The world of cryptocurrencies experienced dramatic upheaval in 2022. This is because a series of negative events occurred throughout his year that will shape the future of the industry in 2023 and beyond. If he had to describe this situation in two words, I would choose “loss” and “trust” (or lack thereof).
With the cryptic winter months seemingly still ahead, being able to see the big picture is essential to finding your way through the snow. Explore the major trends and events that have shaped the crypto space over the past year.
CEX integration, maturity improvement, and integration with the digital economy
Although cryptocurrency as a phenomenon has not died out, the demand for cryptocurrencies has declined significantly, reaching $2 trillion. However, there are broader macroeconomic reasons for this beyond the simplistic reasons often put forward. Over the past year, the actions of some companies like Three Arrows Capital have led to their eventual demise as their investments and the leverage used in them went awry.
In addition to excessive leverage, we have seen CEX consolidate for complex reasons (e.g. too much borrowing from elsewhere) and less complex reasons such as lack of trading volume and liquidity . Lack of volume kills markets, as does lack of liquidity (see The Wall Street Crash of 1929 and the Years After the Crash for more information). Still, it’s important to distinguish between business models weakened by external factors, internal risk management, FTX’s illegal activities, or their modus operandi.
Perspective is key as we begin this new year. Things are starting to normalize and the industry is growing more mature, transparent and determined. Haven’t we seen other scandals and breakups yet? Yes, probably. On the other hand, are the Fortune 500 bankruptcies over? i doubt it. What really matters at this point is how honest and open industry insiders are about what they do, their role in it, and the timeframes involved.
The crypto world – cryptography and blockchain – is set to take hold and strengthen its integration within and outside the digital economy. For those in doubt, it is useful to note the positions of organizations such as Goldman Sachs, Standard His Chartered, the Bank of England, and the Swiss Federal Bank. While this is neither positive nor negative, it is worth noting that global institutions recognize the broad appeal and potential of developing the digital economy.
Centralization and decentralization, a regulatory gray space
2022 was a big reality (failure) check from 2021’s big industry moves and investor optimism, but it also refocused the mind. Amid a flight to safety, the level of demand for stablecoins has not given many a good reason to give up on cryptocurrencies over the past few months. Instead, they swapped to stablecoins and converted their assets into cold storage to see what would happen next and make informed decisions. I think this is a smart move.
Perhaps as things progress, the discussion will become centered around centralization versus decentralization, and possible vectors for space exploration. Circle Internet Financial Chief Strategy Officer Dante Disparte recently wrote to the World Economic Forum: regulated and established body”.
Elsewhere, the issue of regulation and activist analysis of the environmental impact of crypto has made significant progress. Regulations feel imminent in certain countries, particularly the United States, but it remains unclear which aspects these regulations will cover and which parts of the industry will be regulated.
The US SEC sees cryptocurrencies as securities, the UK sees them as digital currencies, and the ECB sees them as a form of gambling. It presents the challenges and opportunities to develop and direction, and the risks to manage.
The Environmental Impact of Crypto: More “Pros” to Regulation
Given the above, the issue of government influence will be one of the most pressing issues in 2023. As a result, the industry must weigh adaptability, adaptability, and innovation simultaneously at an urgent rate.
For example, after China banned cryptocurrencies in 2021, the US market has become one of the major areas for cryptocurrency mining. In 2022, it is no surprise that NGOs and activist groups have stepped up their efforts to draw attention to the dangers of cryptocurrency mining to the environment. Highlighting how crypto-assets that use proof-of-work consensus, such as Bitcoin, require enormous amounts of computer power, the impact of such farms is far greater than all coal mines in the United States combined. leading to non-ecological farm systems, to the extent that they grow to a large extent, but estimates vary widely.
Regardless of the estimates used, industry must play a leading role in protecting the environment on a practical as well as a theoretical level. The technology and solutions are there. Or if it’s a nascent industry like cryptocurrency that has a big following among environmentally conscious 18-35 year olds who know the climate clock is ticking, what It will be interesting to see how developments and initiatives arise. Frankly, the interrelationship between cryptocurrencies and the physical environment is one aspect that will rebuild trust across the industry, but it is not a reason to be aggressive.
Volatility: Not always beneficial
If 2021 brings positive volatility, Terra’s implosion in May 2022 will likely see investors sell a sizeable share of Luna as its synthetic stablecoin is de-pegged from the dollar, leading to a number of It lost almost all of its value in a matter of days, causing a great deal of turmoil.
Terra, though famous, is just one example of where cryptocurrency volatility is a common problem. Yet it works both ways, given the impact of inflation, interest rates, and microeconomic disposable income.
Ethereum’s Merge Upgrade, Brazil’s Upcoming CDBC, NFTs, and AI
One of the major technological advancements of 2022 was the move from “proof of work” to “proof of stake” on Ethereum — aka The Merge. This has allowed Ethereum to reduce its potential environmental impact and avoid ecosystem-related regulations from the US government.
More and more institutions and governments are adopting cryptocurrencies in 2022. Latin America, in particular, a fairly volatile and innovative market, is a pioneer here, with the Brazilian government even planning to test her own digital currency in 2023.
Another trend is the growth of NFTs, metaverse-related projects, and GameFi. Multiple Play-to-Earn projects have created their own ecosystem, allowing users to combine their financial and gaming interests. Axie Infinity still tops the list, but new and interesting players are constantly emerging.
AI-powered platforms are also maturing. It offers a balanced portfolio to maximize growth and is significantly more stable in its current state of AI development. It will definitely be interesting to see this trend in 2023.
How to survive the cryptocurrency winter?
The current crypto winter may delay the development of cryptocurrencies and their space for a long time. Still, the development side is progressing well, and the long-term movement of decentralized finance and Web 3.0 looks like the EV car of 15 years ago.
Apart from that, a reduction in the number of ICOs and/or a clearer differentiation between them would be good for investors, projects, CEXs and the industry, especially if trust has been broken to some extent.
A crypto winter, bear market, ice age, or whatever one wants to call it, occurs when global economic trends are uncertain and pessimistic. Meanwhile, some emerging markets are booming with demand outstripping supply. That said, it is not unreasonable to think of a two-phase recovery for cryptocurrencies that have remained subdued in Europe while demand increases from regions such as Latin America and Africa. As such, the desire for stable coins is also different than for unstable coins. Individual cryptocurrency performances aside, a market marked by a period of stagnation before a brief rally feels like the potential of the whole market once the economic headwinds dissipate.
For investors committed to crypto or currently holding cash, navigation requires timing, analysis, research, risk mitigation, and an open mind. Moreover, retail investors’ appetite for risky assets will naturally remain subdued until the global macro picture becomes clearer and companies begin to halt their mass layoff plans for the well-paid middle class. At the individual crypto level, development, partnerships, and roadmaps must take precedence over short-term trading thinking.
For the industry itself, this latest crypto bear market is an opportunity to enable, foster, communicate, disprove, and be transparent about sophisticated and responsible competition at a time when journalists and regulators are calling for pain. . This environment suggests that the next breakthrough for cryptocurrencies will come not only from economic improvements, but also from technological advances between cryptocurrencies and GameFi, DeFi, shipping, commodities, etc., and regulations that improve rather than block. It suggests that it should be
Robert has 14 years of experience in finance, government, investment banking, wealth management and strategic advice. Former Director of Black Square International and former Visiting Fellow of the London School of Economics.
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