The Crypto Market Digestion of 2022 and Prospects of the New Year

The crypto market saw a significant downturn in 2022, with most digital assets, including BTC and ETH, losing over 65% in value.

The market began the year with BTC trading in the range of $37,000 to $47,000, but this range was broken in Q2 following Terra's collapse, which coincided with a decline in the US stock market.

Since then, BTC traded below $35,000 for much of Q2 and Q3 until recently when the FTX saga pushed the range lower to between $16,000 and $17,000.

Overall, the crypto market experienced a bearish trend in 2022, with some assets like LUNA, FTT, and SOL recording, particularly steep declines. 

Even the most promising niches that had performed exceptionally in 2021 were nowhere to be seen this year.

As of December 2022, the total value locked (TVL) across DeFi protocols stands at $38 billion, down from $166 billion at the beginning of the year.

Meanwhile, Non-fungible tokens (NFTs) trading volume tanked by over 90%, leaving most NFT holders stranded in an illiquid market.

DeFi TVL in 2022: DeFiLlama 

Contagion: The Word of the Year 

The crypto market's intertwined nature was undoubtedly exposed last year; many big firms were affected by the collapse of Terra and FTX, including industry heavyweights that had billions worth of U.S. dollars in assets under management (AUM).

Some of the big players that went bankrupt due to substantial exposure in either Terra or FTX include Three Arrows Capital (3AC), Celsius, Voyager Digital, and more recently BlockFi, which was one of the largest digital asset lending firms. 

Simply put, the chickens came home to roost in 2022, and to make it worse, we are not sure we're fully out of the woods yet with several implications following the FTX implosion still to settle.

Terra’s Collapse

First launched in 2018, Terra’s ecosystem was on a roll until May this year when the UST algorithmic stablecoin lost its peg against the U.S. dollar.

It all started when over $2 billion was withdrawn from Terra’s lending and borrowing protocol Anchor on May 7, triggering hundreds of millions of U.S. dollars liquidations.

Ultimately, the UST stablecoin was affected by the massive capital outflow and lost its peg to trade at 35 cents by May 9. 

While Terra’s founder Do Kwon tried to restore back the peg by ‘Deploying more capital - steady lads’, the statement only amounted to becoming a meme within the crypto community. 

However, it was the aftermath that shocked most crypto stakeholders, a cumulative $60 billion worth of investors' money was lost in this unfortunate event.

What followed was a streak of bankruptcy filings by several crypto firms that had invested in Terra’s ecosystem, either directly or indirectly. 

3AC, Voyager Digital, and Celsius File for Bankruptcy 

The collapse of Terra’s UST stablecoin caused a serious ripple effect in the industry, with Three Arrows Capital (3AC), Voyager Digital, and Celsius being among the most affected.

Just three weeks after UST depegged, 3AC filed for a chapter 15 bankruptcy and defaulted on a $650 million loan owed to Voyager Digital.

This forced the investment firm to also halt withdrawals and eventually file for bankruptcy in the Southern District of New York. 

The script was similar for Celsius, although it took a bit longer before the crypto-lending company declared bankruptcy.

At first, Celsius halted BTC withdrawals on June 12 citing  ‘extreme market conditions’, but with its native token $CEL plummeting by over 70%, the firm was ultimately forced to file for bankruptcy on July 13, 2022.

Besides these big players, quite a number of potential DeFi projects became insolvent as a result of Terra’s collapse.   

The FTX Collapse 

FTX’s collapse is perhaps the most unexpected black swan event that happened this year, not many people would have imagined that Sam Bankman-Fried, a crypto darling and now turned villain was mismanaging clients’ deposits. 

The news first broke through a Coindesk article which revealed that a large part of Alameda’s holdings was in illiquid FTT tokens and there were also some notable discrepancies in the balance sheet; this raised eyebrows across the industry, with Binance’s CEO Changpeng Zhao making it public that the exchange would start to gradually liquidate its enormous FTT holdings. 

The ensuing panic caused a mass FTT sell-off, accompanied by a withdrawal run on the FTX exchange.

According to Dune Analytics, FTX clients had withdrawn over $1 billion in the space of a week before FTX officially halted withdrawals.

With FTX insolvent, hopes were pinned on a strategic acquisition by Binance, but the plan fell through. FTX was forced to file for Bankruptcy, and SBF turned crypto villain overnight. 

The contagion spread further with BlockFi, one of the leading digital asset lenders, filing for bankruptcy due to their substantial exposure to FTX.

Other major firms affected include Genesis Trading, Galaxy Digital, and Voyager Digital.

I have written quite extensive pieces on the FTX saga here and here. Give them a look if you want a deep dive. 

Aftermath

Moving into the year 2023, we have already seen the first signs that we are not out of the woods in relation to the contagion that plagued the markets last year.

More than a few notable entities have been making headlines at the beginning of the year with similar trouble.

Most prominently, the situation revolving around Genesis’ from the Digital Currency Group is currently unresolved but reports mention a hole in their balance sheet of close to $3B. This is why it is likely we can expect this to continue to be a theme well into 2023.

