Reflecting on 2022: making it through the crypto winter – Robert Quartly-Janeiro, CSO at Bitrue

With, it seems, many more crypto winter months ahead of us, it’s vital to be able to see the big picture to find our path through the snow. Let’s explore the key trends and events that shaped the past year for the crypto space.

CEX consolidation, growing maturity, and integration with the digital economy

Even though cryptocurrencies as a phenomenon did not die, the appetite for them fell significantly — to the tune of USD 2 trillion, although there are broader macroeconomic reasons for this besides the simplistic reasons often offered. During the past year, the actions of some firms like Three Arrows Capital, whose investments — and the leverage used for them — went the wrong way, led to their ultimate demise.

Alongside overleverage, we witnessed CEXes consolidate for complex reasons (e.g., too much borrowed from elsewhere) and not-so-complex ones, such as a lack of trading volume and liquidity. A lack of volume kills markets, as does a lack of liquidity (see the 1929 Wall Street Crash and post-crash years for details). Still, it’s important to make the distinction between business models weakened due to external factors, internal risk management, FTX illegal actions, or their modus operandi.

As we begin this new year, perspective is key. Things have started to normalize, and the industry has grown more mature, transparent, and determined. Are we yet to see other scandals and collapses? Yes, more than likely. On the other hand, have we seen the end of Fortune 500 bankruptcies? I doubt it. What really matters at this point is how honest and open the industry players are about what they are doing, their role within it, and the timeframes involved.

The crypto world — namely, cryptography and blockchains — is here to stay, and its integration within and beyond the digital economy is set to intensify. For those in doubt, it is useful to note the position of organizations such as Goldman Sachs, Standard Chartered, the Bank of England, Swiss Federal Bank, et al., who have long recognized the opportunities and supported initiatives in the space. This isn’t positive or negative, but it’s worth noting that global institutions see the broader appeal and the potential for the development of the digital economy.

Centralization versus decentralization and gray regulatory space

Even though 2022 was a huge reality (failure) check from the largesse of industry moves and investor optimism in 2021, it has also refocused minds. In a flight to safety, the level of demand for stablecoins shows that for many, the past months haven’t given enough reasons to give up on crypto. Instead, they’ve traded into stablecoins and converted their assets into cold storage to see what happens next and make informed decisions, which I see as a smart move.

Perhaps, as things move forward, the debate will focus more on centralization vs. decentralization and possible vectors of development for space. To borrow from a piece Dante Disparte, Chief Strategy Officer at Circle Internet Financial, recently wrote for the World Economic Forum, “We could now see the handover of crypto technology and blockchain infrastructure to more regulated and established institutions”.

Elsewhere, the issue of regulation and activists’ analysis of the environmental impact of crypto have been significant developments. Regulation in certain countries — notably, the USA — feels imminent, but what aspects these regulations will cover and which parts of the industry will become regulated remains unclear.

It is telling that the USA’s SEC views crypto assets as securities, the UK — as digital currency, while the ECB sees it as a form of gambling. This lack of uniformity presents challenges and opportunities for industry participants to develop the narrative and the direction, as well as risks to manage.

Crypto’s environmental impact: more ‘pro’s for the regulation

Given the above, the question of government influence will be one of 2023’s most pressing matters as more pro-regulation voices emerge from financial volatility, custody, and ecological concern perspectives. Consequently, the industry must weigh adaptability, adaptability, and innovation simultaneously at a pressing rate.

For example, after the Chinese crypto ban of 2021, the US market became one of the main areas of cryptocurrency mining. 2022 saw NGOs and activist groups understandably ramp up efforts to bring attention to the dangers of crypto mining on the environment. Highlighting how crypto assets using Proof-of-Work consensus, e.g., Bitcoin, demand vast amounts of computer power, leading to unecological farm systems to the extent that the impact of such farms is significantly larger than of all the US coal mines combined, although estimates diverge significantly.

