It has been a tough year for crypto. Major currencies, like Bitcoin, have lost nearly 70 per cent of their value, with the second-largest crypto marketplace collapsing amid reports of major fraud.
But what does 2023 hold for crypto, and is now a good time to buy? We take a look a look at the insights and predictions for the year ahead.
What happened to crypto in 2022?
Just like most other investment and asset classes, cryptocurrencies were hit hard in 2022.
Despite reaching a record-high valuation in October 2021, the price of largest cryptocurrency, Bitcoin, crashed in 2022, tumbling nearly 70 per cent by the end of the year. It was a similar story for almost every other cryptocurrency.
And crypto wasn’t the only asset to suffer last year. Almost all investment classes were hit hard by a changing economic climate, with as much as $9 trillion of value wiped out across US stock markets since the beginning of the year.
In total, the crypto market has seen around $2 trillion worth of market capitalisation erased, with many people losing substantial amounts of money. But why did the cryptocurrency market crash?
Why did crypto crash in 2022?
The loss of value in the crypto space was driven by a number of different factors, the most prominent of which was rising inflation.
Higher rates of inflation and interest rates can eat away at the value of people’s investments.
If inflation is high, the returns generated are worth less as they no longer offer the same profits, taking into account higher general prices, as they did before. The money returned on the investment is subsequently worth less.
As the economic climate has changed, and many investments are no longer as profitable, or certain others are seen as more risky, investors spend less and are more selective in what they put their money into.
And, as one of the most high-risk investment classes, crypto has been hit particularly hard by the changing willingness of people to invest into higher risk assets.
While some buyers of crypto have made a lot of money, others have lost an equally large amount.
With inflation already eating away at people’s money, many have sold their cryptocurrency investments or have become much less likely to invest in it.
As a result, the reduced interest and investments in crypto have led to the price of cryptocurrency falling drastically.
How did the collapse of FTX impact crypto?
While the price of crypto lost a significant amount of value due to changes in the wider economic landscape, a major collapse has taken place among many of the crypto industry’s biggest platforms and marketplaces.
On 11 November 2022, the second-largest cryptocurrency exchange, FTX and its associated organisations, collapsed amid concerns of poor financial health.
In the days that followed, accusations of widespread fraud were levelled against the exchange, culminating in the former CEO of FTX being arrested in December.
While the investigation into the collapse is ongoing, it’s believed between $1 billion and $2 billion of FTX users’ funds are unaccounted for.
The collapse of one of the most high-profile crypto exchanges has led to other crypto companies running into trouble as well.
Crypto exchange Genesis has warned of bankruptcy while BlockFi has already filed for bankruptcy. Questions remain over the health of a number of other exchanges and businesses that were closely connected to FTX.
The collapse of some of the largest crypto exchanges has shaken investor faith in crypto, and triggered another major sell-off of cryptocurrencies, as investors became concerned over the safety of their money.
What does 2023 hold for crypto?
As with all investment predictions, it’s impossible to know exactly what will happen.
With an investment as volatile as crypto, the future is harder to forecast than most. However, taking into account the different causes behind the loss of value in the crypto space, certain predictions can be made.
The main issue affecting cryptocurrencies is the inflationary and higher interest rate environment in which they operate.
As a more volatile investment to make, crypto is seen as a less attractive investment to make when investing more safely is the more prudent thing to do.
For that reason, the key to crypto performance could well be whether interest rates continue to stay high or reduce.
Unfortunately, persistently higher interest rates aren’t expected to level off any time soon.
While some hopeful forecasts had predicted that rates might drop towards the end of 2023, it now seems much more likely that higher interest rates than usual are likely to be a permanent feature of the economic landscape until at least 2024 — meaning cryptocurrencies might not see a major recovery in price for a little while yet.
Equally, it remains to be seen exactly what lasting damage has been done to cryptocurrencies by the collapse of FTX. Although far from common, fraud and insecurity are major concerns to many people uncertain about investing in cryptocurrencies.
Typically, trading on the major exchanges has been the best way to keep money safe, but with the collapse of FTX, it remains to be seen what kind of lasting reputational damage has been done to crypto.
What alternative investments are there?
Investing in crypto can make investors a lot of money, but with the economic landscape changing, many investors are choosing to protect their money by investing in safer assets instead.
Some safer assets to invest in for 2023 include:
Equities: otherwise known as stocks and shares, some equity markets were also hit hard in 2022. Unlike cryptocurrencies though, there are a range of more safe and more risky equities to invest in, meaning that depending on your investing appetite, you could choose to invest in a range of different companies and options.
Property: property is largely considered to be one of the safer investments you can make, and usually returns above-inflation earnings — meaning that during inflationary times, investing in property can be a good choice.
Gold: gold is often deemed a safe haven. When gold is increasing in price, it can indicate than investors are pessimistic when it comes to the economic outlook.
Investing can help you meet your financial goals, no matter the economic climate. However, investing comes with many risks.
Speaking to a financial adviser can help you do it safely.
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