The crypto industry is facing a very difficult 2023. In the longer term, however, there is no reason why it should not rise from the dead again, as it has in the past.
Skeptics have long suspected it, and now they see themselves vindicated by the fiasco surrounding the now-bankrupt crypto exchange FTX in which the whole crypto boom was built on sand. Bitcoin, Ether, and pretty much every other token and altcoin is nothing more than a big scam, designed solely to take hard-earned money out of the pockets of speculative investors and gullible crypto enthusiasts.
Spectacular bankruptcies, sensational hacks, and scams are hard to beat for audacity along with billion-dollar collapses, brazen scandals, and embarrassing confessions truly made for an annus horribilis in the crypto industry. The year 2022 was the first full year that cryptocurrencies definitely hit the mainstream, but looking back, it seemingly turned out to be a complete disaster.
Cascading Collapse
Beginning with stablecoin Terra and its sister token Luna in May, the crypto pyramid collapsed this year, triggering a domino effect that took the entire crypto market down with it, via industry giants like Celsius Network, Voyager Digital, and Three Arrows Capital (3AC), to FTX and BlockFi. Meanwhile, hackers are estimated to have absconded with over $3 billion in 2022 alone. Over two-thirds of the total market capitalization of cryptocurrencies evaporated into thin air during the year.
This is not what a foundation built on confidence looks like. Fear, uncertainty, and pessimism appear to be at unprecedented levels around crypto, and numerous investors have lost interest and exited the cryptocurrency market.
Is History Repeating Itself?
And so the prophets of doom repeat their mantra the crypto market is dead, put into an early grave by pure speculation, especially since the two most important cryptocurrencies, Bitcoin and Ether, are seen as a fad, without use and not backed by any physical asset.
To be sure, at least 95 percent of all tokens are junk, with many of them unlikely to survive the crypto winter in which the industry finds itself. But is the industry doomed? The market already crashed by more than 80 percent in the crypto crashes of 2014 and 2018, and yet the industry emerged stronger from each of these crises.
External Influences
The short- to medium-term outlook for the crypto market looks pretty bleak with 2023 expected to be a better year, albeit a very difficult one, while the long-term future still appears hopeful and promising.
Most of the catalysts contributing to the crypto market crash since November 2021 cannot be attributed to the underlying technology. That was mostly attributable to external factors, like tighter central bank policy, fraudulent crypto players, and dubious business models.
As painful as the crypto winter is, the associated shakeout and recovery process is healthy in the long run since weak competitors with obvious design flaws are being punished by the market and weeded out.
Above all, the excesses of the wild speculation of recent years are being mercilessly pulled up by their roots. The disillusionment is likely to drag on for quite a while, so it seems rather unlikely bitcoin will return to its all-time high any time soon, not least because the low-interest phase that encouraged speculation is now over.
Capital Market Cycles
Boom-and-bust cycles are the essence of all capital markets. But cryptos as a controversial asset class, seem to attract far more media attention than other investment vehicles. Often lost in the general noise is that in the absence of adequate global regulation and due to their young age, cryptos like Bitcoin and Ether are still very vulnerable to dislocation. Both, however, have uses beyond mere speculation or criminal activity, as is often accused.
Bitcoin is increasingly used as a rapid money transfer method via the Lightning network, while Ether is evolving into a currency for the Web3 and Metaverse. What is needed are stronger guardrails providing more legal and investment certainty in the crypto world in the future.
At the same time, it would be illusory that all risks can be regulated away. The task of governance rules lies in creating a consistent and reliable regulatory framework. With stronger regulation, trust, and acceptance of crypto assets increase. If leading financial institutions like Blackrock and Goldman Sachs continue to back crypto, it will ultimately attract new investors.
Innovative and Promising
Healthy crypto companies are not taking things lying down, but taking advantage of opportunities that present themselves for new business ideas. And, last but not least, the blockchain industry spans far more than just out-of-favor cryptocurrencies. The tokenization of digital assets is seen as having a promising future, with increasingly attractive use cases popping up. The technology can lead to a more efficient, transparent, and accessible securities trading system.
As long as the blockchain industry continues on its innovation course, and clearer global regulation provides a healthy foundation for the future, there is no reason why the crypto industry will not rise from the ashes once again, as it has done in each case in the past. Especially in an industry as dynamic as the blockchain industry, new technologies may emerge tomorrow that no one is even thinking about today.