Positive Points of 2022 

Despite the many hurdles that faced the crypto industry last year, we must not fail to acknowledge the several points of progress made.

What stood out is that long-term stakeholders shifted focus to more fundamental areas as opposed FOMOing in on speculative narratives.

The interest in valuable Web3 innovations increased while we also witnessed celebrities and big brands joining crypto, thanks to NFTs and the metaverse. So, what were the positive trends and developments this year? 

DApp Usage Was on the Rise 

The number of daily unique active wallets interacting with Decentralized applications (DApps) increased by 50% to hit 2.37 million from 1.58 million in 2021.

Most notably, blockchain-oriented games accounted for close to 50% of the on-chain activity, with Splinterlands ranking as the most popular game in this category.

Gambling DApps also recorded a 106% spike in new users, the number of dUAW jumped from 53,364 to hitting 110,140 this year. 

Ethereum’s Merge Was Successful

The much-awaited Ethereum merge finally happened on September 15th, marking the transition from Proof-of-Work (PoW) to Proof-of-Stake.

This transition has made the Ethereum blockchain more eco-friendly as it will no longer depend on mining power to secure the network; instead, stakers are now the ones tasked with this function.

Looking ahead, Ethereum’s developers are working on the next phase, the surge, which is expected to make the network more scalable.

Also delivered a quite lengthy commentary on this subject in Hedge Nordic.

VCs Showed a Growing Interest

While the overall funding across crypto innovations took a hit this year, VCs appeared to be particularly interested in potential Web3 innovations.

Some of the notable players that allocated a significant amount of funding towards this niche include Andreessen Horowitz (a16z) and Sequoia capital.

The former announced two billion dollar Web3 focused funds totaling over $7.7 billion while the latter committed close to $3.3 billion towards Web3 innovations as well.

Big Brands Joined the Metaverse 

The metaverse continued to gain traction this year with big brands such as Gucci, Adidas, and Prada launching their own NFT collections.

Atari, one of the most iconic game publishers, also recently launched a massive social and gaming experience in The Sandbox metaverse; Atari Sunnyvale.

This virtual world allows users to explore and interact with each other, alongside an opportunity to participate in featured games and quests for in-game rewards.

Nations Are Adopting Bitcoin  

For a long time, most governments have been against the use of crypto assets within their jurisdictions.

But this stance seems to be gradually changing with the Central African Republic joining El Salvador to recognize Bitcoin as a legal tender.

Meanwhile, Russia and Nigeria are making a u-turn on previous legislation that limited crypto transactions.

Russian officials recently approved the use of cryptocurrencies for cross-border payments while Nigeria is set to pass a bill that will recognize the use of Bitcoin and other crypto assets. 

Behavioral Themes: What We Expect For 2023 

With 2022 behind us, there is a lot to be optimistic about in 2023, prices seem to have bottomed out, although the uncertainty in macro factors and possible continuation of the FTX contagion could spell more doom for the market.

That said, there are some major themes that are already emerging as the top narratives for 2023. Below is a glimpse into the horizon: 

Self-Custody 

One of the biggest lessons crypto natives ought to have learned this year is ‘not your keys, not your coins’.

A good number of centralized crypto service providers have gone under with clients' funds, including FTX, which was among the most trusted exchanges.

Already the shift is happening, the number of BTC held in centralized exchanges witnessed a sharp decline in the aftermath of FTX’s demise as investors sought alternative non-custodial storage solutions.

This trend will likely continue in 2023, ushering in a new paradigm where crypto natives reduce their reliance on third-party service providers. 

Fundamentals Over Speculation 

Gone are the days when the crypto market was mainly driven by speculative narratives, most of the capital in 2023 will be chasing valuable projects that are based on the principles of decentralization and transparency.

Crypto VCs and individual investors who have been in the game for some time are now scouting for Web3 projects that have a solid value proposition as opposed to speculative-driven narratives that promise riches overnight.

In my opinion, this will be a game-changer in the adoption of real blockchain-based solutions as well as integrations with existing industries. 

Regulation Is Around the Corner 

Regulators from across the globe have signaled an intention to pursue regulatory frameworks that will govern the digital asset industry in the future.

One of the key bills expected to come into action is Europe’s MiCA bill which is aimed at preventing insider trading, market manipulation of crypto assets, and unlawful disclosure of inside information.

In the U.S., the senate banking committee has held several hearings this year and is also keen on pursuing crypto governance frameworks, especially after the FTX saga which has left a majority of investors in limbo.

2023: A Year of Digestion and Hope

Transitioning into the new year, 2023, feels like a much-needed fresh start on many accords.

2022 delivered some of the toughest macroeconomic conditions many of us can remember in our lifetime, and crypto likewise suffered idiosyncratic disappointments.

Moving into the new year, the theme of high inflation rates will continue to be central for market behavior. The good news is that there is a fair chance that inflation has already topped out for now.

Both equities markets and crypto are seeing a fairly positive beginning which spins hope for a much more positive outlook for 2023 than 2022 proved to be.