The total capitalization of cryptocurrencies declined in 12 months from $2.2 trillion to $835 billion.
2022 was a dramatic year for the cryptosphere: the volume of investments in cryptocurrencies decreased by 62%, from $2.2 trillion to $835 billion (-65%), although the number of different cryptocurrencies exceeded 22 thousand.
However, the largest capital market – the U.S. – also experienced a record decline: the Nasdaq Composite fell by 32% and the S&P 500 declined by 20.5%, so both indices were in a bearish phase, which is defined as a loss of more than 20%.
Considering the higher degree of risk in cryptocurrencies, their decline is less sensitive to investors than losses in stocks, which have not exhibited such negative volatility for many years.
Moreover, rising yields on U.S. bonds (government and corporate) reflected a drop in their market value, and for investors, this segment of securities has performed worse than cryptocurrencies. At the same time, rising yields make borrowing with bonds more expensive for the financial market.
TerraUSD and FTX: two black swans for the cryptosphere in 2022
The cryptocurrency sphere has learned a number of lessons from its own crises in 2022.
Recall that the loss of the TerraUSD stabelcoin parity with the U.S. dollar caused the bankruptcy of major players such as Celsius, Three Arrows Capital, Voyager, as well as a number of other medium and small companies in the cryptosphere.
In part, the TerraUSD situation was a factor in the collapse FTX crypto exchange.
That said, the drop in bitcoin prices from above $63k in November 2021 to values below $20k in the fall of 2022 was not solely the main factor in the problems of FTX and the cryptosphere as a whole. The FTX situation itself will unfold as early as 2023, in court, when the first hearing on the merits takes place on January 3 after the founder of the FTX crypto exchange, Sam Bankman-Fried, was released pending trial on a record $250 million bail.
By comparison, Bernie Madoff was released pending trial on $10 million bail. Madoff was known for having the second-largest brokerage firm by turnover on Wall Street at its peak. Madoff subsequently launched a $64.8 billion project that was deemed a “pyramid scheme.” In 2009, the 71-year-old trader was sentenced by a U.S. court to 150 years in prison, where he died in 2021.
Bitcoin mining is growing steadily
The mining industry showed a strong resource of adaptation in 2022, and the reduced price of mining equipment was a boon for a number of cryptosphere participants, who began to increase their fleets of bitcoin miners. The reduced price of miners compensated for the rising energy tariffs for such participants.
It is the desire to increase their investment in equipment, not just to cover operating costs, that can explain the fact that mining companies were actively selling bitcoins in 2022, with the volume of sales averaging 135% of the volume of the No. 1 cryptocurrency mined. By the end of 2022, the amount of bitcoins in miners’ reserves had fallen to its lowest value since the beginning of the year, to 78 thousand BTC.
That said, some participants, such as Marathon Digital and Hut 8, for example, did not sell a single bitcoin in 2022, either from what they had mined or from what they previously had in reserves. The major bitcoin miners preferred not to actively sell bitcoins: thus, the top 10 public miners in 2022 mothballed 40.7 thousand BTC, but sold 40.3 thousand BTC. At the same time they had 34.2 thousand BTC in their reserves.
This top 10 miners accounted for about 23% of the global bitcoin hash rate.
In 2022, mining was actively developing not only in the U.S., but also in Russia and Kazakhstan. Hash rate growth was also recorded in China, despite the existing restrictions on mining cryptocurrencies. The expected complete opening borders between mainland China and Hong Kong in January 2023 will lead to an increase in cryptocurrency activity in Hong Kong.
DeFi and its dynamics.
DeFi’s cryptocurrency volume fell from $180 billion (peaking in December 2021) to $65 billion in December 2022. November was a record year in 2022 in terms of the compromise of various DeFi protocols: users permanently lost access to $4.88 billion worth of digital assets in a month.
By the end of the year, the volume of blockchain-based cryptocurrencies on Solana had dropped to $366 million, a consequence of the fact that the Solana-linked Serum protocol was exposed to the negative effects of the FTX crash.
Ethereum blockchain-based tokenized assets fell to $612 million by the end of 2022 after peaking in Q2 2022 at $1.75 billion.
In total, all stackablecoins in the cryptosphere are estimated to be $145 billion by the end of 2022, representing about 17.5% of the total cryptocurrency market capitalization. In the past two years, their share has grown more than fivefold. Stablecoins, bitcoins and Ethereum – these assets together account for about 78% of the entire cryptocurrency market.
Stablecoins play a large role in cryptocurrency trading: USDT, USDC, BUSD and DAI pairs account for about 76% of all transactions on centralized cryptocurrency exchanges. Cash-linked staplecoins account for 91.7% of the total capitalization of such assets, of which Tether (USDT) and USDCoin (USDC) “weigh in” at $67 billion and $44 billion, respectively.
Total stablcoin transactions in terms of cash reached $7.4 trillion in 2022, a new record after $6 trillion in 2021.
Despite the significant decline in NFT buying and selling transactions, the following positives can be highlighted.
For 2022, NFT creators on OpenSea, one of the popular NFT hosting platforms that has faced, alas, successful compromise, were able to earn a total of just over one billion dollars in royalties.
In total, there were more than 100,000 projects in the NFT space by the end of 2022, but the largest volume of transactions in the secondary market for such tokens are made on only 5% of them. The daily average volume of NFT transactions was $5-15 million by the end of 2022, although at the beginning of the year it was as high as $400 million.
It’s important to note that well-known brands have come into the NFT space. Starbucks announced in September that their loyalty program in the U.S. would be backed by NFTs, which they referred to in their documents as “travel cards.” Adidas, Bentley, The New York Knicks, Reddit, Tiffany & Co. and others came into the field.
Investors have not lost confidence that the price of bitcoin will eventually rise and renew an all-time high. Long-term investors now have 13.8 million BTC in their hands, which is almost an absolute record, even though the bitcoin price has fallen to its lowest in two years.
Bitcoin outflows from crypto-exchanges have reached an all-time high, and amid disappointment with CeFi crypto-exchanges, the last month of the year saw a distinct increase in interest in DeFi, which will likely trend in 2023.
The year 2022 saw important changes in cryptocurrency regulation. For the first time ever, a “superbank” or “central bank for central banks,” as the Basel-based Bank for International Settlements (BIS) has developed and already presented in final form standards on how the world’s banking sector should interact with the cryptosphere.
These standards become part of Basel III, in the form of a new chapter. Basel III is a third-generation banking standard that has begun to be implemented in most countries, and now it has a new chapter on cryptocurrencies. The BIS is giving the world’s banking sector time to prepare for the new changes, so the new standards will take effect in January 2025. It is important that the world has come to a fundamental consensus on how to treat cryptocurrencies in terms of how the global banking sector interacts with the cryptosphere.