After experiencing enthusiastic rises in the previous year, the crypto market; had to deal with a tightening monetary policy environment that led to sales, the failure of projects like Terra, the bankruptcy of CeFi companies like Celsius Network and Voyager Digital, and the dramatic collapse of the FTX stock market.
How was 2022 for the Crypto Market?
The year 2022 was extremely challenging for the crypto market. Global central banks began to raise interest rates at the beginning of 2022 in order to reduce inflation and slow down the pace of economic growth. The demand of investors for risky and speculative investment techniques has significantly decreased as a result of the tightening of monetary and fiscal policies.
Many investors preferred to liquidate speculative asset classes or withdraw from them altogether. While traditional asset classes have been affected, emerging asset classes such as cryptocurrencies have also come under great pressure.
The Rise of the Crypto Market
Many different factors have led to the emergence of investors’ interest in crypto. Among these factors are the following:
- Bitcoin (BTC) and Ethereum (ETH) have reached all-time highs
- Record growth of DeFi protocols
- Exceeding the $ 3 trillion market cap for cryptocurrencies
- The exponential growth of the NFT market
- Venture capital firms invest in a large number of crypto businesses
On the other hand, central finance (CeFi) exchanges experienced extraordinary growth as a result of the services they provide to investors who are unable to generate attractive returns in traditional financial markets. For example, the Terra ecosystem, led by the algorithmic stablecoin UST and its sister cryptocurrency LUNA, has gained a lot of attention and growth among new crypto startups.
The Fall of the Crypto Market
The rise of crypto began to slow down as central banks changed course, began to reduce market liquidity, and increased interest rates. Investors saw opportunities to make lower-risk investments and get a competitive return as a result of the rise in interest rates. In short, as the cost of risky assets began to rise, the crypto market also began to decline. The value of the cryptocurrency market fell by over $ 1 trillion by the end of the second quarter of 2022.
As investors left the cryptocurrency markets, brand-new and fascinating startups like Terra began to fall apart. For example, the UST stablecoin is no longer tied to the dollar. This setback of the UST, on the other hand, caused investors to lose billions of dollars, which further weakened the market as a whole.
On the other hand, retail investors could not withdraw their money from user funds located in CeFi systems because they were locked out. When businesses such as Celsius Network and Voyager Digital, which offered attractive returns to users, failed, users also lost their money.
The Future of the Crypto Market
Notably, none of the failures witnessed this year are due to a failure in the underlying blockchain technology. In reality, technical progress in this area has continued and this year has been a very important period for many blockchains.
For example, the successful upgrade of Ethereum from a proof-of-work blockchain to a proof-of-stake blockchain took place in 2022. Many people think that major changes to Ethereum‘s tokenomics will be good for the future of the ecosystem. This is the biggest proof that the future of crypto contains positive developments.
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