Cryptocurrencies had a contentious fourth quarter, one where changes in the regulation of the market and issues with security had led to major drops in value. Major currencies like Bitcoin and Ethereum lost over 60% of their value in just three months. This was largely due to global economic conditions, as well as concerns over security and regulation. Smaller currencies like Litecoin and Monero actually gained in value during this time. FTX, one of the biggest crypto exchanges collapsed and brought a steep downfall with it. Nevertheless, in the end, the overall cryptocurrency market lost over $100 billion in value during Q4.
The trends we see in the industry are all interconnected, and should be understood in terms of how to capitalise on them. Crypto as an industry can fluctuate in value but is forever expanding in application. In this article, we will highlight the trends of the Cryptocurrency market in Q4 of 2022 to get an understanding of how we should approach the new year.
Bitcoin's price declined significantly in the final quarter of 2022, spurring speculation as to why this occurred. Some believe that the dip was caused by a variety of factors, including FUD (fear, uncertainty, and doubt) surrounding the cryptocurrency, the New York government banning Bitcoin mining, and the increasing preference for other digital currencies like Ethereum, Polkadot, and Ripple. While the reasons for Bitcoin's price decline are still being debated, it is clear that the cryptocurrency faced some significant challenges in the latter part of 2022 and is expected to keep the downward movement during the first quarter of the next year.
In the fourth quarter of 2022, Ethereum suffered a major setback. The price of Ethereum plummeted, and the network was hit by a number of security issues, coming with the high hopes of the previous quarter, where Ethereum 2.0 was launched. This caused many investors to lose confidence in the platform, and many projects built on Ethereum to falter. In response to this, Ethereum’s development team made several changes to the platform to make it more secure and reliable.
However, Ethereum faced increasing competition from newer platforms, such as NEO and Cardano. Ethereum's development team has been slow to adopt new features, which has led to some developers moving to other platforms. Nevertheless, Ethereum remains the most popular platform for developing smart contracts.
Cryptocurrency Companies Collapse
Many companies filed for bankruptcy during this fourth quarter. This was a result of various factors, including the cryptocurrency market crash that began in late 2021, the rise of decentralized exchanges, and mainly, several corporate missteps. Here are some of the most notable companies that went bankrupt:
The company FTX, second to Binance for crypto exchange, filed for bankruptcy, with the central reason being that the company did not have sufficient assets in reserve to meet customer demand. Consequently, FTX suffered from a decline in sales and had to lay off a large number of employees. Finally, the company was sued by several creditors and was catalogued as the largest collapse in the short history of cryptocurrencies generating an abrupt $100 billion loss in a 24-hour period.
The crypto lender BlockFi also ceased operations after FTX collapsed. The two companies had become entangled, with FTX agreeing to buy BlockFi as the crypto bear market began early in 2022. Accordingly, BlockFi stopped withdrawals when FTX started to tumble, citing financial concerns and later filed for bankruptcy. Additionally, the company was hit hard by the cryptocurrency market crash in late 2020. This caused a decline in the value of the assets that BlockFi was holding as collateral, and resulted in a significant increase in loan defaults. In the end, these factors combined to cause BlockFi to go bankrupt. This happened with no surprise as in July, two of its rivals and big players in the market, Celsius Network and Voyager Digital, also declared bankruptcy, as the bear market and bad investments combined and exposed corporate errors and faulty operations.
Even though it was one of the most popular cryptocurrency exchanges in the world, Liquid also filed for bankruptcy. The company cited various reasons for its financial woes, including declining trading volumes, increasing regulatory scrutiny, and a failed attempt to pivot to a new business model. However, the main reason was that FTX acquired it early this year, another collateral damage from when FTX filed for Chapter 11 bankruptcy in the U.S.
$100 billion loss in a 24-hour period…and more
Apart from FTX collapse, there are additional factors as to why the industry lost over $100 billion in value during this quarter.
Increased Regulation of the Cryptocurrency Market
The first was the increasing regulation of the cryptocurrency market by governments and financial institutions. Regulatory scrutiny put a damper on investor sentiment and led to a sell-off of cryptocurrencies. In the United States, the SEC released a report on initial coin offerings (ICOs), concluding that many were in violation of securities regulations. The report also called for more clarity around the regulatory framework for crypto assets.
Meanwhile, in China, the government announced a ban on ICOs. The ban was followed by a crackdown on crypto trading, with the government shutting down a number of exchanges.
These developments showed that there is still a lot of uncertainty around the regulation of crypto assets. However, they also highlighted the importance of having clear regulations in place.
Businesses Implementing Blockchain
The second factor was the increasing use of blockchain by businesses. These included major companies such as IBM and Walmart, as well as smaller businesses. Blockchain technology was seen as a way to improve security and efficiency, and many businesses saw it as a way to stay ahead of the competition.
It also can help businesses reduce their costs, and makes it much harder for hackers to get into their systems to steal information. As businesses started to adopt blockchain, they stopped using cryptocurrencies as payment methods, leading to a decline in demand for cryptocurrencies. Nevertheless, while hitting the market sporadically, this small reason will contribute to greater adoption of blockchain technology and increased trust from the average consumer in the long run.
Stablecoins on the Rise
The third factor was the increasing popularity of stablecoins. As stablecoins became more popular, investors shifted their money from cryptocurrencies to stablecoins, leading to a decline in the price of traditional cryptocurrencies.
The fourth quarter of 2022 was an eventful one for stablecoins. In September, Tether lost its peg to the US dollar, dropping to $0.85 on the Kraken exchange. This was the first time that Tether had failed to maintain its peg. The other stablecoins, including TrueUSD and Gemini Dollar, also suffered during this period, dropping by around 10%.
However, the stablecoin market recovered in the final weeks of the quarter. Tether regained its peg, and the other stablecoins also regained most of their value. This suggests that the market is relatively resilient, and that investors are willing to continue to trust the industry.
Cryptocurrency's Q4 in 2022 concluded with mixed results. The top six cryptocurrencies experienced a market capitalisation decline, with Bitcoin leading the way down. The total market cap for all cryptocurrencies fell from $978 billion starting in October to $840 billion in December.
Looking ahead to 2023, there are a number of potential developments that could impact the cryptocurrency market. These include the continued growth of blockchain technology, the entrance of institutional investors into the market, and the development of new cryptocurrencies. Whatever the future holds, despite the fact that it can take all of next year to recover from the market crash, it is clear that cryptocurrency is here to stay and will continue to be a major force in the global economy.
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