Regardless of the estimates one uses, it is incumbent upon the industry to take a leading role in protecting the environment at a practical, not just theoretical, level — the technology and solutions are there. Аor an industry as nascent as crypto that has significant backing amongst environmentally conscious 18–35-year-olds who know the climate clock is ticking, it will be interesting to see what developments and initiatives arise. Frankly, the interrelationship between crypto and the physical environment is one of the facets of rebuilding industry-wide trust, yet this isn’t a reason for being proactive.

Volatility: not always a benefit

If 2021 provided positive volatility, then Terra’s implosion in May 2022 caused huge turmoil, as its synthetic stablecoin de-pegged from the dollar, causing investors to sell a considerable share of their Luna, which lost losing almost all its value within days. Most investors lost significant sums and made a case for crypto regulation in the USA stronger whilst gaining attention from President Biden along the way.

Terra is only one example, albeit high-profile, of cryptocurrency volatility becoming a public issue. Yet, that does work both ways when considering the effect of inflation, interest rates, and microeconomic disposable incomes.

Ethereum’s Merge upgrade, Brazil’s upcoming CDBC, NFTs, and AI

One of the major technological advancements of 2022 was the shift from ‘proof of work’ to ‘proof of stake’ in Ethereum — AKA, The Merge. It allowed Ethereum to reduce its possible environmental impact and escape possible ecology-related regulations from the US government.

More and more institutions and governments have adopted cryptocurrencies in 2022. In particular, Latin America, a rather unstable and innovative market, is a pioneer here, with the Brazilian government even planning to test its own digital currency in 2023.

Another trend is the growth of NFT, metaverse-related projects, and GameFi, as multiple Play-to-Earn projects have created their own ecosystems, allowing users to combine their financial and gaming interests. Even though Axie Infinity still tops the list, new interesting players are constantly emerging.

AI-powered platforms are maturing as well: offering balanced portfolios to maximize growth, they’ve become significantly more stable with the current state of AI development. It would definitely be interesting to watch this trend in 2023.

How do we make it through the crypto winter?

The current crypto winter may slow the development of cryptocurrencies and the space for an extended period. Still, aspects of development continue at pace, and the longer movement of decentralized finance and web 3.0 look much like EV cars 15 years ago — cool, not fully formed yet, but going to happen.

Separately, the decrease in the number of ICOs and/or their differentiation becoming clearer is a good thing for investors, projects, CEXes, and the industry, especially when trust has been broken to the extent it has.

The crypto winter, bear market, ice age, or whatever anyone wants to call it, occurs when world economic trends are uncertain and pessimistic. Meanwhile, certain emerging markets are booming as demand outstrips supply. That said, it is not unreasonable to conceive a two-speed recovery in crypto whereby the demand from regions such as Latin America or Africa increases but remains subdued in Europe. At the same time, the appetite for stablecoins over non-stable coins also diverges — like the cyclicality of equities. Individual cryptocurrencies’ performances aside, a market characterized by a plateau before tentatively edging higher feels like a whole-market probability if economic headwinds dissipate.

For investors committed to crypto, or those now holding in cash, navigation requires timing, analysis, research, de-risk, and being open-minded. In addition, until the macroeconomic picture becomes clearer globally and companies start halting plans for mass layoffs of well-paid middle-class jobs, the appetite for risk assets from retail investors will naturally remain subdued. At an individual crypto level, developments, partnerships, and roadmaps must prevail over short-term trading mindsets.

For the industry itself, this latest crypto bear market is an opportunity to refine, enable responsible competition, nurture, communicate, disprove, and be transparent at a time when journalists and regulators are looking for pain. This environment suggests that crypto’s next breakthrough must come not just from the economic improvement but technological progress between crypto and GameFi, DeFi, shipping, commodities, et al., and regulation that improves, not blocks.

Robert has 14 years of experience in finance, government, investment banking, asset management, and strategic advisory. A former Director at Black Square International and Ex-Visiting Fellow at The London School of Economics.

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