The cryptocurrency market experienced a significant decline in 2022, plummeting by over 70% amidst a series of negative events that garnered global attention. These events included FTX’s bankruptcy, the arrest of Sam Bankman-Fried, and the $50 billion collapse of the Terra ecosystem.
Additionally, the United States faced a 40-year high in inflation, alongside a continuous rise in national debt. However, amidst the challenging circumstances, there were some positive developments. In September 2022, Ethereum successfully transitioned to a proof-of-stake network, and Bitcoin’s hash rate tripled throughout the year. Furthermore, the market experienced a strong rebound in 2023.
Let’s explore some key events that took place in the industry between 2022 and 2023.
Understanding the History of Crypto
Inflation rates in the United States reached their peak, at least for the time being. The staggering inflation played a significant role in the 77.2% decline in Bitcoin’s price, dropping from its previous all-time high of $68,990 to a cycle low of $15,740 in November 2022. The U.S. Consumer Price Index (CPI) inflation rate hit a high of 9.1% in June 2022, marking the highest level since 1982, according to the U.S. Bureau of Labor Statistics.
Thankfully, the CPI inflation rate began to trend downward after June 2022, reaching a low of around 3% in June 2023. Subsequently, the monthly figures have remained around the 3% range.
There has been a significant increase in Bitcoin’s value since June 2023, with a surge of over 135%, rising from $30,480 to a new all-time high above $73,000. However, due to the 11.65% increase in the CPI inflation rate since November 2021, Bitcoin has not yet reached its inflation-adjusted all-time high. This milestone will be achieved when Bitcoin reaches $77,026.
Furthermore, the U.S. national debt continued to surge, reaching $33.2 trillion over the two fiscal years of 2022 and 2023, according to data from the U.S. Treasury. Currently, the debt has risen to $34.5 trillion, which has placed the U.S. on an unsustainable fiscal path, as stated by U.S. Federal Reserve Chair Jerome Powell. However, there has been a decrease in the U.S. debt to gross domestic product ratio, dropping from approximately 3.2% to around 123%.
Researchers from the University of Pennsylvania have warned that financial markets can only handle another 20 years of accumulated deficits projected under the current U.S. fiscal policy. Beyond that point, the debt dynamics would begin to unravel.
Coinbase CEO Brian Armstrong recently emphasized that increased Bitcoin adoption in the U.S. could serve as a check on excessive deficit spending, which he believes is crucial for maintaining the strength of the U.S. dollar. Armstrong stated that Bitcoin’s inclusion would signify a return to financial discipline.
El Salvador serves as a prime example of this, according to venture capitalist Tim Draper, who believes that the country’s Bitcoin investment could help repay its $215 million debt to the International Monetary Fund.
The Collapse of FTX and the SEC’s Regulatory Role
Between 2022 and 2023, the macroeconomic conditions impacted numerous cryptocurrency firms, resulting in bankruptcies, liquidations, and even imprisonment for some controversial figures within the industry. These events prompted the U.S. Securities and Exchange Commission (SEC), led by Gary Gensler, to take regulatory action and position itself as the “cop on the beat” for the cryptocurrency industry.
Among the collapses, FTX experienced the most significant downfall, losing over $8 billion in misappropriated customer funds due to a crashing market. BlockFi also faced bankruptcy, citing the loss of loans from FTX, while Three Arrows Capital filed for Chapter 15 bankruptcy after its excessive leverage on long positions was wiped out. Other notable firms such as Celsius and Voyager also filed for bankruptcy.
Former FTX CEO Sam Bankman-Fried was convicted of fraud in November 2023 for orchestrating what has been described as the largest fraud in U.S. history.
The collapse of the Terra ecosystem and its algorithmic stablecoin, TerraUSD (UST), also caused significant damage in May 2022. Do Kwon, the former CEO of Terraform Labs, was primarily responsible for this collapse. He spent over five months evading authorities in multiple countries before being apprehended at immigration control in Montenegro for using a fake Costa Rican passport. Kwon is facing fraud charges in South Korea and the U.S. for his role in the Terra collapse.
The SEC became even more determined to apprehend the remaining individuals involved in fraudulent activities within the cryptocurrency industry after Bankman-Fried’s conviction. Notably, the SEC sued Binance, the world’s largest cryptocurrency exchange, and its former CEO, Changpeng Zhao, who pleaded guilty to money laundering violations in November 2023. Additionally, the securities regulator filed a lawsuit against Coinbase in June 2023, accusing the trading platform of unlawfully listing cryptocurrencies deemed to be securities.
Local Banking Crisis and the Resilience of Builders
In March 2023, the industry faced a local banking crisis, with three cryptocurrency-friendly banks collapsing: Signature Bank, Silvergate Bank, and Silicon Valley Bank (SVB). This raised concerns about the resilience of the U.S. banking system, surprising even Federal Reserve Chair Powell.
Despite these setbacks, builders in the industry continued to innovate. Ethereum’s transition to a proof-of-stake consensus mechanism in September 2022 significantly reduced its energy consumption by over 99%. Additionally, the Bitcoin network became more secure between 2022 and 2023, with its hash rate increasing by 200% to 515 terrahashes per second, according to data from Blockchain.com.
In conclusion, although the cryptocurrency market faced significant challenges between 2022 and 2023, it also witnessed notable advancements and resilience among industry participants.