The review of 2022 year in crypto: hacks, bankruptcies, downfalls, crashes, regulations.
In the beginning of 2022 it was difficult to tell what the ratio of the highs and lows for the cryptocurrency market would be. Despite a rough start of the year when the price of Bitcoin fell from over $46,000 to the levels under $34,000 just some three weeks into January, the asset managed to recover strongly by the end of March, getting back above $47,000 at the first quarter’s close. That period even showed green shoots for the crypto industry, while the next few months pushed the authorities towards regulating the cryptocurrency business.
In February the Department of Justice announced the seizure of over $3.6 billion worth of Bitcoin linked to the infamous hacking incident of the Bitfinex exchange, as well as the arrest of a New York couple on charges of conspiracy to launder the stolen funds.
The crypto exchange FTX made a solid start to the year, raising $400 million raising $400 million just in the third round. Other notable investments in Q1 2022 included infrastructure giant Fireblocks raising $550 million, interoperability and scaling framework Polygon and Ethereum software company ConsenSys both closing $450 million rounds, NFT and metaverse-backer Animoca Brands securing $358,888,888, and blockchain software company Alchemy and Ethereum NFT gaming startup Immutable both raising $200 million.
The world’s largest marketplace for non-fungible tokens and crypto collectibles smashed its previous records in January, posting more than $5 billion in trading volume between Ethereum and Polygon sales.
President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets — the first “whole-of-government” approach to regulating the cryptocurrency industry followed by a chain of debates. The order addresses multiple issues faced by the crypto space, including consumer protection, illicit finance, financial inclusion, and responsible development. It also demands different federal agencies to coordinate their supervision efforts.
About the same time, the European Parliament’s Committee on Economic and Monetary Affairs passed its Markets in Crypto Assets Regulation legislative package, which, just like the American bill, aims to coordinate the EU’s regulatory approach to the crypto industry. Besides, the EU Parliament has voted to impose new regulatory measures that would essentially prohibit anonymous cryptocurrency transactions.
The first and probably the most dramatic crash happened in May when the price of LUNA, once a top 10 coin by market cap, fell 100% to a fraction of a cent, wiping out $40 billion worth of investors’ money in a week’s time, shrinking the combined market cap of all cryptocurrencies by almost $700 billion.
Terra’s collapse was the year’s largest domino that led to insolvency troubles at crypto lending platform Celsius and cryptocurrency hedge fund Three Arrows Capital (3AC). The latter included the hedge fund, founded in 2012 and managed an estimated $10 billion, had positions in many of crypto’s largest projects and companies, including Bitcoin, Ethereum, Solana, Axie Infinity, and BlockFi.
It was followed by other crypto exchanges, such as BitMEX, FTX, and Deribit liquidating the hedge fund’s positions after it failed to meet margin calls. The crypto derivatives exchange CoinFLEX moved to freeze user withdrawals.
Extreme market conditions also saw several high-profile crypto firms lay off their workforce. These included crypto exchanges Gemini, Crypto.com and Coinbase, as well as several companies in Latin America.
In April, a group of lawmakers introduced a new bill to regulate developers and exchanges working with digital commodities which expands the authority of the Commodity Futures Trading Commission. In other words, the CFTC would regulate American crypto exchanges, such as Coinbase and Kraken. The bill introduced a raft of other significant measures, including a provision that eliminates the obligation to report crypto gains of $200 or less to the IRS.
Office of Foreign Assets Control sanctions Tornado Cash, a smart contract that increases the difficulty of tracing blockchain financial transactions. Soon thereafter, the crypto industry responds with outrage and lawsuits.
Bitcoin started April trading at $47,000, however by the end of June, the price of it nosedived to a little above $20,000. According to the data from blockchain analytics firm, this was the worst quarterly performance for Bitcoin since Q3 of 2011. Ethereum followed the trend to fall below $900, adding more pain for investors. Over the same span, the combined market cap of all digital assets fell from just below $2 trillion to just above $890 billion.
In a new court filing submitted in July the U.S. Securities and Exchange Commission stated that at least nine cryptocurrencies listed on Coinbase are unregistered securities. Shortly before that, SEC head official stated that cryptocurrency exchanges should be regulated in the same manner as traditional securities exchanges.
In July 2022, Elon Musk’s Tesla revealed that it sold 75% of its BTC holdings, worth approximately $936 million, with the shareholder letter stating that Bitcoin impairment had a negative impact on the firm’s profitability during the second quarter, when it posted $2.5 billion in operating income. Despite dumping most of its Bitcoin, Tesla was still holding $222 million worth of various digital assets on its balance sheet as of the end of June.
The second half of 2022 was a rocky time in this industry with most optimism destroyed by the collapse of multiple crypto firms, Coinbase’s stock hitting one low after another, the Grayscale Bitcoin Trust de-pegging by nearly 50% from its underlying asset, and its largest shareholder, 3AC using money borrowed from a number of big companies to fund many of its positions.
Ethereum successfully moved from its proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS) mechanism in August with the core update bringing major changes to the network. According to the reports, it led to the 99.95% reduction in energy consumption and a 90% cut in ETH issuance.
2022 not only brought major decline to the crypto market, the industry also saw multiple departures of high-profile CEOs who stepped down from their respective roles at the head of crypto-centric firms in 2022. The reasons given for stepping down vary — the bankruptcy of their company for some, for others, the volatility of the crypto market or a transition to a new phase for the firm.
Amid the bear market, Coinbase’s stock has hit its lowest price since the company went public last year, with COIN falling 87.04% to $35.00, compared to $268.15 on December 21. The crypto exchange’s troubles were the result of a downturn in the broader macroeconomic environment, which also contributed into crypto industry having a troublesome winter.
On November 11, one-time crypto icon Sam Bankman-Fried resigned as CEO of FTX as the company filed for Chapter 11 bankruptcy. Before that, Binance CEO Changpeng Zhao said on Twitter that the world’s largest cryptocurrency exchange would liquidate its entire position in FTX’s FTT token. As for SBF himself, after his arrest in the Bahamas, the notorious FTX founder is now on American soil, facing criminal charges.
It’s hard to believe that, but Bitcoin and Ethereum performed quite well, comparing to traditional equities. Although BTC saw experienced a 64% decline in value year-to-date, the research shows that the both cryptocurrencies returns in 2022 per unit of risk were about the same as equities and significantly better than bonds.
At the same time, Bitcoin losing about 75% from its all-time high made mining less lucrative for companies that took on debt to accelerate growth operations during the bull market. A number of mining companies even filed for bankruptcy. It’s no secret crypto miners are struggling, and more casualties are expected next year.
The overleveraged bitcoin miners are the ones who will feel the most heat in 2023. Buying newer, more efficient mining hardware in quantity at historically low prices will pay off for some, some are already looking to expand to international markets and are evaluating various renewable energy opportunities. Interestingly, there exist an opinion that more regulation could help miners keep afloat during the crypto winter. The logic is simple: if the whole sector has more security, the miners will benefit because when people don’t invest, the miners are affected.