Cryptocurrency in 2023: A Review and Lessons to Learn from 2022

In recent years, cryptocurrency has garnered significant mainstream acceptance as an alternative investment option to traditional assets such as equities and bonds. The year 2022 was a tumultuous one for cryptocurrencies. Since its peak in 2021, the US stock market has lost more than 15% of its value, bond markets have lost more than 20%, and cryptocurrency markets have lost more than 50% of their value.

Following the Reserve Bank of India’s (RBI) hawkish statement, the Indian government implemented a flat 30% tax and an extra 1% tax deducted at source on the transfer of crypto tokens in the 2022 budget. In addition, in 2022, the RBI will develop its own digital currency, the Central Bank Digital Currency (CBDC).

The fall of FTX aggravated the problem just as the market was starting to stabilise in the second half of FY23. Since the fraud was exposed in early November, the industry’s total market valuation has dropped close to $200 billion. Several more companies, including Celsius, Three Arrows Capital, and, most recently, Core Scientific, declared bankruptcy in 2022.

Crypto Markets in 2022

Central banks around the world began raising interest rates in early 2022 in an attempt to curb inflation and slow the rate of economic expansion. Monetary and fiscal policy tightening has significantly reduced investors’ appetite for risky and speculative investment techniques. This macroeconomic pressure has had a significant impact on established asset classes as well as emergent asset classes such as bitcoin.

Overall, the crypto industry had a bear embrace this year. At the start of 2022, Bitcoin, the largest cryptocurrency by market cap, was trading at $47,098. It had decreased to $16,880 on December 25.

Evidence of Crypto Adoption

As bitcoin and ether both hit all-time highs, it was clear that investors were interested in cryptocurrencies. The market for non-fungible tokens (NFTs) expanded rapidly, the scale of decentralised finance (DeFi) protocols reached a record high, and the cryptocurrency market cap exceeded $3 trillion. Many crypto startups received investments from venture capital firms. 

CeFi exchanges experienced phenomenal development as a result of the services they provided to investors who were unable to find enticing rewards in the traditional financial markets. The Terra ecosystem, which is led by the algorithmic stablecoin UST and sibling cryptocurrency LUNA, attracted a lot of interest and growth among new cryptocurrency initiatives.

Funding for Cryptocurrencies Has Slowed.

These speculative asset classes began to slow as central banks changed course, started to reduce market liquidity, and increased interest rates. The crypto market started to decline as the cost of risky assets started to rise. The value of the cryptocurrency market fell by over $1 trillion by the end of the second quarter of 2022.

CeFi institutions had too much debt because they had lent a lot of money to hedge funds like Three Arrows Capital, which lost a lot of money in the sell-off that happened after Terra failed. Three Arrows Capital and a lot of other leveraged hedge funds stopped paying back loans to a lot of CeFi companies, which forced these CeFi companies to file for bankruptcy.

Fake Out

By the end of the summer, crypto markets had begun to level down. Confidence in the crypto market remained high until unexpected facts about FTX and sibling company Alameda Research surfaced in November 2022. Binance CEO Changpeng Zhao highlighted public doubts about FTX’s stability and capacity to sustain their self-issued coin, FTT, immediately. Traders started withdrawing funds from FTX. The FTT price dropped from $26 to $1 in a matter of days, and FTX halted customer withdrawals.

Possibility Of Recovery

Many people have called for more crypto regulation in response to the failures and bankruptcies experienced in 2022. Many feel that effective government control and regulation would have prevented fraud and theft, as well as imprudent lending and leveraged trading, from creating a tough situation for investors. It is critical for all investors to assess their crypto portfolios and the investing thesis underpinning their crypto allocations and develop a strategy for prudent crypto investment moving ahead.

What did the various crypto firms in India say?

Shivam Thakral, CEO of BuyUCoin, said, “We can foresee favourable macroeconomic conditions in 2023 since central banks have hinted at easing monetary policies and interest rates. Inflation will be a critical element in determining the fate of global financial markets. The crypto market will recover from the demise of crypto titans such as FTX and enter a more mature era with wiser investors and sound laws.”

