It would be an understatement to say that 2022 and the first half of 2023 have been tumultuous years for both the real world and the world of crypto. We did a complete 360 from the optimism and the raging bull market of 2021 to what many will call a full-blown crypto winter, having checked off all the appropriate milestones: huge loss of market capitalization, extreme downside volatility, numerous failed projects, and, to top it all off, bankruptcies of some of crypto’s biggest players.
Bitcoin reached a low of just under 17k in 2022 before slightly recovering in 2023, which is 75.56% from an all-time high of around $69K back in November of 2021. The altcoins fared even worse, some being down by a factor of 10 or more. According to CNBC, the May 2022 crypto crash wiped out around 2 trillion in investor value in just a few months. While a lot of this decline can be attributed to macroeconomic factors, certain events in the crypto industry also had a major effect.
Among numerous crypto projects that met their demise in 2022, the Terra/Luna collapse most certainly takes the crown by its magnitude, and the disastrous consequences it caused for the entire crypto industry. A perfect storm that wreaked havoc on the Terra ecosystem including its algorithmic stablecoin, UST, causing billions in losses to investors. Luna has lost 90% of its value in a matter of days, around $40 billion total, while UST lost its dollar peg and collapsed 99%. Many have lost their life savings, believing UST to be a safe investment since it was supposed to be pegged to the US dollar. This collapse has cast doubts on stability of stablecoins, a backbone of the crypto industry, and sent shockwaves through the crypto space showing that even the biggest and most well-funded projects are not immune to crashes.
The once-booming NFT market has also experienced a series of crashes in 2022, turning from a booming oasis in the latter part of 2021 into a barren wasteland in the end of 2022. Current trading volume across all sectors is down 90% compared to the peak in the fall of 2021 according to The Block and Cryptoslam. NFT prices are also down to a fraction of what they were during the bull market peak.
Terra/Luna collapse was the catalyst in a chain of events that led to a number of crypto firms’ bankruptcies later in the year. One of the biggest investors in the Terra ecosystem was a crypto hedge fund called 3 Arrows Capital (3AC), which invested $200 million in February of 2022. The firm was already having performance and liquidity issues due to the overall decline of the crypto market and some risky bets it had made prior, so 3AC decided to up the riskiness of their investments and hopefully score bog. Unfortunately, the Terra/Luna bet did not pay off and 3AC filed for bankruptcy on July 1st, taking down a few of their creditors with them and causing even further collapse in the price of crypto assets as the firm’s loans were called in and accounts were being liquidated. They were followed by the likes of Voyager (after 3AC defaulted on a $665 million loan from them), Celsius, Hodlnaut, BlockFi, and finally the crypto exchange FTX, a top five crypto exchange by volume at the time. The FTX collapse was a true shock to the crypto community since it was believed to be too big to fail, and by all indications appeared to be weathering the storm better than anyone else.
These spectacular failures of centralized platforms served to reinforce the “not-your-keys-not-your-coins” mantra among the crypto community and caused crypto investors to increasingly turn to Defi platforms to trade in or earn a yield on their assets. These platforms have had their own share of problems, however. According to Fortune magazine, 2022 is on track to surpass 2021 as the biggest year for hacking on record with over $3 billion stolen in hacks as of October 2022. Cross-chain bridges have remained the most popular and profitable targets, with the most recent one being a bridge used by Binance, a victim to a $100 million hack. In February, the Wormhole Bridge had a $325 million exploit, and in March, Axie Infinity’s Ronin Bridge had a $625 million exploit.
All these events resulted in significant losses for investors of all caliber, loss of confidence in crypto as a financial instrument, loss of confidence and rise in scepticism of crypto projects in general, loss of trust in centralized platforms, and flight of capital from the crypto industry. We have seen first-hand that despite the widespread adoption of crypto in the past decade, it’s still the Wild West with very little regulatory oversight, investor protection and consumer safeguards enjoyed by more traditional investment vehicles.
There is a huge degree of negativity right now in the crypto community, and with the very recent FTX collapse, the true impact of which has not been yet realized, many are calling this a full-blown crypto winter. It is hard to argue with this assessment given all that has transpired this year, and the current dismal state of the crypto market.
The upside of all this is if we are in fact in the middle of crypto winter, spring is sure to follow. We are not going to predict whether the market has reached its bottom, and when the industry will start to recover, as these forecasts are rarely accurate. What we do know is that the best times of opportunity are the times of extreme pessimism and uncertainty. We can also clearly observe a number of trends that will shape the crypto landscape for the foreseeable future. In our next blogs we would like to discuss these trends, the opportunities that they bring, and how we are planning to take advantage of these opportunities.
by Igor Pelipenko, OrdinalsGoods
OrdinalsGoods is a team of professionals with over a decade of experience in the financial and IT industries, dedicated to innovation and the implementation of transformative solutions in the field of digital finance.
