Almost everyone in the crypto industry will be very happy to close the books on 2022.
This was the year of the crypto meltdown, marked by events such as the collapse of sister cryptocurrencies Luna and UST or TerraUSD, sparking a credit crunch that turned out to be disastrous for many companies, including hedge fund Three Arrows Capital or 3AC.
The fund was unable to make payments to crypto lenders Celsius Network and Voyager Digital, forcing 3AC into liquidation while Celsius and Voyager filed for Chapter 11 bankruptcy.
And then there was the whole FTX debacle, which saw founder Sam Bankman-Fried arrested and his crypto empire in shambles.
David Lesperance, Managing Partner of Immigration and Tax Advisor at Lesperance & Associates, said: “2021 was a boom year for crypto, 2022 was a crappy year and 2023 will be the year the market and regulators clear out the rabble.”
He said the market demands proof of reserves, account segregation and software that cannot be easily hacked, resulting in stolen funds from crypto exchanges, stablecoins and DeFi or decentralized finance.
“The tide is receding and the crypto world is about to find out who’s been swimming naked and who’s in a bathing suit,” Lesperance said. “Those who swim naked are subject to close scrutiny by regulators and law enforcement to determine if there have been any criminal offences.”
“Those in a bathing suit will be more powerful than ever when their competitors disappear,” he said.
Bitcoin (~BTCUSD) declined slightly to $16,628.62 on Dec. 29, according to data firm CoinGecko. Ether, the native currency of the Ethereum blockchain, was flat at $1,202.14, while Dogecoin edged up to $0.071208.
“A Year of Hard Lessons”
Frank Corva, senior digital assets analyst at Finder, said that “2022 was a year of hard lessons for those in the crypto space.”
“The biggest and most sobering lesson many investors have learned in this space is the oft-cited crypto adage: Not Your Keys, Not Your Coins,” he said.
“Due to the failure of numerous centralized credit and lending platforms like BlockFi, Celsius, and Voyager, as well as the implosion of FTX,” Corva said, “crypto investors have learned the hard way that if you don’t have the private keys to your digital assets in your own hands you no longer technically own these assets.”
Another key lesson learned by many in the industry, he said, is that crypto and leverage don’t mix.
“Crypto assets are extremely volatile, and when you’re trading them with leverage, you’re really playing with fire,” Corva said. “Not only did large crypto hedge funds like Three Arrows Capital go under because of their excessive leverage trading, but many retail investors also lost money as more crypto derivatives products launched this year.”
Looking ahead to 2023, Corva said he believes the crypto industry needs to focus on adapting the product to the market.
“Given that regulators are intent on containing an industry that has emerged as one that cannot govern itself,” he said. “Developers in this space need to deliver products with real use cases to better illustrate the value of this technology.”
“Just having a lot of developer activity on a blockchain is not a sufficient reason for people to invest in cryptocoins and tokens for the long term,” Corva said. “I hope that in 2023, developers will see real-world applications for what they are building. And I hope that UX and UI for decentralized apps (dApps) will continue to improve.”
Institutional investors at a crossroads
Winston Ma, associate professor at New York University Law School, said that in the post-FTX era in 2023, institutional investors — particularly the largest sovereign wealth funds and pension funds — are at a crossroads regarding Web3 and crypto investing.
“In the wake of the FTX bankruptcy, Singapore government-backed Temasek announced that it has fully written off its $275 million investment in the crypto exchange,” he said.
In his announcement, Ma said Temasek said there had been “misperceptions” that FTX exposure was “an investment in cryptocurrencies.”
Instead, Temasek continues to recognize the potential of blockchain applications and decentralized technologies “to transform sectors and create a more connected world,” and Ma said this type of two-pronged approach is likely to be seen across the institutional investing space.
“They will shift their focus to infrastructural aspects of blockchain, the industry’s so-called hoes and shovels,” said Ma, author of Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse. “Instead of pure financial applications, so-called ‘hard technology’ innovations are favoured.”
“They are usually technical in nature and require a high level of expertise; it also takes longer to set up and implement, which fits well with the patient, long-term capital of sovereign wealth funds and pension funds,” he added.
“So in 2023, institutional investors like SWFs and pension funds may focus more on investing in Web3 technology and less on token-related projects, as VC funds have typically done in the past.”