Nowhere to go but up

2022 and the great crypto shakedown

To say this was a tumultuous year for crypto, would be an understatement. And it goes beyond bear and bull markets. The year 2022 will no doubt go down in history as the year of the great crypto shakedown. While there were a few hiccups along the way, 2022 showed us all, not only how far the industry had come, but also how quickly it can fall. 

It took the crypto market a few years, and a couple of ‘bumps in the road’, but it finally took off. 2021 was the year of the great bull run. Overnight, we heard about amazing success stories of new & promising crypto projects, institutional players flocked in, adoption increased greatly, $BTC reached an all-time high of nearly $70K and the market reached a cap of approx. $3B.

Source: Coinmarketcap

What goes up must come down

It was towards the end of 2021 when this growth spurt came to a grinding halt. It didn’t take long for the market to understand that what goes up must come down. There were initial indications of the changing trends, even before the events of 2022. The price of $BTC fell beneath the $40K mark (considered by many to be a breaking point) towards the end of Jan. 2022. It recovered a bit over the next months but hasn’t yet managed to recoup past the $50K mark.

Then, what got bad, got even worse:

The first to drop

May 2022 –  Terra Luna scandal and USD/UST depeg –  which is blamed for wiping $60-300B (depending on who you talk to) in market cap from the industry.

The next to fall

June-July 2022 – a variety of trading firms and VCs who were overextended/overinvested against Luna or some of the other buckling currencies began to file for liquidation or bankruptcy.

The bigger they are the harder they fall

November 2022 – FTX and their bookkeeping “mismatch”. It turns out that their attempted bailout of 3AC and BlockFi, as well as some of their other activities, put FTX and Alameda in the same bucket.

Bottom-line, quite a few companies put in place quite a few practices that would have any regulator raising an eyebrow (or two). We talked about some of the events which conspired to bring on the crypto winter in one of our other blogs (read here: Hunker Down and Build for the Next Boom).

Was the writing on the wall?

Quite a few people are saying the writing was on the wall and that the regulators have up until now been much too reactive, rather than proactive. In fact, way back in 2018 the Office of the Attorney General (OAG) of New York issued a special report, labeled the Virtual Markets Integrity Initiative. In the report they clearly warn that customers of virtual asset trading platforms face significant risks:

In recent years, hackers have infiltrated trading platforms and stolen billions of dollars’ worth of virtual currency, leaving customers with little or no recourse. Delays and outages on trading platforms are common, leaving customers unable to withdraw funds and susceptible to significant losses given volatile prices. Public reports also have linked certain trading platforms to deceptive and predatory practices, market manipulation, and insider abuses.

The findings of this report are based, at least in part, on questionnaires filled out by some of the biggest trading platforms at the time. The analysis revealed three broad areas of concern for the market:

• The Various Business Lines and Operational Roles of Trading Platforms Create Potential Conflicts of Interest.
• Trading Platforms Have Yet to Implement Serious Efforts to Impede Abusive Trading Activity.
• Protections for Customer Funds Are Often Limited or Illusory.

In other words, customers, …, could find themselves without recourse in the event of a dispute with the platform, or loss of funds due to fraud, theft, or insolvency.

However, the vast majority do not have access to the same information, nor do they read “special reports” issued by the OAG. This, of course, is an issue, in and of itself.

And while the situation seems dire, there is reason to remain optimistic.

Cryptocurrency adoption similar to those of other technologies

In Feb 2022, Wells Fargo Investment Institute issued a special report called Understanding Cryptocurrency. In this report, Wells Fargo, the American banking giant, attempts to answer the question of whether it is ‘too early’ or ‘too late’ to invest in cryptocurrencies. Their answer was – that it was neither.
Their reasoning per the report:

1. Focusing on the past performance of the crypto market could be misleading – these numbers were skewed due to the fact that most cryptocurrencies began trading at under $1.
2. Crypto is still a relatively young investment space
3. Price volatility
4. Crypto is a different type of investment – as it relies on more of a crowd-sourcing pattern than a more traditional (private to public) company pattern.

They likened crypto adoption to the adoption rates of other technologies. For example, the following graph looks at the adoption rates for new technologies in the US:

Sources: Our World in Data, National Opinion Research Center (NORC), & Wells Fargo Investment Institute.

At the end of 2021, crypto adoption stood at 295M according to Chainalysis, just under 4% of the global population. Impressively it took under 4 months to double the global cryptocurrency population.

And while it may be difficult to predict, according to some estimates, cryptocurrency adoption was on target to reach 1 billion users by 2024:

Moreover, many have likened the current situation to that of the dot.com crash of the early 2000’s. Similar to other ‘black swan’ events, the events of 2022 will go down in history as “severely rare” but ones with “extreme impact” on the entire industry. Similarly, we will indeed see a ripple effect in which many blockchain-based tokens with little to no value are washed out with the tide, and many bad players behind them. Hopefully, the regulators will understand that before this gets any worse, it is important for them to quickly step in, and up the regulation.

Of course, MiCA, OFAC, and other regulations have already come a long way. Yet there is still quite a ways to go to ensure that consumer and institutional investors alike can do business safely and securely.

We have no doubt that 2022 will lay the impetus for the industry to emerge stronger, and more resilient than ever. We can only echo some of Wells Fargo’s suggestions:

• Be patient
• Be prudent
• Be careful

And whatever you do, make sure your investments are stored safely and securely. We’ve said it before, and we’ll say it again:

It is clearer than ever that financial institutions should not rely on external parties to manage their assets nor hold their private keys. Having an end-to-end, self-managed institutional solution that allows you to be in full control of your private keys is highly valuable to institutions that sometimes manage billions of dollars in AUM.

To read more about the GK8 solution, and how it can help you guarantee the security of your crypto assets, click here.