Cryptocurrency is still a relatively new technology, and many people are excited about its potential. However, crypto has been through turbulent times in the past year after a meteoric rise. Major coins, including Bitcoin, have lost a significant amount of their value.
Was the dramatic drop in 2022 just another bump in the road, or will crypto continue to fall as people become more skeptical about the technology? We’ll break down what you need to know and how recent trends suggest the crypto space can continue to grow.
Key learning points
- Bitcoin’s price fell in 2022, losing about $30,000.
- The collapse of FTX has significantly damaged the cryptocurrency industry, but the even more recent collapse of Silicon Valley Bank has arguably increased confidence in decentralized banking.
- Investors remain uncertain whether digital assets will become a more popular form of currency, or could 2022 be the beginning of the end for the technology?
What is Cryptocurrency?
Cryptocurrency, or crypto, is a digital currency that does not depend on central authorities such as governments or banks. It serves as a decentralized system to complete transactions.
There are hundreds of different cryptos out there. One of the most famous is Bitcoin, which was released in 2009.
Different cryptos have variations in how they work, but they tend to share some features. Transactions are validated as part of a blockchain and devices can connect to the crypto network to “mine” coins, verifying transactions in exchange for coins. This makes crypto closer to something like the Gold standard.
Fiat currency – used worldwide today – derives its value from the fact that the government decides it has value. The government trusts businesses to accept the currency as payment, but the value of the currency is not tied to a specific commodity, such as gold or silver. Bitcoins need to be mined, but not all cryptocurrencies need to be mined. The mining process is expensive, requires complex hardware and consumes a lot of energy.
Since crypto started gaining popularity, exchanges have been launched to help people buy and sell various cryptos or exchange real currencies for crypto.
Early adopters of the most popular coins have usually seen their wallets thicken. In 2010, Bitcoin was worth less than a dime. In 2021, Bitcoin peaked at over $64,000.
However, less popular coins have been seen investors lose significant amounts.
What happened in 2022?
In 2022 there were significant upheavals in the crypto market.
Crashes early in the year
2022 was the year of the crypto winter. This cryptocurrency bear market saw a steep decline at the beginning of the year when the stablecoins Luna and TerraUSD crashed in May. Trading platform Voyager filed for bankruptcy in July along with crypto hedge fund Three Arrows Capital. According to last year’s bankruptcy filings, Three Arrows Capital faced $3.5 billion in claims from creditors.
Prominent celebrities like Kim Kardashian were also scrutinized for cryptocurrencies endorsement in 2022. Kardashian’s confrontation with the SEC in October resulted in her settlement with the commission for more than $1 million.
However, the most high-profile crypto upheaval of 2022 was the collapse of FTX.
Historically, the cryptocurrency market has been volatile, with significant price spikes and falls. For example, during the period from 2012 to 2014, Bitcoin started trading at $13.28, rose to $1,237.55, and fell to around $687.
During the COVID-19 pandemic, the crypto market experienced a rapid increase, rising from $6,635.84 to over $64,000. Many mainstream businesses got involved in the crypto market, with investment firms offering crypto ETFs or direct investments in cryptocurrencies.
Crypto-focused companies, such as FTX, also started bringing in large amounts of money and became known to the public rather than just crypto or tech enthusiasts.
FTX, a crypto exchange, was one of the main entities behind last year’s crypto crash.
The company was founded in May 2019 and quickly grew into one of the largest exchanges. It has even made high-profile investments in its marketing, sponsoring the Miami Heat basketball arena, Major League Baseball and the Mercedes-AMG Petronas F1 team.
On November 2, Coinbase, another cryptocurrency company, published an article revealing that a trading firm owned by FTX CEO Sam Bankman-Fried owned a large chunk of FTX’s proprietary cryptocurrency, FTT. This could artificially increase the value of the coin.
Binance, a competing exchange and FTX investor, sold its FTT holdings in response. This led to a price crash. Many FTX users rushed to withdraw their funds from the exchange, causing a liquidity crisis and preventing investors from withdrawing funds.
A Nov. 9 Bloomberg report revealed that the SEC and the Commodity Futures Trading Commission were investigating FTX and Bankman-Fried. FTX and 100 of its affiliates filed for bankruptcy on November 11. Sources claimed the exchange had debts in excess of $8 billion.
