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Cryptocurrency has had a disastrous year, littered with hacks, bankruptcies and sharp price drops. Are there any bright spots to look forward to in 2023?
The cryptocurrency market hit an all-time high in November 2021, with Bitcoin’s price peaking at $68,000. This is driven by NFTs, play-to-earn games, decentralized finance (DeFi), and the amorphous concept of Web3, a decentralized fuzzy vision. Internet running on blockchain.
The cryptocurrency acquisition of the famous Super Bowl ad slot in early 2022 signaled that the industry was at the height of mainstream acceptance and sustained growth, but some believed that the industry’s rise had already pointed out the warning signs that it might not be as inevitable as others had made clear. Be.
With inflation soaring earlier this year and the Federal Reserve starting to raise interest rates, proponents argued that Bitcoin could be a credible hedge against rising prices. Goldman Sachs said in January that he called it “digital gold” and predicted it could replace the safe haven of traditional investors.
But the paper didn’t pan out, and by April it was revealed that while the value of gold was indeed rising, the major cryptocurrency was sinking alongside stocks. By the beginning of the year, Bitcoin had lost more than half its value from the previous year’s all-time high.
Then, in the second week of May, the industry’s first major collapse set off a death spiral that cryptocurrencies have yet to recover from. The stablecoin Terra, whose price was supposed to be firmly pegged to the dollar, started declining in value. By the end of the week, it was worth just 10 cents, making its sister Coin Luna essentially worthless.
The failure cost the cryptocurrency market around $45 billion in a matter of days. The main source of liability lies in the risky approach Terra’s founders took to maintain the dollar peg. While most stablecoins back their tokens with cash reserves, Terra relies on an esoteric system of algorithms and game theory to take advantage of investor behavior to trade almost always for exactly $1. I was trying to be
Many criticized the plan as unworkable in the long run, and it proved to be correct. People were encouraged to hold on to Terra by his 20% return-providing savings scheme called Anchor, but after the organization decided to switch to floating rates, people began to withdraw. This was followed by investors selling Terra in bulk and Trump’s house collapsing.
Terra’s collapse has had ripple effects in the wider cryptocurrency market. In June, 3 Arrows Capital (3AC), the world’s largest cryptocurrency hedge fund, announced that it had suffered heavy losses following the Luna plunge. By the end of the month, his $670 million loan from crypto broker Voyager Digital had defaulted, and the two companies filed for bankruptcy the following month.
Poor risk management practices and the incestuous nature of cryptocurrency trading (nearly every major cryptocurrency lender had financed 3AC) meant that the failure of this single entity would ripple through the crypto industry. It means that the This summer saw a series of crises, with crypto exchanges and lenders freezing withdrawals and companies filing for bankruptcy.
In the background, an ever-growing list of hacks against some of the biggest names in the industry further eroded investor confidence. in October, Consultant Chainalysis points out With over 125 hacks already in 2022 and losses of $3 billion, this year looks set to be the worst ever for cryptocurrency hacks.
The finishing blow came in November, when major exchange FTX plummeted from a valuation of around $32 billion to bankruptcy in just days. An affiliated trading firm founded by his CEO of FTX, Sam Bankman-Fried, was effectively using FTX customer deposits as collateral to invest in various cryptocurrency projects. When this came to light, people rushed to withdraw their funds, went wild on exchanges, and quickly depleted their reserves.
The failure of such a large player in the crypto ecosystem has pushed prices further down and continues concerns about “contagion” as more companies disclose their exposure to FTX. Crypto lender BlockFi, which had been in talks with FTX about the possibility of , also folded. All of this has given him a tailwind for cryptocurrency at the end of 2022, with some predicting more pain to come.
But there are still some bright spots among the industry’s wreckage.
In September, the number two cryptocurrency Ethereum performed an ambitious update called a merge. Currency blockchains previously relied on a security protocol called proof of work. Under Proof of Work, people compete to solve complex mathematical puzzles and win the right to verify transactions in exchange for cryptocurrency rewards. Merge has switched Ethereum to an approach called Proof of Stake. In this approach, people present chunks of cryptocurrency as collateral in exchange for the right to verify.
Previous approaches required so-called “miners” to run thousands of high-end computer processors, consuming enormous amounts of energy to verify transactions. This has raised concerns about the environmental impact of cryptocurrencies, but Proof of Stake may offer a solution.
This approach is still largely unproven, with many highlighting the potential risks of mergers. So far, however, the upgrade has been going well, with preliminary analysis suggesting a significant drop in energy usage, possibly pointing to a greener future for cryptocurrencies. Future changes may also allow Ethereum to execute more transactions at higher rates and lower costs. Beginning in 2023 with a process called “sharding,” which splits the Ethereum blockchain into a series of smaller databases, more updates are expected to roll out over the next few years.
In all the doom and gloom, this year’s cryptocurrency crash is a much-needed fix for all the hype that has accumulated around the industry and could go a long way in weeding out speculators and charlatans. There is also a growing call for regulation of the sector, which could make it more sustainable in the long run.
Ultimately, despite the depth of the crisis, many in the traditional financial industry believe cryptocurrencies will likely recover in 2023, though it may be a slow, gradual recovery. Needless to say, they predict that projects like Ethereum, which can be used to support practical real-world applications, rather than just financial speculation, will be the next growth engine for crypto. .
Image credit: Shubham Dhage / Unsplash
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