Cryptocurrency is still a relatively new technology, and many people are excited about its potential. However, crypto has experienced turbulent times in the past year after a meteoric rise. Major coins, including Bitcoin, have lost a significant chunk of their value.
Was the dramatic drop in 2022 just another bump in the road, or will crypto continue to fall as people become more skeptical of the technology? We’ll break down what you should know and how recent trends suggest the crypto space may continue to grow.
- Bitcoin’s price fell in 2022, losing roughly $30,000.
- The collapse of FTX significantly damaged the cryptocurrency industry, but the even more recent collapse of Silicon Valley Bank has arguably boosted confidence in decentralized banking.
- Investors remain uncertain whether digital assets will become a more popular form of currency, or could 2022 have been the beginning of the end for the technology?
What Is Crypto?
Cryptocurrency, or crypto, is a digital currency that doesn’t rely on central authorities like governments or banks. It serves as a decentralized system to complete transactions.
There are hundreds of different cryptos out there. One of the best-known is Bitcoin, which was released in 2009.
Different cryptos have variations in how they work, but they tend to share some features. Transactions are validated as part of a blockchain, and devices can connect to the crypto network to “mine” coins, which involves verifying transactions in exchange for coins. This makes crypto closer to something like the gold standard.
Fiat currency – used worldwide today – derives its value from the fact the government decrees it has value. The government trusts businesses to accept the currency as a form of payment, but the currency’s value isn’t tied to a specific commodity, like gold or silver. Bitcoins have to be mined, but not all cryptocurrencies have to be mined. The mining process is expensive, requires complex hardware, and uses significant energy.
Since crypto started gaining popularity, exchanges have launched to help people buy and sell different cryptos or to exchange real-world currencies for crypto.
Early adopters of the most popular coins have mostly seen their wallets grow thicker. In 2010, Bitcoin was worth less than a dime. In 2021, Bitcoin peaked at above $64,000.
However, less popular coins have seen investors lose significant amounts of money.
What Happened In 2022?
2022 saw significant upheavals in the crypto market.
Crashes early in the year
2022 was the year of the crypto winter. This bear market for cryptocurrency saw precipitous drops early in the year when stablecoins Luna and TerraUSD crashed in May. The trading platform Voyager filed for bankruptcy in July along with crypto hedge fund Three Arrows Capital. According to its bankruptcy filings from last year, Three Arrows Capital faced $3.5 billion in creditors’ claims.
Prominent celebrities like Kim Kardashian also faced scrutiny for endorsements of cryptocurrencies in 2022. Kardashian’s run-in with the SEC in October resulted in her settling with the commission for over $1 million.
The most high-profile crypto upheaval of 2022, though, was the collapse of FTX.
Historically, the cryptocurrency market has been volatile, seeing significant price spikes and drops. For example, the period from 2012 to 2014 saw Bitcoin start trading at $13.28, rise as high as $1,237.55, and fall to around $687.
During the COVID-19 pandemic, the crypto market experienced a meteoric rise, jumping from $6,635.84 to over $64,000. Many mainstream companies began getting involved in the crypto market, with investment firms offering crypto ETFs or direct investments in cryptocurrencies.
Crypto-focused companies, such as FTX, also began bringing in large amounts of money and becoming well-known among the public rather than solely among crypto or tech enthusiasts.
FTX, a crypto exchange, was one of the most important entities behind last year’s crypto crash.
The company was founded in May 2019 and quickly became one of the largest exchanges. It even made high-profile investments in its marketing, sponsoring the Miami Heat’s basketball arena, Major League Baseball, and the Mercedes-AMG Petronas F1 team.
On November 2nd, Coinbase, another cryptocurrency business, published an article revealing that a trading firm owned by FTX CEO Sam Bankman-Fried held a large portion of FTX’s own crypto, FTT. This could artificially boost the coin’s value.
Binance, a competing exchange and FTX investor sold its FTT holdings in response. This led to a price crash. Many FTX users rushed to withdraw their money from the exchange, which created a liquidity crisis and left investors unable to withdraw funds.
A Bloomberg report on November 9th revealed the SEC and Commodity Futures Trading Commission were investigating FTX and Bankman-Fried. FTX and 100 of its affiliates filed for bankruptcy on November 11th. Sources claimed the exchange had debts exceeding $8 billion.
