The collapse of FTX, the failure of Terra (LUNA) and other events continue to haunt the crypto industry. But some think the nightmare may not be over yet as we enter 2023.
Cryptocurrency market had a tough year
cryptocoin.comAs you follow, 2022 has been an eventful year for the global cryptocurrency industry. At the beginning of the year, the market cap of the global cryptocurrency industry was $2.19 trillion. However, its market capitalization fell 63% to approximately $820.7 billion by mid-June, with wide-ranging events taking the industry by storm.
This stretches back to 2021, when central banks around the world implemented expansionary fiscal policies to boost the economic recovery following the beating of Covid-19. These measures have accelerated the growth of the digital asset economy. Thus, it led to record highs for leading cryptocurrencies like Bitcoin and Ethereum.
However, in early 2022, top authorities began to implement contractionary fiscal policies to combat global inflation. Thus, investors’ appetite for speculative assets decreased. For example, on June 13, the stock market entered a bear market, witnessing one of its worst performances in 40 years. This change in the macroeconomic climate spelled doom for the cryptocurrency industry as the pressure on traditional assets was wiped out from their digital currency counterparts.
Terra (LUNA) nightmare
In February, the Russia-Ukraine war broke out. Digital assets played a role in financial dodge in this process. Then came the first shock in the industry in March: the Axie Infinity hack. The attack on Ronin Network, the blockchain-based side-chain powering NFT-based online gaming video, resulted in hackers stealing $625 million. Other hacks followed during the year.
However, what really shook the global cryptocurrency industry was the collapse of the Terra (LUNA) ecosystem. In April 2022, LUNA hit a record $119.20 in April, limiting its months of growth. However, economic pressure has taken its toll on the market. The stabelcoin of the ecosystem, UST, lost a peg of $1 on May 9. By May 13, the UST dropped from $1 to 35 cents. The management token LUNA was also affected. The LUNA fell 96% in one day through May 12 to less than 10 cents.
Waves engulfing Terra (LUNA) swept through crypto lending institution Celsius Network and Voyager Digital, which lend to crypto hedge funds like Three Arrows Capital (3AC), which took over leveraged positions during market highs. As a result, hedge funds and crypto lenders went bankrupt due to the ensuing liquidity crisis and withdrawal spree among clients.
FTX: Knight of the crypto winter?
Sam Bankman-Fried, Co-Founder and then CEO of FTX, embarked on several bailouts to save slumping crypto startups after several crypto credit institutions went bankrupt. The once fastest-growing exchange offered early liquidity to Voyager’s clients in July. Additionally, the US subsidiary of the exchange, FTX.US, has offered to buy American crypto lender BlockFi for $240,000. In addition, the exchange acquired Liquid Group, Good Luck Games and Bitvo.
Also, tough macroeconomic conditions contributed to the crypto winter, when crypto prices fell to record lows. For example, the price of Bitcoin fell 14% to below $24,000. Thus, BTC fell to its lowest level since December 2020. As a result, major crypto actors such as Coinbase, Gemini, and the bankrupt BlockFi have announced layoffs. Experts attributed the mass shrinkage to the unpreparedness of these stakeholders. Regardless, the ‘deep pockets’ of FTX and Binance have allowed them to expand and thrive amid the drought. But who won in the crypto winter: Binance or FTX? The answer would be serious.
However, in the middle of the summer crypto winter, The Ethereum Merge, or the hard fork of Ethereum Blockchain technology from Proof-of-Work to Proof-of-Stake, was completed on September 15. Despite the important event, investors continued to follow a cautious path.
FTX after Terra (LUNA): The fall of a crypto giant
While FTX seemed to be heading for industry domination, its bubble soon burst. In November, a CoinDesk report revealed that the Bahamas-based crypto firm is supporting its business with client funds from sister quantitative trading company Alameda Research. Following the news, Binance made the decision to sell its FTX Tokens (FTT). This put FTX in a liquidity crisis where the firm capsized for bailout capital. Binance later abandoned a deal to take over the exchange, citing concerns about its financial condition. Later, FTX filed for bankruptcy protection in the USA. Furthermore, Bankman-Fried resigned from the CEO of the crypto exchange. The stock market crash is estimated to cost investors more than $8 billion in losses.
In the latest update, Bankman-Fried was arrested in the Bahamas. He was later extradited to the US, where he was accused of fraud by the US Securities and Exchange Commission and the Commodity Futures Trading Commission. However, he was soon released on bail of $250 million.
Cryptocurrency regulations in 2022
For the most part, the events of 2022 keep regulators on their toes. On June 30, the European Union reached a tentative agreement on the Crypto Asset Markets (MiCA) regulation aimed at putting an end to the ‘crypto wild west’ in Europe. However, the regulation primarily aims to ensure uniformity across the continent’s fragmented crypto landscape.
Federal lawmakers in the US have passed bills that seek to regulate stablecoins and other crypto assets and sanctify consumer protection. President Joe Biden’s executive order on digital asset regulation in March marked an important phase of cryptocurrency regulation in the United States. However, it is not yet clear how these will take shape.
Worldwide, the race for central banks’ digital currencies has begun. In this direction, Europe, including the USA and Spain, launched new experimental projects. Central banks are also trying to impose limits on banks’ investments in crypto assets by 2025.
What’s next for crypto?
Like 2022, it was a year full of drama and events that determined the industry. So, how will the cryptocurrency industry perform in 2023? Experts believe that crypto regulation will be a big part of 2023. Others say the storm is not over yet. Simone Mazzuca, CEO and Co-Founder of Wallex Custody, comments:
I believe 2023 will be a year of institutional adoption of stablecoins on a global scale and more transparency in the market. After all, that’s what we’re here for. On the regulatory side, I expect to see rapid progress in regulatory measures, driven by what happens in 2022.
For Frank Corva, Senior Analyst for Digital Assets at Finder, it wouldn’t be surprising if a handful of startups explode in the next year. This will likely happen ‘before the dust in the crypto space is fully set,’ Corva says. In this context, he makes the following statement:
Many are wondering if Genesis, the crypto borrowing and lending firm that powers the crypto exchange Gemini’s Earn program, will be able to repay the $900 million it owes Gemini Earn customers. If it fails to make these redemptions and sinks, these events could trigger the next wave of liquidations. Therefore, there may be more pain in the first quarter of 2023.
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