Let’s consider 2022 the base camp for crypto looking for 2023
As 2022 comes to a close, we can recap many historical milestones, like the Earth’s population hitting 8 billion and the global economy surpassing $100 trillion.
What is happening behind is just as important as knowing what is happening in front. CEOs have a lot on their plates today between mitigating geopolitical risk, preparing their companies for an endemic future, and navigating inflation and supply-chain woes.
After the euphoria of 2021, we have come back down to earth. The crypto markets have crashed, numerous industry giants have fallen, and global regulatory headwinds are picking up. Still, there is a lot to be excited about. This fall’s Ethereum “Merge” was the tech equivalent of the Moon Landing, and it went off without a hitch. We’ve seen exciting leaps forward in scalability solutions, DeFi, NFTs, DAOs, and other sectors of the crypto economy this year. And macro forces might reemerge as a tailwind for bitcoin in 2023.
Total Value Locked (TVL) is the sum of the value of all assets deposited in a DeFi product. Total DeFi TVL has trended down this year, but the new floor sits far above the level seen before the most recent bull market. On the 31 December 2021 the Total Value Locked (USD) was 166.77b, and one year later is $38.82b ( source https://defillama.com/)
Although the world’s largest cryptocurrency by market value, bitcoin (BTC), saw a roughly 64% decline in value year-to-date, CoinDesk research shows that bitcoin and ether returns in 2022 per unit of risk were about the same as equities and significantly better than bonds. CoinDesk research shows that per unit of risk, bitcoin and ether performed significantly better than bonds and had similar results to equities in 2022.
Salient Crypto Moments from 2022
2022 was a significant year for the industry. While events like the collapse of FTX have taken their toll, cryptocurrency has bounced back from worse. In 2022, notably how the whole reset lower in Bitcoin prices was driven by just three events: 1) Luna implosion, 2) Three Arrows filing for bankruptcy protection and the implications for the crypto lenders as well as 3) the FTX implosion
It is interesting to notice that FTX Trading Ltd.’s financial statements were a series of related-party transactions in the previous year. FTX Trading paid $250 million, or 25% of its revenue, to an unnamed related party for “software royalties.” The story of Sam Bankman-Fried’s bankrupt crypto empire is not just about collapsing tokens, missing billions, and sunny offshore tax havens. There were also red flags in its financial statements.
Overall trend adoption
Blockchain Fails to Gain Traction in the Enterprise, according to the Wall Street Journal: Maersk and IBM shut down their global platform that was supposed to bring blockchain to the shipping industry last month. Other big bets are moving slowly.
As David Solomon ( CEO of Goldman Sachs) pointed out: “Blockchain Is Much More Than Crypto,” and there are few Institutions, such as BNP Paribas, that are using blockchain technology to deliver the next generation of assets. Institutional investors still eye crypto despite FTX collapse, and data from crypto exchange Bitstamp shows that institutional registrations on the trading platform increased by 57% in November. There is even a growing interest from finance sector treasurers to prepare then self for CBDCs and stablecoins.
Security is still an issue
According to TRM analysis, 2022 was a record-setting year for crypto hacks, with about $3.7 billion in stolen funds. Attacks against DeFi projects were widespread, with approximately 80 percent of all stolen funds, or $3 billion, involving DeFi victims. TRM Labs has identified ten “mega hacks” in 2022, which we define as hacks involving $100 million or more. These ten hacks account for almost 75 percent of the total amount stolen in 2022.
Elliptic reported that the value of illicit crypto laundered through cross-chain crime reached $4.1bn this year and will increase by nearly 60% to reach $6.5bn in 2023. Their forecast suggests that crypto criminals will launder at least $10.5bn by 2025 by harnessing new technologies — such as decentralized exchanges, cross-chain bridges, and coin swap services — to hide the movement of their dirty funds.
The increased adoption of blockchain and the Web3 expansion will be the catalyst for opportunities in providing this service.
VC and funding
The declining crypto market and uncertain macroeconomic conditions have slowed venture-round cadence. Venture strategy and valuations will likely see some correction as crypto investors adjust to the challenges of navigating a new industry. Messari suggested that in the year’s final months, the capital moved towards concentrated deals at the earliest stage.
During November and December of this year, crypto funding significantly decreased compared to last year. According to Messari Fundraising Data, about $1.4 billion in venture capital was deployed across 112 rounds, compared to $8 billion across 287 rounds during the same time in 2021.
The Infrastructure and CeFi categories show a non-negative 30-day percent change. As the market cooled, capital started to coalesce toward CeFi and away from DeFi. Infrastructure faced the least negative impact of capital change in the last year, seeing the start of a positive difference in the previous 30 days. This category includes base layers, wallets, and bridges.
The NFTs category, which captures gaming apps and collectibles, saw the least amount of capital during this period. Gaming infrastructure and studios captured 24% of the capital in the Web3 category, alluding to moving away from only gaming apps and metaverses.
Interest in CeFi, as a percent of total funding, decreased only slightly. The year’s first half saw $26 billion in deployed capital, with 29% invested in CeFi. From the $1.4 billion invested in November and December, CeFi received 26%. We may see this change as the impact of FTX plays out over the next few months.
The most significant shift in investment over the year happened in the Infrastructure category. Between November and December last year, 23% of capital went towards Infrastructure, which increased to 42% this year. Infrastructure over applications has become the primary trend as the bear market deepens.
Two potential explanations for VC's favor of infrastructure:
· Apps beget infrastructure. After a bout of early applications in any tech adoption, it becomes clear that limited infrastructure limits innovation — correcting this sets the foundation for the next wave of crypto applications.
· Bear markets invite more infrastructure investments because focusing on single applications is riskier, leaning into pick-and-shovel investing. During the last bear market in 2018, $1 billion was invested in infrastructure, while CeFi followed behind with $700 million.
The full Pro Research report from Eshita Nandini: Towards Wallets and Institutional Tools
Conclusion
But despite all these risk events, Bitcoin volatility rarely moved back to the five-year moving average. We interpret this as a sign that institutional arbitrage traders have become dominating in compressing crypto volatility. The Metaverse also appears to have suffered from a lack of interest as the Sandbox’s SAND token has experienced a significant decline. Metaverse market collapses, with monthly platform sales falling 96% this year.
End-of-the-year fluctuation caused by tax-loss selling. Investors with large losses on stocks may be selling their shares to capture the losses for 2022. If investors sell at a loss and don’t buy back for at least 30 days, they can offset other capital gains they may have. And if the loss is a short-term one — meaning a stock bought less than a year ago — that failure can offset capital gains and up to $3,000 worth of income.
It is still much to be done for the crypto industry in terms of regulation and acceptance before it can become a genuine alternative to the current traditional banking system and a significant asset class in the institutional investors’ portfolio. Cryptocurrency and crypto ventures need several components to gain the trust of institutional investors Yong Hak Huh (HK), Senior Advisor to HashKey Capital, summarizes:
1. Regulatory oversight and compliance: Institutional investors will only trust cryptocurrency and ventures with robust regulations and supervision to protect their investments.
2. Creditworthiness: Investors want to feel confident that solid credit and proper debt practices back their investments. Crypto-related companies need to establish processes to ensure their ability to manage the capital entrusted to them safely.
3. Long-term vision: Institutional investors want to invest in companies they can trust and with which to build a sustainable long-term relationship. Companies must outline their strategy to assure investors that long-term capital growth will be sustainable.
4. Reliable transaction processing and reporting: Institutional investors will want to be able to access reliable and up-to-date information about the operations of crypto-related companies to make informed investment decisions.
So Let’s consider 2022 the base camp for crypto looking for 2023