That same day, FTX removed $473 million in funds in authorized trades. Analysts currently estimate that billions of customer money are still not taken into account.
On December 12, police arrested Bankman-Fried in the Bahamas on wire fraud and conspiracy charges.
Crypto prices in 2022
Unsurprisingly, the events that destroyed one of the world’s largest exchanges had a significant impact on the value of cryptocurrencies.
Bitcoin started the year at $47,733.40. It bounced up and down until early April when it began a steady decline. It reached a low of $15,760.10 on November 21, but then recovered. Currently it sits at just over $30,000.
FTX and several crypto collapses were not the only factors behind the price drop in 2022. Economic uncertainty, the war in Ukraine and continued inflation mixed with rate hikes also contributed to pessimism about investing in crypto.
A few examples of other events that have hurt cryptos in the past year include:
- An announcement in early 2022 that Russia could ban crypto
- An issue in June 2022 where Binance interrupted Bitcoin withdrawals
- A June 2022 announcement by Celsius Network freezes withdrawals and transfers
How has Crypto recovered?
The question for investors at the end of 2022 was whether this was the case the beginning of the end for cryptocurrency. Or was it just another bump in the road? After all, crypto has seen major price crashes before, but continued to soar to greater heights.
It is worth remembering that even at the low point in the fall of 2022, Bitcoin’s value was still higher than it had been before 2020. Since the low point late last year, Bitcoin has regained a significant amount of its value, now sitting at over $30,000.
Many experts say declining inflation, expected interest rate cuts later in 2023 and reduced recession fears were factors behind this price hike. Also, the collapse of Silicon Valley Bank earlier this year may have spurred investors to investigate digital assets such as cryptocurrency. With the banking crisis in America, many investors are skeptical about the ability of centralized banks to manage money.
Consumers have yet to use cryptocurrencies like Bitcoin widely enough to be considered a legitimate replacement for fiat currency. However, investors may turn to blockchain technology if centralized banks continue to run into difficulties.
Could Crypto be on its way out?
Some arguments against a full cryptocurrency recovery include Chinese government skepticism and a crackdown on the technology, strong concerns about crypto’s impact on the environment, and the history of crypto exchange security vulnerabilities and hacks.
Given the nature of crypto, it can be difficult, if not impossible, to recover funds after a hack.
Crypto regulation has also increased recently, eliminating one of the main benefits of a decentralized, unregulated currency.
On the other hand, blockchain technology has valuable applications for industries that rely on contracts. Crypto can make online and international trade more accessible by removing the need for currency conversion and middlemen.
Due to many coins’ limits on the number of tokens that can exist, some argue that crypto can be a good store of value in the long run.
Investors should be cautious due to the volatility of crypto and the uncertainty surrounding it. Those who choose to invest should use basic risk management strategies such as maintaining a diverse portfolio.
In addition, investors may want to keep only a small portion of their portfolio in cryptocurrency limit the risk of catastrophic loss crypto should drop again.
Debates about the value of cryptocurrency
Crypto skeptics often debate whether the asset has any underlying value. This debate includes related theories of currency. While the world we know today uses fiat currency, traded on global markets and not tied to any specific commodity, we have historical precedent for currencies tied to a “made” thing.
Countries used the gold standard worldwide for years and it had obvious benefits, such as controlling inflation and limiting government power over money printing. But it also had obvious drawbacks, such as inflexibility and difficulty adapting to crises such as war. If you’re not sure about the value of cryptocurrency — especially since it’s an asset that isn’t widely accepted as a means of payment by most businesses — broader debates about currency may interest you.
It comes down to
Crypto is an exciting technology and many people have jumped on the bandwagon in recent years. Sadly, many investors were burned over the past year as crypto values plummeted.
With the collapse of the crypto exchange FTX, stablecoins such as Luna and TerraUSD, and the SEC taking legal action against celebrity endorsement of cryptocurrencies, investors understandably lacked confidence in the digital asset.
In 2023, we have seen cryptocurrencies like Bitcoin regain some of their value, giving hope to many that crypto will recover and recover most of its value in the years to come. We’ll have to wait to see if this happens, but it’s still true that cryptocurrency is a volatile space, and investors should prepare to lose everything they invest in it.
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