That same day, FTX removed $473 million in funds in authorized transactions. Analysts currently estimate that billions of customer funds are still unaccounted for.
On December 12th, police arrested Bankman-Fried in the Bahamas for wire fraud and conspiracy charges.
Crypto Prices in 2022
Unsurprisingly, the events that destroyed one of the world’s largest exchanges had a significant impact on cryptocurrencies’ value.
Bitcoin started the year at $47,733.40. It bounced up and down through early April when it began a steady fall. It hit a low of $15,760.10 on November 21st but then rebounded. Currently, it sits at just over $30,000.
FTX and various crypto collapses weren’t the only factors behind the 2022 price drop. Economic uncertainty, the war in Ukraine, and persistent inflation mixed with interest rate hikes also contributed to pessimism about investing in crypto.
A few examples of other events that hurt crypto values this past year include:
- An early 2022 announcement that Russia might ban crypto
- A June 2022 problem with Binance pausing Bitcoin withdrawals
- A June 2022 announcement by Celsius Network freezing withdrawals and transfers
How Has Crypto Recovered?
The question for investors at the end of 2022 was whether this was the beginning of the end for cryptocurrency. Or was it simply another bump in the road? After all, crypto saw large price crashes before but continued to move to greater heights.
It’s worth remembering that even at its lowest point in the fall of 2022, Bitcoin’s value was still higher than it ever had been before 2020. Since the trough at the end of last year, Bitcoin has recovered a significant amount of its value, now sitting at over $30,000.
Many experts say easing inflation, anticipated rate cuts later in 2023, and lessened recessionary fears were factors in this bump in price. Also, the collapse of Silicon Valley Bank earlier this year could have urged investors to look into digital assets like cryptocurrency. With the banking crisis in America, many investors are skeptical of centralized banks’ ability to manage money.
Consumers have yet to use cryptocurrencies like Bitcoin widely enough to be considered a legitimate replacement for fiat currency. However, investors may turn to blockchain technology if centralized banks continue facing difficulties.
Could Crypto Be On The Way Out?
Some arguments against a full cryptocurrency recovery include skepticism from the Chinese government and crackdowns on the technology, major concerns over crypto’s environmental impact, and crypto exchanges’ history of security issues and hacks.
Given the nature of crypto, it can be difficult, if not impossible, to recover funds after a hack.
Crypto regulation has also increased recently, eliminating one of its primary draws of being a decentralized, unregulated currency.
On the other hand, blockchain technology has valuable applications for industries that rely on contracts. Crypto can make online and international trade more accessible by eliminating the need for currency conversion and intermediaries.
Due to many coins’ limits on the number of tokens that can exist, some argue that crypto can be a good store of value in the long term.
Investors should tread lightly because of the volatility of crypto and the uncertainty surrounding it. Those that do choose to invest should use basic risk-management strategies such as holding a diverse portfolio.
Additionally, investors may only want to keep a small portion of their portfolio in cryptocurrency to limit the risk of catastrophic loss should crypto plummet again.
Debates on the value of cryptocurrency
Skeptics of crypto often debate whether the asset has any underlying value. This debate involves related theories of currency. Though the world we know today uses fiat currency, traded on global markets and not tied to a specific commodity, we have historical precedent for currencies tied to a “made” thing.
Countries used the gold standard worldwide for many years, and it had distinct advantages, like managing inflation and limiting government power over printing money. But it also came with distinct disadvantages, like inflexibility and difficulty adjusting to crises like war. If you’re confused about the value of cryptocurrency – especially since it’s an asset not widely accepted as payment by most businesses – broader debates about currency may interest you.
The Bottom Line
Crypto is an exciting technology, and many people have jumped on the bandwagon over the past few years. Unfortunately, this past year, many investors were burned as crypto values plummeted.
With the collapse of the crypto exchange FTX, stablecoins like Luna and TerraUSD, and the SEC taking legal action against celebrity endorsements of cryptocurrencies, investors understandably weren’t confident about the digital asset.
In 2023, we’ve seen cryptocurrencies like Bitcoin recover some of their value, giving many hope crypto will rebound and recover most of its value in the coming years. We’ll have to wait to see whether this happens, but it’s still true that cryptocurrency is a volatile space, and investors should prepare to lose anything they invest in it.