After experiencing euphoric highs the previous year, the cryptocurrency market has had to deal with a tightening monetary policy environment, which has resulted in sell-offs, the implosion of projects like Terra, bankruptcy, and the dramatic demise of the FTX exchange. As the governor of the Reserve Bank of India warned on Wednesday, would crypto be the cause of the next financial crisis?
There is no denying that 2022 has been a challenging year for international markets.
From its peak in 2021, the value of the U.S. stock market has decreased by more than 15%, that of the bond market by more than 20%, and that of the cryptocurrency market by more than 50%. A volatile asset, cryptocurrency has always been.
However, 2022 was a stomach-turning roller-coaster journey for investors and significant market participants.
Popular cryptocurrencies had their prices fall throughout 2022. Additionally, some cryptocurrency businesses and their founders are in danger of going bankrupt and perhaps being imprisoned.
Bitcoin, Other Currencies Plunge
Undoubtedly, 2022 has been a challenging year for international markets. From its peak in 2021, the value of the U.S. stock market has decreased by more than 15%, that of the bond market by more than 20%, and that of the cryptocurrency market by more than 50%.
BTC Price 1Year
A volatile asset, cryptocurrency has always been. However, 2022 was a stomach-turning roller-coaster journey for investors and significant market participants.
Popular cryptocurrencies had their prices fall throughout 2022. Additionally, some cryptocurrency businesses and their founders are in danger of going bankrupt and perhaps being imprisoned.
According to some experts, the free slide of cryptocurrency began when investors started liquidating their digital holdings in response to interest rate increases by the Federal Reserve.
After Celsius Network, a former cryptocurrency lending business, stated it was halting all withdrawals and account transfers in order to “respect, over time, withdrawal obligations,” the market immediately crashed.
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Investors’ Retreat And Bankruptcies
These speculative asset classes began to slow as central banks changed course, started to reduce market liquidity, and increased interest rates.
Investors saw possibilities to hold lower-risk investments and receive a competitive yield as a result of the rise in interest rates.
The crypto market started to decline as the cost of risky assets started to rise. The value of the cryptocurrency market fell by over $1 trillion by the end of the second quarter of 2022.
As leveraged positions started to unravel, this dramatic sell-off picked up speed.
The crypto markets were beginning to show indications of stabilization by the end of the summer. Investor trust in cryptocurrencies started to rise as it appeared that the markets had been cleansed of the ecosystem’s leverage.
Until surprising facts about FTX and its sister company Alameda Research were made public in a November report, the cryptocurrency markets remained confident into the late fall of 2022.
Changpeng Zhao, CEO of Binance, voiced his concerns about FTX’s stability and capacity to support its self-issued coin, FTT, right away and in public. Traders started taking money out of FTX.
In just a few days, the price of FTT dropped from almost $26 to $1, and FTX halted customer withdrawals.
Sam Bankman-Fried, the company’s 30-year-old founder, has been detained after being accused of scamming investors.
The United States Securities and Exchange Commission, which claims that FTX client losses total $8B, has filed a number of accusations against Bankman-Fried. However, FTX was hardly the first cryptocurrency business to fail in 2022.
As a result of FTX’s demise, bitcoin lender BlockFi filed for Chapter 11 bankruptcy protection in November.
Crypto Hackings
As of this point in the year, hackers have stolen more than $3 billion in digital assets, according to the research firm Chainalysis.
According to the company, 11 different hacks resulted in the theft of $718 million in October alone, making it the worst month of the worst year for cryptocurrency cybercrime.
The biggest cryptocurrency exchange in the world, Binance, lost $100 million as a result of an exploit on its blockchain network, Binance Smart Chain.
In the wake of increasingly large losses, experts from academia, crypto exchanges, the research community, and the legal sector are speaking out to argue that hacking does not pose an existential threat to the cryptocurrency concept.
Stablecoins Also Took A Punch
The digital currency, stablecoin, is backed by another form of money, such as the US dollar or a physical good like gold. They are made with the intention of being less erratic than other types of cryptocurrencies.
But in 2022, the value of some of the most actively traded stablecoins significantly decreased. The collapse of the Luna token and its related TerraUSD was the most notable loss.
Recent Governments’ Take On Crypto
In India, the government is drafting cryptocurrency laws that could forbid some cryptocurrency-related behavior while establishing a legal framework for the digital currency issued by the central bank.
Even though cryptocurrencies were a considerably smaller asset class, central banks frequently claimed that they did not pose a significant risk to the economy.
However, a rising number of voices are raising concerns about the possible macroeconomic effects, especially if cryptocurrencies are left uncontrolled.
If private cryptocurrencies are allowed to proliferate, they will be the root of the next financial crisis, the governor of India’s central bank said on Wednesday.
Shaktikanta Das, governor of the Reserve Bank of India, stated at a gathering that “cryptocurrencies pose… significant inherent hazards for our macroeconomic and financial stability.” He used the most recent demise of FTX as an illustration.
In China, the central bank has made the most progress in creating a CBDC. Since the end of 2020, Beijing has been testing the usage of its digital yuan in the real world and will make it more widely available this year.
China has virtually outlawed the trade of cryptocurrencies.
In the UK, Jon Cunliffe, the Bank of England’s deputy governor for financial stability, noted that cryptocurrencies might not be “integrated sufficiently” into the financial system to pose an “immediate systemic danger.
He stated that he believes there would “increasingly become hazy lines” separating the regular financial system from the cryptocurrency industry.
In the U.S., the Treasury Department stressed the need for regulation and warned that “crypto-asset operations could pose dangers to the stability of the U.S. financial system.”
Are There Hopes for 2023 Recovery?
Investors should be mindful that pressure on crypto will continue as we head towards 2023 due to the current macro climate, a lack of regulation and confidence in cryptocurrencies, and unclear legal frameworks.
Although these problems are serious and will be difficult to resolve, blockchain innovation and advancement are still expanding, and the technology’s use cases are still being adopted.
It is crucial for all investors to assess their cryptocurrency portfolios and the investing thesis behind their allocations and create a plan for future investments in cryptocurrency.
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