in November, cryptocurrencies were seen as two to three years away from gaining acceptance from large institutional investors, Malcolm said.
“It’s completely in the very distant future now.”
errors and frauds
Even the biggest cryptocurrency exchanges have faced massive reliability issues, particularly in the last few months of the year. The biggest case of its kind exploded in November: FTX, one of the largest companies in the sector, filed for bankruptcy after a series of mistakes by its founder, the young Sam Bankman-Fried.
Considered a cryptocurrency militant, Sam stepped in to try and save other cryptocurrency brokers, such as BlockFi and Voyager Digital, who were facing problems caused by successive interest rate hikes in the US, one of the causes of the great tech crisis.
After a series of administrative errors, including financial transactions with subsidiary Alameda Research, cryptocurrency leader Binance offered to acquire FTX, in response to a call for help. According to Changpeng Zhao, president of Binance, FTX faced liquidity problems and could no longer financially secure its clients’ trades.
Zhao withdrew from the deal after identifying the company’s financial problems and possibly to avoid scrutiny by regulatory agencies during such important deals.
The withdrawal of the deal hastened FTX’s downfall, which culminated in a bankruptcy filing and subsequent arrest of Sam Bankman-Fried in the Bahamas.
Binance itself has faced problems. In October, hackers stole $100 million. In addition, he was investigated by the US Department of Justice, who suspected money laundering.
To escape an extensive inspection of the company’s accounts, CEO Changpeng Zhao (known as CZ) created Binance.US, legally isolated from the parent company. But regulatory agencies identified that the new company was also run by CZ from overseas.
The federal investigation remains active and could be a headache for the company and its founder next year as well.
However, this year hasn’t been as bad for cryptocurrencies as it might seem: 2022 was also the year that the Ethereum blockchain finally released its mega update known as “Fusion”, which turned it into September in a “trial” system. of participation”, with less expenditure of energy.
“This event was… one of the only positive events in an otherwise rather dismal year for cryptocurrencies,” said Anthony Georgiades, co-founder of blockchain Pastel Network.
“This update will make the Ethereum ecosystem much easier for people around the world to use. Because of these advances, it’s hard not to be optimistic about cryptocurrencies in 2023,” he added.
Ben McMillan, chief investment officer at IDX Digital Assets, said the growing popularity of blockchain-based tools, including decentralized exchanges and finance, was also a major development this year.
“So this is very good for the ecosystem and something to watch for in the long term,” he added. “We could see higher allocations to digital assets once risk appetite picks up in 2023.”
Bitcoin meets the recession
Bitcoin’s quotation reached a record $69,000 (R$358,900) in November 2021, with the cryptocurrency market valued at $3 trillion. The currency was buoyed by fiscal and monetary stimulus from countries around the world seeking to stave off the economic damage caused by their own lockdown measures.
But as companies resumed activity, rising inflation forced central banks to tighten rates, leading investors to flee high-risk assets like tech stocks and cryptocurrencies.
Bitcoin, long touted as a store-of-value currency in times of inflation due to its limited supply, failed the first test, with investors abandoning the cryptocurrency for traditional safe-haven assets like the dollar.
“The year 2022 has been a new environment for digital assets. They’ve never been in a recession or rising rate environment,” said Katie Talati, director of research at digital assets firm Arca.
As investors pulled out of their cryptocurrency investments, big projects were put under severe strain. The first to crash were terraUSD, presumably a “stablecoin”, and its sister luna. The value of the coins fell in May, with investors losing around $42 billion (R$218.4 billion) globally.
Shockwaves have reverberated across the market: US cryptocurrency bank Celsius froze client assets in June and disclosed a $1.2 billion deficit by filing for insolvency, dragging the crypto hedge fund’s headquarters into the hole Three Arrows Capital in Singapore.
Since the FTX crash, bitcoin and other digital assets have been destroyed, declining by more than half in just 49 days since the end of May. In a single day in June, the world’s largest cryptocurrency dropped more than 15%, the worst day since March 2020, when the wave of Covid-19 rocked the financial markets. Bitcoin is now hovering around $16k.
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Overall, 2022 has been pretty much a calamity for cryptocurrencies. Or, as economist Noelle Acheson puts it, “the year the leveraged bubble burst, revealing the structural weaknesses of an industry that was growing very, very fast.”
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