Just as 2022 has been perhaps the most turbulent year investors have ever seen for the cryptocurrency market, the latest meltdown has delivered a series of shocks, shaking the foundations of digital assets.
Here’s the grant narrative: Trillions of dollars wiped off world stocks, bond market tantrums, whip-sawing currency and commodities, and the collapse of a few crypto empires.
After peaking in November 2021, crypto assets suffered a $2.2tn wipe-out in the following 12 months, with their combined market value tumbling by 73%, according to data from tracker CoinGecko.
In the past, such collapses — also known as “crypto winters” — were triggered by events within the industry itself, such as the failure of an exchange or a regulatory crackdown.
But the latest one began with something external: Central banks hiking interest rates to combat a post-pandemic surge in inflation, which reduced investor appetite for riskier assets including crypto.
And that has exploded the idea that crypto enjoys a similar status to gold as a refuge in times of economic uncertainty by being decoupled from the fortunes of traditional financial assets.
It’s also turned out that the crypto rally of 2021 was built on shaky foundations because many investors borrowed heavily to wager on digital coins and projects, often using other crypto as collateral. That interconnectedness spread the impact of high-profile failures.
The biggest crypto explosion involved a so-called algorithmic stablecoin called TerraUSD — a digital token whose value was meant to be pegged to the US dollar through the use of a parallel currency, Luna.
In November, there was yet another shock: the implosion of star entrepreneur Sam Bankman-Fried’s crypto empire, including one of the biggest digital-asset exchanges, FTX.
The implosion of FTX and subsequent failure of Genesis underscored the dangers of contagion, in which problems in one corner of the industry spread fast and in unexpected ways, triggering huge losses elsewhere.
Now, have a look at the flipside of the narrative.
Coin prices have jumped across the board in recent weeks, just months after an industrywide meltdown that prompted sceptics to dust off predictions for the demise of the embryonic asset class.
And Bitcoin — the pre-eminent cryptocurrency, which lost 60% of its value in 2022 — is set for its best January since 2013 on bets that monetary tightening and the crypto-sector crisis are both ebbing.
The largest token is up 40% since the turn of the year, a first-month gain bettered only twice before when crypto was in its infancy, according to a Bloomberg report.
Despite all that’s gone wrong in the industry, the world’s largest financial giants are hoping to expand in crypto — not shrink.
They’re pushing ahead with projects in blockchain, the digital scaffolding that logs transactions.
From BNY Mellon — which launched a crypto custody platform one month before Bankman-Fried’s FTX filed for bankruptcy — to mutual-fund giant Fidelity Investments, BlackRock Inc and Nomura Holdings Inc, members of the Wall Street establishment are planning for a future in digital-assets.
Crypto was invented in the wake of the 2008 global financial crisis, which eroded trust in traditional institutions. But the string of scandals in 2022 raises what amounts to an existential question of whether crypto can be trusted, either.
Over the years, the financial world has been growing warier of the highly volatile digital currencies.
Amid the regular boom-and-bust cycles, longer term, regulatory scrutiny of the highly-volatile cryptocurrency market is set to get wider.
Going forward, tougher regulation may eventually make crypto a more stable and respectable investment. What’s not clear is how much of the industry can withstand the kind of scrutiny that’s going to evolve.