Crypto Wrapped 2022: The Ups, the Downs, and the Learnings

Crypto Wrapped 2022: The Ups, the Downs, and the Learnings

2021 was a record year for cryptos, and coming into 2022, investors were riding a wave of euphoria and remained hopeful for the crypto market. But in retrospect, those hopes seem to have been misplaced. That isn’t to say that the crypto market had nothing good going on this year- every dark cloud has a silver lining. So let’s get into the good, the bad, and the ugly of the crypto world in 2022.

Lead-up to 2022

Coming into 2022 from 2021, cryptos were the hottest asset class on the market. Every investor, retail and institutional, wanted a piece of the crypto cake. Bitcoin and Ether had both seen record-high prices as recently as November 2021, and the overall crypto market had exceeded $3 trillion in market cap.

Not to mention promising crypto projects coming up from every corner, like the Terra ecosystem, with its algorithmic stablecoin, UST, and sister currency LUNA leading the way. 

Centralized exchanges were cashing on the crypto craze as well. This sector saw incredible growth, with investors flooding in to invest in products that offered better returns than their traditional finance counterparts.

Record-low interest rates, supportive economic policies, and a growing supply of money led experts to predict sky-high growth in the near future in terms of money and adoption.

The Current Situation

The current predicament of crypto is no secret to anyone in the space. 2022 was a difficult year, and not just for digital assets. The global market took a dip and hasn’t quite recovered yet.

The US stock market saw a 15% dip, bond markets took it a step further and dipped 20%, and crypto had the hardest fall- over a 50% drop in value from 2021.

How the dip impacted investors’ behavior

In early 2022, central banks worldwide started raising interest rates to check inflation. And as banks started to take a step back by lowering market liquidity to slow down the rate of economic expansion, investors started moving away from speculative investing. Speculative investing is when you buy high-risk assets based on price movements and hunches over sound fundamentals to make abnormally high returns.

Since interest rates were rising, investors decided to shack up with low-risk investments that offered good returns. Cryptos obviously took a hit, and by mid-2022, the crypto market had lost over $1 trillion in market cap. Once investors started giving up leveraged positions, crypto’s fall only happened faster. Leverage is an investment in which debt is used to maximize investment returns or acquire additional assets.

Institutions on the receiving end of the dip

Terra, a promising project until that point, imploded in May 2022, with traders exiting the market in droves. Its stablecoin, UST, depegged from the USD, leading to investors losing billions of dollars- a crash that affected the overall crypto market.

The sell-off post the Terra crash caused hedge funds like Three Arrows Capital to lose huge amounts of funds. CeFi companies that had lent money to Three Arrows Capital had to file for bankruptcy protection. User funds on their platforms were frozen. Companies like Celsius Network and Voyager Digital went under in this chaos as well.

The Recovery That Almost Happened

By the end of the summer, hope was in the air again. Experts believed that all the leverage in the system was a thing of the past, and investors were beginning to feel confident in crypto again. This confidence was also a result of FTX, the then-second largest crypto exchange in the world, stepping in to save BlockFi, a crypto lending company, from bankruptcy.

FTX, led by its CEO, Sam Bankman-Fried, was beginning to look like crypto’s savior- it was investing in crypto companies and rescuing start-ups from the brink of bankruptcy. But we know how that turned out. 

Once reports of FTX’s insolvency came out owing to it mixing customer funds with the company’s, the world of crypto saw one of the biggest crashes in its history. And it didn’t go out alone. Collateral damage was the name of the game- FTX’s downfall affected 134 other companies, BlockFi being one of the first ones to go under.

Opportunity for an Actual Recovery

One thing to remember is that even with all the chaos and all the failures in the crypto realm, none of this happened due to the failure of the underlying technology. Blockchain tech continues to be as sound as ever; in fact, this year saw the technology make fantastic strides. Ethereum saw a transition from proof of work to proof of stake. Its tokenomics also underwent a major overhaul, leading investors to believe the road ahead leads to better places.

This year was not the best in crypto history, but there are reasons to keep your eyes on the light at the end of the tunnel. As any experienced investor could tell you, the worst periods often provide the best investment opportunities. So what are these opportunities?

Crypto funds

Let’s take the example of Grayscale Bitcoin Trust (GBTC). Recently, the Bitcoin fund has been trading at a 45% discount on its net-asset value. For the uninitiated, net-asset value refers to a company’s total assets minus its total liabilities.

Cathie Wood, CIO of ARK Invest, has scooped up $4.2 million worth of GBTC shares in two separate investments in two weeks.

Other crypto funds have been trading at such mind-boggling discounts as well. Put simply, if you’re confident that these assets will rise again, the discounts you’re currently getting are equivalent to buying 1 dollar for 55 cents.

Crypto stocks

Major financial institutions like the Ontario Teachers Pension Plan and Sequoia Capital are writing off millions of dollars of investments in FTX from their balance sheets. These write-offs and upsets are likely to bring about a slow period in crypto investments from institutions. And the hesitancy that follows such episodes is also seen as a hindrance to investments by retail investors.

Crypto stocks have seen major dips recently, and the asset class is full of high-potential investment opportunities. When we say crypto stocks, we are referring to Web 2.0 companies building for Web 3.0. For example, Meta. However, make sure to DYOR- Do Your Own Research before investing in any asset.

Crypto ETFs

Crypto futures-linked ETFs use futures to get exposure to crypto-linked returns without trading the asset, and this happens in the regulated wrapper of an ETF. These ETFs mostly track the movement in the blue-chip cryptos, Bitcoin and Ether.

Buy the tokens

Despite all the recent uncertainty surrounding crypto, experts believe buying tokens might not be a bad investment after all.

Crypto critics have recently begun pointing out that crypto price movements seem to be mimicking traditional asset classes like mutual funds and sector ETFs, thus negating crypto’s USP. But a study conducted by the CFA institute, an association of investment professionals, suggested that while major cryptocurrencies like BTC, ETH, LTC, XRP, and ADA seem to be moving in the same direction as these asset classes, that’s where the similarities end. The movements aren’t of similar proportions. 

Rather than being a flaw, this is actually positive news. It indicates an increase in cross-market trading and growth in crypto’s popularity.

Our Takeaway

Regulators in some of the biggest crypto markets are taking steps to regulate crypto and ensure the safety of customers. The lack of regulations played a big role in the disasters we saw in 2022, but with regulatory institutions keeping an eye on crypto, trust in the asset will grow, and it will likely gain mainstream adoption soon enough.

So as we step into 2023, you might want to re-evaluate your crypto investment plans and rebalance your portfolio based on your financial goals.

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