2022: the year that broke bitcoin

Bitcoin flipped in 2022, ending the year down an alley and losing the reputation of easy money and leveraged bets, and avoided by investors.

The cryptocurrency has lost 60% of its value, while the broader market has shrunk by $1.4 trillion, crushed by rising interest rates and fading interest in risky businesses hit by meltdowns. industry companies including FTX by Sam Bankman-Fried.

Cryptocurrency funds recorded net inflows of US$ 498 million (R$ 2.6 billion) in 2022, against US$ 9.1 billion (R$ 48.3 billion) in 2021, according to data from the digital asset manager CoinShares, reflecting how conventional finance has moved away from the market.

James Malcolm, director of exchange strategy at UBS, stated that during the first half of the year he spent 70% of his time with clients interested in cryptocurrencies. In contrast, last month during 10 days from Montreal to Miami “I spent less than 2% of my time discussing crypto”.

Even last year, before the meltdown began in November, cryptocurrencies were seen as two or three years away from gaining acceptance from large institutional investors, Malcolm said.

“Now that’s completely in the very distant future.”

2023

However, this year has not been as bad for cryptocurrencies as it might have seemed: 2022 was also the year that the ethereum blockchain finally released its mega-update known as “Fusion”, which changed it in September to a “proof” system. of participation”, with less expenditure of energy.

“This event was…one of the only positive events in what was otherwise a pretty 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 this progress, 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 an important development this year.

“So this is very positive for the ecosystem and something to keep an eye on for the long term,” he added. “We may see higher allocations to digital assets once risk appetite resumes in 2023.”

Bitcoin meets recession

The bitcoin quotation reached a record US$ 69 thousand (R$ 366.7 thousand) in November 2021, with the cryptocurrency market worth US$ 3 trillion (R$ 16 trillion). The currency was boosted by fiscal and monetary stimulus from countries around the world trying to avoid the economic damage caused by their own lockdown measures.

But as societies have resumed activity, rising inflation has forced central banks to tighten rates and this has led investors to flee high-risk assets such as tech stocks and cryptocurrencies.

Bitcoin, long touted as a store-of-value currency in times of inflation because of its limited supply, failed the first test, with investors abandoning the cryptocurrency for traditional safe havens like the dollar.

“The year 2022 was a new environment for digital assets. They’ve never been in a recession or an environment of rising rates,” said Katie Talati, director of research at digital asset firm Arca.

As investors pulled out of their cryptocurrency investments, major projects came under strain. The first to crash were terraUSD, supposedly a “stablecoin”, and its sister luna. The value of coins fell in May, with investors globally losing around US$42 billion (R$223.2 billion).

Shockwaves reverberated through the market: US cryptocurrency bank Celsius froze client assets in June and revealed a $1.2 billion (R$6.3 billion) shortfall by declaring insolvency, pulling the fund from Singapore-based Three Arrows Capital cryptocurrency hedge into the hole.

In November, one of the industry’s leading platforms, FTX, suddenly filed for court protection and bitcoin lost 25% in value in less than four days as Bankman-Fried struggled for funds to bail out her exchange.

Bitcoin and other digital assets have been crushed, more than halving in just 49 days since the end of May. In a single day in June, the world’s largest cryptocurrency dropped more than 15%, its worst day since March 2020, when the wave of Covid-19 roiled financial markets. Bitcoin is now hovering around $16k.

Overall 2022 was pretty much a calamity for cryptocurrencies. Or, as economist Noelle Acheson puts it, “the year the leverage-inflated bubble burst, revealing the structural weaknesses of an industry that grew very, very fast.”