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23 Aug 2023

Is a new narrative emerging from the 2022 crypto crisis?

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This article is not intended to be financial, investment or trading advice. This article is for information and solely for education purposes. It does not protect against any financial loss, risk or fraud.

Crypto: A year in review

Written by Lydia Rose Pallot

This time last year, the market was reeling from a series of huge bankruptcies that sent prices tumbling and forced a collective introspection. Though many investors are still out of pocket and some of the biggest culprits are yet to appear in court, a new positive narrative may be forming. But, just how resilient can the crypto space be?

2022 - A timeline

At the start of 2022 things looked reasonably positive for those who held a crypto portfolio. Bitcoin had reached its all-time high of ~€69,000 six weeks prior, and a resurgence of the web3 narrative driven by NFTs and the Metaverse was gaining pace.

However, as outlined below, a series of disastrous bankruptcies and failures followed. Triggered in part by external factors, such as tightening monetary policies and geo-political upheaval, but largely driven by poor risk management and a cult of personality.

Let’s break down the timeline:

February 24th, Russia invades Ukraine

  • The financial markets fell, concerned that the fragile post-Covid recovery will be blighted by higher energy, commodity, and food prices.
  • Oil hit € 100 a barrel for the first time since 2014.
  • Russia’s invasion further fuelled inflation fears.

March 16th, The Federal Reserve raises interest rates by 25 BPS

  • This was the first increase since December 2018, and was followed by nine further hikes aimed at taming inflation.
  • Monetary tightening cooled interest in risk-on assets like crypto, stress testing business models and tokenomics.

May 8th, The collapse of the €60bn Terra-Luna ecosystem begins

  • UST, the algorithmic stablecoin pegged to the US Dollar, collapses within days, along with Luna and the interest-bearing Anchor protocol. The fallout sent shockwaves through the market and started a contagion for exposed third party services.

June 12th, Celsius Network halts withdrawals

  • Celsius stops withdrawals citing the challenging market conditions.
  • It soon becomes clear Celcius has a black hole in its balance sheet of over €1.2bn, destroying the crypto banking narrative.
  • Over 100,000 customers are left in limbo, catalysing a €300bn sell-off that sets off another round of connected bankruptcies.

June 27th, Voyager lending platform sends 3AC a default notice

  • Three arrows capital fails to service a €665 million loan with Voyager, triggering a default notice.

July 1st, 3AC files for bankruptcy

  • Bankruptcy is confirmed and 3AC’s founders flee to Dubai.

July 5th, Voyager files for bankruptcy

  • Voyager becomes one of the first high-profile victims of 3AC exposure, throwing its customers into turmoil.

September 15th, The Merge sees Ethereum transition to Proof of Stake

  • Ethereum’s completes migration from Proof of Work to Proof of Stake

November 2nd, FTX begins to unravel

  • A Coindesk article casts doubt on the strength of Alameda Research’s balance sheet. This leads to the discovery that most of the €15bn in assets held by Alameda were denominated in FTT, the token created by Bankman-Fried’s trading platform, FTX.
  • CZ, the CEO of Binance, tweeted a barbed message, and four days later confirmed Binance was dumping all its FTT.
  • By November 8th, FTX halted non-fiat withdrawals, triggering repercussions for big crypto players including Genesis, BlockFi and Galaxy Digital.

By the end of 2022, Bitcoin had fallen below €16,500 with a year-on-year decline of 65%.

What were the repercussions?

1. Spurring Regulation
A European regulatory framework (MiCA) was already in progress, but US regulators became far more aggressive towards crypto, alongside actively investigating the live cases. Worldwide, tighter crypto legislation is in the pipeline.

2. Refocusing on fundamentals
The huge shakeout of failed business models and unsound tokenomics naturally caused a refocus on fundamentals and building.

3. The custody debate
The collapse of so many centralised services exposing alleged malpractice led to discussions around counterparty risk and the importance of self-custody.

4. The cult of personality
Last year’s crypto meltdown exposed an unhealthy trust in personality, which seems paradoxical for a technology designed to remove the need for trust and work without any figureheads.

5. If it sounds too good to be true
The speed of Terra’s collapse showed it was a house of cards, built on faulty logic and unsustainable yields (at one point, 80% of UST was earning 20% in the Anchor protocol). The same could be said of Celsius.

Where are we now?

Here we are, in 2023, and Bitcoin is still doing what it was designed to do and churning out new blocks every 10 minutes like clockwork. And the price of Bitcoin has almost doubled since hitting rock bottom around New Year.

Crypto continues to build and evolve, with layer 2 innovation being particularly important for providing scalability, tokenisation and opening up huge potential liquidity. Meanwhile, wallet-as-a-service models could help bring newcomers into the space.

But there’s more than a little irony that much of the renewed positivity within the space is routed in the clarity that regulation might finally bring and the acceptance that crypto might need a safety net after all.

Regulated stablecoins look set to play a crucial role in crypto’s maturity, while the ruling that XRP isn’t a security may provide mcuh needed clarity on the status of altcoins.

But the promise of a Bitcoin ETF from Blackrock (and others) is one of the most positive news stories to have buoyed industry. It's an amazing plot twist: if Bitcoin were a superhero, Blackrock would have originally been seen as its arch-nemesis, rather than its saviour.

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Cryptocurrencies are unregulated in the UK. Capital Gains Tax or other taxes may apply. The value of investments is variable and can go down as well as up.

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