After a terrible year, cryptocurrencies are at a critical juncture.

After a terrible year, cryptocurrencies are at a critical juncture.

To paraphrase Queen Elizabeth II of the United Kingdom, 2022 is not going to be a year that people in the Bitcoin world would look back on with unadulterated happiness.

Investors were left with major existential problems as the year drew to a close as a result of the rapid succession of breakdowns, contagion, and crashes that occurred throughout the year.

After all, bitcoin, the largest cryptocurrency, has not been able to keep its head above water for more than a week at a time, and its price has dropped by around three-quarters since its all-time high of $69,000 in November of last year.

The market worth of the approximately 22,000 tokens and coins is currently at less than a third of the height of $3 trillion in November 2021, and many of them are comatose, if not downright dead. In November 2021, the value of the market for these assets reached a high of $3 trillion.

An industry that began 2022 with the hopes of widespread mainstream institutional adoption, of bitcoin replacing even gold as the world’s inflation hedge, as well as endorsements from the likes of Tesla Inc. chief Elon Musk and the wild celebration of billion-dollar non-fungible tokens has been dealt a harsh reality check by this development.

Not only did the ultra hawkishness of the US Federal Reserve cause cryptocurrencies to suffer, but their slide also caused the crash of a stablecoin known as TerraUSD, which then caused a “Lehman moment” when funds and brokers such as Celsius and Voyager went bankrupt.

The failure of Sam Bankman-FTX Fried’s exchange at the end of last month was seen by some as the final nail in the crypto industry’s coffin.

Why it is significant

This time around, there are a lot fewer crypto enthusiasts who are confidently forecasting a rebound, in contrast to 2017, when bitcoin had a drop that was just as stunning.

Rather, 2022 has become the “I-told-you-so” case for authorities, who have, for the most part, kept a distance from the crypto sector or even outlawed trading in cryptocurrencies. This case will be proven true in 2022.

The European Central Bank believes that the bitcoin market is experiencing a “artificially produced last gasp before the path to irrelevance” despite the recent slight price increase.

In point of fact, the one mitigating circumstance of this year has been the relative immunity of the mainstream financial sector to the epidemic. The majority of the excesses, irresponsible lending, and questionable accounting of billions of dollars have taken place within the cryptocurrency ecosystem.

At the same time, the concept that decentralised financial systems and private crypto coins can operate in the shadows of the old banking system and still be successful looks to be delusional at this point.

A number of policymakers and even crypto barons are supporting US Securities and Exchange Commission Chair Gary Gensler in pushing for regulation of the cryptocurrency industry. This comes as retail and institutional investors lose trust in cryptocurrency operators.

What can we expect from 2023?

UBS strategist James Malcolm cites the growing correlation between cryptocurrencies and micro-cap US stocks as evidence that bitcoin and other tokens could thrive on the margins, as a specialized, diverse asset in investment portfolios. This correlation is a testament to how bitcoin and other tokens could survive on the margins of the market.

“It’s wrong to say that this thing is going to curl up and die completely because there are elements of it that can be useful in other areas, and there is probably a modest cryptocurrency market that will continue to thrive on the margin of financial markets,” he says. “It’s wrong to say that this thing is going to curl up and die completely because there are elements of it that can be useful in other areas.”

However, the implementation of the kind of regulation that investors need in order to feel safe working with cryptocurrency brokers and exchanges, whether it be transparency or capital adequacy, might take months, if not years.

In a report that summarised the bank’s interactions with the cryptocurrency industry, Morgan Stanley stated that “some asset managers are looking at this as a 10-15 year road to digital assets being fully mainstream.”

In the meantime, the traditional financial world may take advantage of the bear market in cryptocurrencies in order to step up its game in the year ahead. This may involve acquiring platforms and assets in the blockchain world, issuing tokenized bonds and stocks, or possibly even rolling out more central bank digital currencies.

According to Malcolm of UBS, this may only go to prove that cryptocurrency was intended to be more of “an evolutionary rather than a revolutionary development in financial markets.”


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