Crypto Winter Leaves Few Gifts Under the Tree in 2022

In 2022, the cryptocurrency industry fully entered the mainstream — and almost drowned.

The industry enjoyed an auspicious start, coming off of a banner 2021 year that saw record valuations, exciting innovations, and hordes of newly minted paper millionaires, even paper billionaires.

Splashy, celebrity-studded, fear-of-missing-out (FOMO)-driven commercials for crypto companies like Coinbase, Crypto.com, eToro and FTX ran during February’s Superbowl and kept the party going on one of the world’s biggest stages.

Their enthusiastic appeals belied the trouble ahead.

Marketplace Markdowns

Tech focused and digitally native companies around the world grew in leaps and bounds during 2021, only to hit reality’s brick wall in 2022. Crypto was no different.

The industry’s preeminent digital asset, bitcoin, lost around 60% of its value from a one-time high of $69,000, tracking comparable declines posted by other mega-cap tech titans including Amazon, Meta, PayPal and Netflix, to name a few.

Admittedly, 2022 was a difficult year all around. Coming out of a global pandemic, global markets ran into a buzzsaw of macroeconomic headwinds. The U.S. equity and bond markets both took double-digit percentage hits, led primarily by tech markdowns.

Trillions of dollars of value were vaporized.

But while large companies and their shareholders have weathered storms before, 2022 was a new environment for emergent digital assets and their investor base. The crypto industry, which was born out of the 2008 recession, had not been around for anything similar since, much less endured a broader macro ecosystem destabilized by both interest rates and inflation rising at historic levels.

Tightening monetary policy and investor pullbacks caught the nascent industry by surprise, shrinking the value of the crypto market by an estimated $1.4 trillion, a nearly 50% drop from its 2021 high of $3 trillion.

Burnouts and Bailouts

The unfavorable economic environment would, as the year continued, go on to lend credence to the old Warren Buffet adage that, “while a rising tide lifts all boats, it’s only when the tide goes out do you learn who has been swimming naked.” In the case of crypto, that exposure was being made clear, especially its oft-touted and purported status as a hedge against inflation.

TerraUSD and Luna

Responding to macro realities, investors began to pull their money from crypto. The outflow strained major industry projects, and the first to fracture was TerraUSD and its native coin Luna, which in May collapsed, costing stakeholders across the world an estimated $48 billion.

The failure of TerraUSD, supposedly a “stablecoin” pegged to real monetary value whose intended purpose was to promote stability across crypto, sent shockwaves reverberating through the industry. It turned out TerraUSD maintained its peg through a complex arbitrage system with the free-floating sister token, Luna, which was managed by self-executing smart contracts.

Self-executing, yes. Smart execution, not so much.

Celsius Network

U.S. crypto lender Celsius Network, which leveraged big bets to promise its customers cheap money and attractive yield, fell victim to the Luna collapse through one of its investments and tumbled down a $1.2 billion hole into an ignominious bankruptcy just a few weeks after freezing customer assets in June.

Three Arrows Capital

Much of the Terra/Luna damage flowed through Singapore-based crypto hedge fund Three Arrows Capital (3AC), which hemorrhaged capital in the sell-off that followed the stablecoin’s failure. 3AC was subsequently left unable to meet margin calls from its own lenders, and was forced to declare bankruptcy. This proved to be very bad news for the many crypto institutions who had extended loans to the hedge fund and bet their money on 3AC’s ability to stay afloat, and it led to an over-leveraged daisy chain of even more industry bankruptcies, including Voyager.

FTX and Sam Bankman-Fried

While this was going on, the (at-the-time) leading crypto exchange FTX and its founder Sam Bankman-Fried were still actively casting themselves as the industry’s savior, promising to backstop crypto’s cascading domino moment with acquisitions and well-placed capital injections.

As summer wound down, crypto markets showed promising signs of stabilization and it appeared that the bad leverage had been purged from the marketplace.

From White Knight to Lights Out

Unfortunately, reality always trumps perception, and the biggest crypto domino had yet to fall. In November, the FTX exchange imploded over 48 hours as news came to light that the enterprise group of companies had misappropriated customer funds to make successively bad bets that left the company billions upon billions in the hole and no viable options to close the gap.

The knock-on effects of the global exchange’s demise severely rattled the industry, leading to further collapses at BlockFi, Genesis and others.

It has also sowed doubt through the entire sector, as the full extent of the fraudulent possibilities inherent to a centralized, black box business model become more widely understood.

Current headwinds in the macro environment, coupled with murky confidence and even murkier regulatory oversight will continue to put pressure on crypto.

Money Crypto vs. Tech Crypto

It needs to be said that none of the failures mentioned above were caused by issues endemic to the underlying blockchain technology supporting the crypto industry. In fact, many industry observers, and especially the purists, would tell you the failures were directly at odds with the promise and premise of blockchain technology.

Additionally, technical development within native web3 architecture has rapidly progressed, with Ethereum transitioning from proof-of-work to an exponentially more sustainable, on an energy-usage basis, proof-of-stake blockchain model. The upgrade, a monumental technological feat no matter one’s inclinations toward the industry, can be pointed to as a singularly positive event.

Today, the future of crypto as an asset class remains more unclear than ever as the focus has shifted to spiral cycle of new contagion impacts, bankruptcy and clawback proceedings, regulatory probes and potential after-the-fact legislative fixes.

Taken together, crypto appears set to remain in a similar course — at least for the early part of 2023 — as the industry braces for further impacts while awaiting its next killer use case or White Knight.