When the ball comes down in Times Square on New Year’s Eve, just about everybody in the crypto sector will be very happy to close the books on 2022.
This was the year of the crypto meltdown, marked by such events as the collapse of sister cryptocurrencies Luna and UST, or TerraUSD, which sparked a credit crunch that proved disastrous for many firms, including hedge fund Three Arrows Capital, or 3AC.
The fund was unable to honor its payments to crypto lenders Celsius Network and Voyager Digital, so 3AC was forced into liquidation, while Celsius and Voyager filed for Chapter 11 bankruptcy.
And then there was the whole FTX debacle, which saw founder Sam Bankman-Fried arrested and his crypto empire in ruins.
David Lesperance, managing partner of immigration and tax adviser with Lesperance & Associates, said that “2021 was a boom year for crypto, 2022 was a bummer year, and 2023 will be the year that the market and regulators clear out the riff raff.”
He said the market is demanding proof of reserves, account separation, and software that cannot easily be hacked resulting in stolen monies from crypto exchanges, stablecoins and DeFi, or decentralized finance.
“The tide is going out and the crypto world is about to find out who was swimming naked and who is wearing a bathing suit,” Lesperance said. “Those found to be swimming naked will find themselves under close examination by regulators and criminal law enforcement to see if there were any chargeable transgressions.”
“Those with a bathing suit will find themselves more powerful than ever as their competitors disappear,” he said.
Bitcoin (~BTCUSD) was off slightly to $16,628.62 on Dec. 29, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was flat at $1,202.14, while dogecoin was up modestly to $0.071208.
‘A Year Filled With Tough Lessons’
Frank Corva, senior analyst for digital assets at Finder, said that “2022 was a year filled with tough lessons for those in the crypto space.”
“The biggest and most sobering lesson that many investors in the space learned is the oft-cited crypto adage: not your keys, not your coins,” he said.
“Due to the failures of numerous borrowing and lending centralized finance platforms like BlockFi, Celsius and Voyager as well as the implosion of FTX,” Corva said, “crypto investors learned the hard way that when you don’t hold the private keys to your digital assets in your own hands, you no longer technically own said assets.”
Another big lesson that many in the space learned, he said, is that crypto and leverage don’t mix.
“Crypto assets are extremely volatile, and, when you trade them with leverage, you’re really playing with fire,” Corva said. “Not only did major crypto hedge funds like Three Arrows Capital go under due to its trading with excessive leverage, but many retail investors lost money, too, as more crypto derivative products came to market this year.”
Moving into 2023, Corva said he believes that the crypto industry has to focus on product-market fit.
“Given that regulators are champing at the bit to rein in what has proven to be an industry that cannot govern itself,” he said. “Developers in the space are going to need to ship products that have real use cases so as to better illustrate the value of this technology.”
“Just having a lot of developer activity on a blockchain isn’t a good enough reason for people to invest in crypto coins and tokens in the long term,” Corva said. “In 2023, I hope that developers consider the real world applications for what they develop. And I hope that UX and UI for decentralized apps (dApps) continue to improve.”
Institutional Investors at a Crossroads
Winston Ma, a New York University Law School adjunct professor, said that in the post-FTX era, institutional investors–especially the largest sovereign wealth funds and pension funds–are at the crossroad regarding Web3 and crypto Investments in 2023.
“As a result of FTX bankruptcy, Singapore government-backed Temasek announced that it had respectively fully written down their $275 million investment in the crypto exchange,” he said.
In its announcement, Ma noted, Temasek said that there have been “misperceptions” that the FTX exposure was “an investment into cryptocurrencies.”
Instead, Temasek continues to recognize the potential of blockchain applications and decentralized technologies “to transform sectors and create a more connected world” and Ma said this kind of bifurcated approach probably will be seen across the institutional investor space.
“They will shift their focus toward infrastructural aspects of blockchain, the so-called picks and shovels of the industry,” said Ma, author of Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse. “Instead of pure financial applications, so-called ‘hard technology’ innovations will be in favor.”
“They tend to be technical in nature, requiring a high level of expertise; also, they take longer to build out and realize, which matches well with the patient, long-term capital of sovereign wealth funds and pension funds,” he added.
“So in 2023, we may see institutional investors like SWFs and pensions focus more on Web3 tech investing and less on token-related projects, as VC funds typically do historically.”