4 charts on the year of the ‘crypto credit crisis’

The crypto contagion, caused by the rapid and sudden collapse of seemingly established crypto firms, made things significantly worse for a market that had already been struggling for some time.

In 2022, Bitcoin cemented its legitimacy, with the CFTC and SEC declaring it as a commodity. However, the shenanigans of centralized exchange executives handicapped its price. Ethereum suffered the same fate, despite completing a monumental technological feat – The Merge – moving from a proof-of-work (PoW) to a proof-of-stake (PoS) blockchain.

While the contagion continues, characterized by a domino effect of crypto lenders filing for bankruptcy, we look back at 2022 with CoinDesk's Annual Crypto Review. The collapse of multiple centralized exchanges has plunged the industry into what CoinDesk calls a 'crypto credit crisis', with circumstances still unfolding today.

For a broad perspective on the market, we discuss the macro returns, Bitcoin and Ethereum's performance, and the state of capital raised for crypto funding.

Macro returns

2022 was a terrible year to hold risk-on assets, and government bonds were not a safe bet either. In its relentless crusade to curb inflation, the Fed hiked interest rates and sent the stock market reeling.

Source: CoinDesk

• The S&P 500, Bitcoin, ETH, and bonds all took a significant drop, with crypto faring the worst.
• The S&P 500 tumbled 20%, and fixed-income assets focused on preserving capital, such as government bonds, fell 32% in 2022.
• Classified as a commodity and touted as the new digital gold, Bitcoin tumbled 65%, while the price of gold retained its value and managed to return 2%.
• Ethereum followed Bitcoin and took a 67% hit.

The CoinDesk report attributes Bitcoin and Ethereum’s poor performance to broader market concerns and the 'secular shocks' the assets had to take from the crypto business.

Bitcoin market performance

Bitcoin’s market cap became a casualty in the wake of several centralized exchanges declaring bankruptcy in 2022.

• In 2021, the Bitcoin market cap was around $800 billion to $1 trillion, but today, it sits at around $300 billion – a 70% drop from all-time highs.
• Bitcoin’s price took a massive fall in the second quarter of 2022.
• The first major price decline of the year happened in May, after the Terra Luna collapse. To save the UST peg, Do Kown ‘deployed more capital’ by flooding the open market with billions of dollars worth of bitcoin and instigating a panic sell-off. The price fell 58%.
• Given the collapse of Three Arrows Capital, Celsius, and FTX, Bitcoin's price performance was not unusual.

Source: CoinDesk

Ethereum market performance

Ethereum’s market cap finished 2022 down 69%, losing almost $300 billion and ending at $143 billion. While BTC and ETH frequently move in sync, Ethereum faced different headwinds in 2022. 

• According to the CoinDesk Ether Price index (ETX), the second-largest cryptocurrency shaved off 67% of its value in 2022. 
• The SEC chairman, Gary Gensler, claimed all proof-of-stake assets are considered securities, a narrative that might play out in 2023. 
• The banning of Tornado Cash in the US caused ETH validators to run flash boats that ensure all transactions comply with OFAC regulations. The crypto community met this new development with concerns about censorship.
• In addition, ETH also faced accusations from community members of its increased centralization among a few big staking services. 29% of all ETH staked is placed in Lido DAO, for example.

Source: CoinDesk

Even though Ethereum completed the Merge, the second-largest cryptocurrency could not escape regulatory scrutiny in 2022. 

Capital raises for crypto funding

While 2022 was a down year for asset prices and centralized crypto firms, venture capital continued to show interest and grow.

• The 2021 bull market brought a 500% increase in investments, from $3.4 billion in 2020 to $23.1 billion.
• According to CoinDesk, despite a substantial downturn in the broader crypto market, funding given to companies still grew nearly 30%.
• Despite the FTX collapse and probe from regulators, venture capital backing still shows confidence in crypto and Web3. 

Source: CoinDesk

Looking ahead, VCs will take more time to conduct due diligence processes and set up proper safeguards to protect their investments in 2023, having learned from the failures of 2022.