After the terrible crisis, cryptocurrencies are at a crossroads


To borrow a phrase from Queen Elizabeth II of Great Britain, the cryptocurrency community will not have a happy memory of 2022.

Investors were beginning to have serious existential concerns toward the end of the year as a result of the rapid succession of collapses, contagion, and collapses.

After all, bitcoin, the largest cryptocurrency, hasn’t been above water in more than a week and is down about three-quarters from its $69,000 peak in November.

The 22,000 tokens and coins have a market value that is less than a third of the peak of $3 trillion in November 2021, and many of them are in a coma or even dead.

That has been a harsh reality check for an industry that started 2022 with hopes of widespread mainstream institutional adoption, bitcoin replacing even gold as the world’s inflation hedge, endorsements from people like Elon Musk, CEO of Tesla Inc., and wild celebrations of billion-dollar non-fungible tokens.

The extreme hawkishness of the US Federal Reserve not only hit cryptocurrencies hard, but it also led to the crash of a stablecoin called TerraUSD, which caused a “Lehman moment” when funds and brokers like Celsius and Voyager went bankrupt.

What some saw as the last nail in the crypto final resting place was the breakdown of Sam Bankman-Seared’s FTX trade the month before.

What it means?

Why it matters This time around, there are significantly fewer crypto enthusiasts predicting a rebound than in 2017, when bitcoin crashed in a manner that was just as spectacular.

Instead, the “I-told-you-so” case for regulators has been 2022, when they have mostly kept out of the crypto world or even banned trading in cryptocurrencies.

Bitcoin’s modest rise this month, according to the European Central Bank, is an “artificially induced last gasp before the road to irrelevance.”

In point of fact, the fact that mainstream finance has largely escaped contagion has been the only contributing factor this year. The majority of the excesses, unchecked lending, and fraud involving billions of dollars have occurred within the crypto ecosystem.

Decentralized finance and private cryptocurrencies, on the other hand, no longer appear to be viable alternatives to the traditional banking system.

A number of policymakers and even crypto barons are joining US Securities and Exchange Commission Chair Gary Gensler in calling for regulation as retail and institutional investors lose faith in crypto operators.

What awaits in 2023?

James Malcolm, a strategist at UBS, cites the growing correlation between cryptocurrencies and micro-cap US stocks as evidence that bitcoin and other tokens can thrive as niche, diverse assets in investment portfolios.

He states, “It’s wrong to say this thing is going to curl up and die completely because there are parts of it that can be useful in other areas, and there is probably a modest cryptocurrency market that will continue to thrive on the margin of financial markets.” “It’s wrong to say this thing is going to curl up and die completely.”

However, it may take months, if not years, to implement the kind of regulation investors need to feel safe dealing with crypto brokers and exchanges, such as capital adequacy or transparency.

In a note summarizing the bank’s discussions with the cryptocurrency industry, Morgan Stanley stated, “Some asset managers are looking at this as a 10-15 year journey to digital assets becoming fully mainstream.”

In the meantime, the traditional financial industry may capitalize on the crypto bear market next year: acquire blockchain-based platforms and assets, issue tokenized bonds and stocks, or possibly even introduce additional digital currencies issued by the central bank.

According to Malcolm at UBS, it may demonstrate that cryptocurrency was intended to be more of an evolutionary rather than revolutionary development in financial markets.

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