Dileep Seinberg, Founder & CEO of MuffinPay, said, “The cryptocurrency industry is transitioning from an unorganised and uncontrolled state to one that is audited and regulated. As a result, projects that extract utility and value from real-world use cases will propel the industry ahead… 2023 will most likely be a year of growth and consolidation. The latter half of the coming year will see the introduction of new projects as well as potential indicators of improved sentiment.”

Punit Agarwal, Founder of KoinX, said, “We are certain that crypto markets will recover from their current lows in the coming year, citing lower inflation and less hawkish policy stances by central banks throughout the world… We anticipate better answers on the classification and taxation of these VDAs in the next Union Budget. We also expect improved crypto education.”

Ashish Singhal, Co-founder and CEO of Coin Switch, said, “2022 has demonstrated that regulating cryptocurrency is more than just deciding on a tax rate. India must take a deeper look at what and how the policies established here affect crypto clients, as well as how they respond to these changes.”

Top 5 Lessons to Learn From Crypto Market 2022

There is a lot of work to be done to establish that system by 2023 and beyond. However, it begins with the lessons of 2022. The following are the top five:

1. Crypto does not exist in a monetary vacuum.

It’s easy to forget that cryptocurrency markets suffered significantly greater losses in January, not because of a crypto-endemic scandal but rather because the Federal Reserve was increasing interest rates. This halted the global influx of excess funds into speculative assets, such as cryptocurrency. The macro environment is significant!

2. Always, excessive leverage results in contagion.

The domino effect, in which the bankruptcy of one cryptocurrency institution rapidly spreads to another, is not uncommon. Excessive trust in the increasing velocity of financial assets encouraged the accumulation of high speculator loans. Regardless of the decentralised nature of the underlying protocols, this was always going to affect crypto speculation.

3. DeFi is robust but requires routine economic and technical audits.

The majority of the high-profile failures in 2022 such as FTX, Celsius Network, Voyager Digital, Three Arrows Capital, and Genesis – included custody-holding CeFi firms that jeopardised consumer assets. This has energised DeFi supporters, who correctly point out that the most successful decentralised market-making and exchange systems have survived because they lack a trusted intermediate capable of such exploitation.

DeFi is a dangerous, violent, perplexing, and unexpected environment. To ensure mass involvement, a complete audit model is required, in which trustworthy independent analysts or bounty-hunting engineers evaluate project code security, founder procedures, and tokenomics.

4. “Number goes up” is not enough to keep crypto going.

We should have all been asking serious questions in 2020 and 2021 when social-media-driven meme currencies were turning kids into instant billionaires, and DeFi projects were providing yields unreachable anywhere else in the globe.

The majority of it was based on momentum trading and “numbers-go-up” predictions. It’s time to return to the fundamentals and search for real-world applications. Token returns must be linked to actual value cases, whether they are cross-border payments, decentralised energy, new marketing models enabled by non-fungible tokens (NFTs), or one of many other intriguing applications.

5. A well-informed, independent, and hard-hitting press is a must for Crypto.

The events of 2022 in the crypto industry proved clearly that this industry requires a robust “Fourth Estate” to hold responsible the people and entities working inside it. Many questions were raised following the collapse of FTX as to why this was not discovered sooner.

The answer is that there aren’t enough crypto-savvy, professionally managed, independent journalists, covering this sector. 

What to Expect in 2023 from the Crypto Market?

In 2023, 

• As cryptocurrency becomes more broadly acknowledged and mainstream adoption grows, the industry is projected to expand more. This could lead to higher pricing and, as a result, larger returns for investors.

• Regular frameworks are projected to grow more solid and harmonised, which might boost investor trust and help to stabilise the market further.

• Investors may have more options to engage in initial coin offers (ICOs) and other fundraising activities for new cryptocurrency ventures as the market evolves.

Conclusion

In 2023, the market will again be susceptible to ups and downs in response to good cryptocurrency-related events or news. Such as a large corporation adopting a new cryptocurrency or the adoption of favourable measures. In such circumstances, the prices of cryptocurrencies may likely rise, and market participants may become more active and enthusiastic. But be realistic and do not expect any improvement until the next quarter, which will revive the market. 

For now, of course, invest wisely! Spread out all risks!