2022 will be remembered as a bleak one for those who invested their trust and money into the cryptocurrency market.
As the calendar flips to 2023, cryptocurrency is in the throes of a deep and dark winter. The value of nearly every digital asset, including bitcoin and ethereum, has plunged greatly as investors pull their funds from the fraught markets. This past year’s decline was marked by several headwinds, many of which have not yet abated.
In mid-December, bitcoin was hovering at about $17,000. Those heavily invested in cryptocurrencies would not have likely predicted such a fall from grace after the flagship cryptocurrency hit a record $69,000 just a year ago. The rout has left many in doubt and eviscerated the life savings of some.
Since punching in at about $50,000 this time last year, bitcoin has shed a whopping 66% of its total value. Ethereum, the second most popular cryptocurrency, is approaching losses of about 69%.
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Cryptocurrencies began to fall dramatically in the spring and summer as the Federal Reserve raised interest rates. Higher rates generally lower the value of risk assets such as stocks — and, this year shows, digital tokens.
In downturns, investors typically flee risky investments in favor of safer and more stable stores of value. Bitcoin and other cryptocurrencies are still a new asset class, and those who have invested in the coins have been selling off their holdings for fear they will crash, resulting in a chain reaction effect.
While bitcoin prices remained at a low but somewhat stable level throughout much of the fall, the FTX collapse in early November delivered another blow. The company, which was one of the biggest crypto firms in the world, quickly declared bankruptcy, and bitcoin erased a whopping quarter of its value in just days.
The FTX implosion caused many investors to panic and leave the crypto space, given that the company and its now-disgraced founder Sam Bankman-Fried were touted as a massive success story in the media. “If FTX could collapse in a matter of days, then what is stopping other platforms from falling apart?” rattled investors thought.
“FTX going down is not good for anyone in the industry. Do not view it as a ‘win for us.’ User confidence is severely shaken. Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get,” the CEO of the exchange Binance said in a memo released at the outset of FTX’s collapse.
The downfall of FTX created a ripple effect, or contagion, that caused other cryptocurrency companies to fall apart, further depressing the value of bitcoin and other digital assets.
Crypto lender BlockFi announced late last month that it had filed for bankruptcy. BlockFi’s struggles were intertwined with those of FTX, as the company provided BlockFi with a $400 million credit line and the option to buy the company.
In BlockFi’s Chapter 11 filing, the company indicated it had liabilities and assets ranging from $1 billion to $10 billion and in excess of 100,000 creditors. Its largest disclosed client has a balance approaching $28 million.
The brutal end of the year for bitcoin will invariably bleed into 2023. As a result of FTX’s stunning collapse, there has been new pressure for increased regulations on cryptocurrency, the prospect of which has added to declines in the crypto market.
During congressional testimony this month, CFTC Chairman Rostin Behnam called on Congress to establish a regulatory framework for cryptocurrencies. Behnam testified that without sufficient regulations, collapses like that of FTX are more likely to occur. He implored lawmakers to give the CFTC increased regulatory authority to prevent fraud and malfeasance in the digital asset space, saying that the FTX collapse demands accountability.
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Committees in both the House and the Senate have already held hearings about FTX’s collapse, and there will certainly be more into next year as lawmakers probe the bankruptcy and weigh increased regulation.
