2022 was one of the worst-performing years in crypto. Most cryptocurrencies dipped more than 85% from their all-time highs in what is now commonly referred to as the crypto winter. Headlines flashed on major publications, with some expert analysts announcing that crypto was dead. In November, Bitcoin, the king of cryptocurrencies, fell below $16,000 for the first time since 2020. Solana plunged 92% below its ATH. Surely, this was it. But it wasn’t! The crypto winter would later thaw out in 2023, and Bitcoin would double in price within the next few months.
TerraUSD (UST): The Domino Piece That Started it All
TerraUSD (UST) was an algorithmic stablecoin that was created by Terraform Labs in 2018. UST was pegged to the dollar using an arbitrage mechanism. This mechanism involved buying and burning LUNA, UST’s sister token, to mint UST. This helped adjust the supply of UST and manage a price close to $1.
On May 7, 2022, two traders took advantage of a vulnerability in the 3Pool stablecoin decentralized exchange and swapped around $185,000 UST for USDC. UST depegged, and the pool was left prone to volatility.
This caused panic among Investors, and a selloff began. The LUNA Foundation Guard tried to burn more LUNA to repeg UST. As a result, LUNA plunged over 95% within a few days. When this did not do the trick, the organization started emptying its Bitcoin reserves. At least $2.1 billion of Bitcoin hit the market in 10 days, leading to a rapid decline in the price of the asset and other cryptocurrencies.
The TerraUSD-LUNA crash wiped over $1 trillion from the market in less than 5 weeks. Bitcoin sank below $29,000 for the first time in 16 months.
3AC, Voyager, and Celsius Come Crumbling
Over the next few months, the collapse of TerraUSD and LUNA would pull down other big names that had exposure to the two tokens.
Three Arrows Capital (3AC), a crypto hedge fund that held nearly $500 million worth of LUNA, could not sell its holdings because of smart contract staking agreements. 3AC filed for Chapter 15 bankruptcy on July 1, with their assets barely worth $600.
On July 5, five days later, Voyager Digital, a crypto lender, filed for Chapter 11 bankruptcy. Voyager had offered 3AC an unsecured loan of $650 million.
A week later, on July 13, another crypto lender, Celsius, suffered liquidity problems and filed for bankruptcy.
FTX: The Final Blow
In early November, Coindesk wrote an exposé on the irregularities in the balance sheet of Alameda Research, a crypto trading firm and FTX’s sister company. Coindesk reported that a huge percentage of Alameda’s assets were held in FTT, FTX’s native token. This called into question the liquidity and general health of both FTX and Alameda Research.
A few days later, Binance’s CEO, “CZ” Zhao, announced that the exchange would liquidate its FTT holdings. This caused panic among investors, leading to a bank run on FTX that saw the price of FTT plunge from $22.06 to $3.38 in two days.
Binance later announced that it would acquire FTX, a decision that it later walked back on, leaving the failing exchange helpless. FTX, once valued at $32 billion, filed for Chapter 11 bankruptcy on November 17. Its founder, Sam Bankman-Fried stepped down as CEO and was later hit with multiple charges, including wire fraud.
This series of events shook faith in the crypto industry and drew increased scrutiny from governments and regulatory bodies. Shortly after the collapse of FTX, the cryptocurrency market went into freefall, with Bitcoin falling to a 2-year low of $15,649 on November 22.
What Role Has the Government Played?
Rising Interest Rates
Apart from the internal rot, one other factor that deeply affected crypto in 2022 was rising interest rates. Since COVID-19, many countries have been dealing with record-high inflation, which can be attributed to supply chain disruptions and governments printing surplus money during the pandemic. As a result, central banks across the world have been hiking interest rates to slow down inflation. The US Federal Reserve has been on its severest inflation-fighting campaign in 40 years, hiking interest rates eleven times since 2021.
Rising interest rates drive investors away from risky investments like Bitcoin and towards less risky investments like bonds. There is also increased uncertainty in the financial markets, reducing investment activity.
In 2022, Bitcoin fell sharply as the Fed shot up interest rates to as high as 75 basis points. However, in 2023, the market has anticipated and factored in potential hikes, reducing the impact on Bitcoin and other digital assets. The asset has been trading in a range for the better part of the year.
Since the collapse of FTX in 2022, crypto has fallen under heavy scrutiny by governments looking to protect their citizens. In some countries, like Kuwait and Saudi Arabia, it is now illegal to trade or hold cryptocurrencies. In others, like the United States and the United Kingdom, crypto service lenders and users must adhere to strict rules.
The UK Financial Conduct Authority (FCA) is the chief crypto regulator in the United Kingdom. UK residents can freely buy and sell cryptocurrencies, but derivatives and exchange-traded notes (ETNs) are banned.
The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Internal Revenue Service (IRS) oversee crypto activities at the Federal level in the United States. The classification of a cryptocurrency as a security or a commodity dictates which agency controls it and which rules must be followed.
Bitcoin is deemed a commodity like crude oil and falls under the purview of the CFTC. According to the SEC chief, Gary Gensler, “everything else other than Bitcoin is a security.”
Despite being a commodity, Bitcoin has not been immune to the ongoing crypto crackdown in the US. The crackdown has created uncertainty, reduced liquidity, and created negative sentiment towards Bitcoin, all of which have contributed to the decline in its price. The current price of Bitcoin is $27,208, 60.45% below its all-time high of $68,789.
Bitcoin in 2024; What to Expect
The next Bitcoin halving, an event that splits miner rewards by half every four years, is just a little over six months away. The highly anticipated event is historically followed by a strong rally that often pushes Bitcoin to a new all-time high.
The prospect of a spot Bitcoin ETF is yet another upside catalyst. If the SEC approves a spot Bitcoin ETF in the United States, demand for the asset will most certainly increase since issuers will need to purchase BTC, driving prices higher. Major financial institutions such as BlackRock, VanEck, Invesco, ARK Invest, and Fidelity have applied for a Bitcoin spot ETF.
Top Expert Bitcoin Price Predictions for 2024
Many Bitcoin experts believe that the asset is headed for a new all-time high in 2024. Here are some specific predictions from Bitcoin experts:
Cathie Wood, CEO of ARK Invest: $1.48 million by 2030.
Mike Novogratz, CEO of Galaxy Digital Holdings: $500,000 by the end of 2024.
Dan Held, co-founder of Kraken: $1 million by the end of 2025.
PlanB, pseudonymous Bitcoin analyst: $100,000 by the end of 2023 and $1 million by the end of 2025.
CoinCodex, a crypto data firm: $427,000 by the end of 2025.
Standard Chartered, British multinational bank: $50,000 by the end of 2023 and $120,000 by the end of 2024.
However, these are just predictions that may or may not come true. As the saying goes, “Do Your Own Research (DYOR)” and carefully consider your risk tolerance before committing your hard-earned funds.