2022 was a tough year for the cryptocurrency industry. With the rapid growth of digital assets to their all-time highs in 2021, investors were excited about what the future held in store. But unfortunately, 2022 has seen its fair share of uncertainty and turbulence, with a number of major market events causing dramatic price swings and resulting in the sector being thrown into disarray.
In this article, we will look back at some of the most noteworthy events that occurred within the crypto and blockchain industry in 2022.
Crypto Winter and the Fall of Crypto Prices
One of the most significant events was undoubtedly the so-called “crypto winter” of 2022, which saw many crypto assets slump in value, wiping out billions of dollars worth of investments.
How did that happen? From the very beginning of the year, cryptocurrency prices began rapidly declining. The total market cap of the crypto market was around $2 trillion in the first days of January, and as of December 7, 2022, it is worth around $800 billion. The market shrunk by more than half, with practically all digital currencies massively losing their value. Bitcoin price has slumped by more than 75% — from $64,863 on November 12, 2021, to just $15,647 on November 22, 2022. Other currencies followed the lead, with Ethereum dropping about 75% year-over-year and Ripple dropping about 70%.
Why did that happen? Most experts believe that this sharp decline can be attributed to many factors, such as the macroeconomic and geopolitical challenges that took place this year, rising interest rates from the world’s leading central banks, and increased attention of regulators to the blockchain industry. And not only that — the crypto market was also hit by a number of high-profile scandals and collapses that further led to the industry’s shake-up.
Terra-Luna Collapse and Its Consequences
The first massive blow to the crypto market was the collapse of the stablecoin Terra USD and its associated token Luna.
On May 7, the Terra USD suffered a significant devaluation after a large swap caused an imbalance in its liquidity pool, leading to mass withdrawals of UST tokens from exchanges.
The main idea behind stablecoins is that they should be immune to price swings, always have a value that is equal to 1 U.S. dollar, and be a sort of safe haven from the volatility of other crypto assets. However, Terra stablecoin depegged, which pushed prices below $0.01 as crypto investors were trying to save their money.
The consequences of this event were severe — the crypto market experienced its first major price crash, with Bitcoin dropping by more than 25% in over a week. Some prominent crypto funds, like Three Arrows Capital, went bankrupt following the collapse. Additionally, many crypto projects were affected, succumbing to the market’s pressure.
FTX Bankruptcy and the Ensuing Market Chaos
The second major scandal of 2022 was the bankruptcy of FTX, one of the most popular crypto exchanges in the industry.
November saw a series of revelations about FTX that sparked investor concerns — it was revealed that the FTX exchange had strong ties to the trading firm Alameda Research, founded by FTX CEO Sam-Bankman Fried, and that the native token of FTX (FTT) was being used as collateral for Alameda. It also turned out that FTX was using customers’ money to plug budget holes. This led investors to start asking questions about the integrity of the exchange and its operations.
After Binance CEO Changpeng Zhao announced that his exchange will liquidate all its FTT holdings, the FTX token started a steep decline. This led to significant withdrawals from FTX, causing liquidity issues on the platform and ultimately resulting in the collapse of FTX. The estimated debt of FTX is now ranging between $10 billion and $50 billion to its former partners and clients.
The market chaos that followed the FTX bankruptcy was immense. Many investors lost their money, triggering huge sell-off across the entire crypto market. As a result, most digital assets dropped to levels unseen since 2019-2020, with Bitcoin falling to nearly $16,000. Several big players on the market went bankrupt, like BlockFi, and some others had major problems, like Galaxy Digital. Almost all big centralized exchanges saw a significant outflow of customer funds from their platforms. A lot of traders started to look for more decentralized solutions — and the DeFi industry got its boost.
Also, “proof of reserves” audits became a thing — many cryptocurrency exchanges are now publishing documents to provide their users with added assurance and transparency that the investments are backed by the assets they claim to hold.
DeFi and NFT Sectors are Taking a Heavy Hit
The markets that were supposed to be the saviors of crypto — DeFi and NFT sectors — also took a heavy hit in 2022.
The DeFi sector has been particularly hard-hit this year. After its impressive bull run in 2020 and 2021, the sector started declining in early 2022 due to heightened regulatory scrutiny and general market chaos. Once having top positions in venture capital investments, the DeFi sector lost almost 75% of its market cap in over three months this spring, as evident from GoinGecko’s Q3 2022 report. New projects were struggling to get financing as institutional investors started to look for safer options.
The NFT sector has also seen a decline in activity and prices throughout this year. The sector’s boom happened in 2021 when it saw incredible growth, but since then, the market has been struggling to stay above water. The bearish sentiment that affects the crypto market at large is also having an effect on the NFTs, as investors are selling off their assets to avoid losses.
However, both DeFi and NFTs still hold promise for the future of crypto investing and the industry as a whole. Despite the challenges, many projects are still pushing forward in developing their protocols and products, and the industry is still likely to see a lot of activity in these sectors in the coming years.
The Ethereum Merge, a major event in the crypto world this year, brought with it a whole new set of opportunities for those involved in crypto. The network underwent a big upgrade, transitioning from its proof-of-work algorithm to a proof-of-stake consensus mechanism. Ethereum should now consume 99.9% or so less energy and be much more secure.
The Ethereum Merge enabled Ethereum 2.0, an upgrade that introduces sharding, scalability, and better privacy features to the network, and this is likely to increase its utility in the near future.
Regulations and Increased Institutional Involvement
Due to the increasing popularity of digital assets and their underlying technology, governments around the world started paying more attention to them.
Many countries around the globe started to introduce laws that regulate the use of digital assets, including their tax implications.
For instance, in 2022, the U.S. announced a new framework that gave additional authority to market regulatory agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regarding financial markets and the crypto market particularly. Regulators in other countries are not lagging behind either.
The SEC’s position on cryptocurrencies appears to be hardening, as evidenced by its recent lawsuit against Ripple and targeting of major exchanges such as Coinbase and Binance. Chairman Gary Gensler has referred to the sector as the “Wild West” with an emphasis on investor protection, suggesting that cryptocurrencies may ultimately be classified as securities in the future. FTX collapse also contributed to the general sentiment of mistrust towards crypto by authorities.
However, governments are also taking note of the advantages of blockchain technology as central bank digital currencies (CBDCs) are now being actively developed and tested by many countries. Also, many big banks and institutions started to increasingly collaborate with crypto companies to build better transaction infrastructure by implementing blockchain and distributed ledger technology.
What Will Be Coming Next?
That is difficult to say, but the crypto industry surely learned its lesson from this year’s events and is now more prepared to face whatever is to come. The market leaders are now looking into ways to make cryptocurrencies more stable and secure in order to counter any potential risks. Regulations have become stricter as well, with governments around the world taking steps to protect investors and combat illicit activities.
There is no doubt that blockchain is a future of finance and will certainly have far-reaching implications for the global economy. The industry is still in its infancy, so there are many challenges for it to overcome.