After a tough year of bankruptcies and criminal investigations, crypto investors are hoping for better times to come in 2023.
Almost everyone in the crypto sector will be happy to close the books in 2022.
This has been the year of cryptocurrency, marked by events like the collapse of sister cryptocurrencies Luna and UST, or TerraUSD, which triggered a credit crunch that proved disastrous for many companies, including hedge fund Three Arrows Capital, or 3AC.
The fund was unable to meet its payments to crypto lenders Celsius Network and Voyager Digital, forcing 3AC into liquidation, while Celsius and Voyager filed for Chapter 11 bankruptcy.
And then the whole FTX debacle happened, with founder Sam Bankman-Fried arrested and his crypto empire in ruins.
David Lesperance, managing partner of immigration and tax adviser Lesperance & Associates, said that “2021 was a boom year for cryptocurrencies, 2022 was a bad year, and 2023 will be the year where the market and regulatory authorities iron out the row.”
He said the market requires proof of reserves, account segregation and software that cannot be easily hacked resulting in stolen money from crypto exchanges, stablecoins and DeFi, or decentralized finance.
“The tide is going out and the crypto world will find out who was swimming naked and who was wearing a bathing suit,” Lesperance said. “Those found to be swimming naked will come under close scrutiny from regulators and the criminal law to see if there were any offenses they are charged with.”
“Swimsuiters will be more powerful than ever when their competitors are gone,” he said.
Bitcoin (~BTCUSD) it was down 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 rose modestly to $0.071208.
‘A year filled with hard lessons’
Frank Corva, senior digital asset analyst at Finder, said “2022 was a year filled with hard lessons for those in the crypto space.”
“The biggest and most sobering lesson many investors in the space have learned is the oft-quoted crypto adage: not your keys, not your coins,” he said.
“Due to the failure of numerous centralized lending and borrowing financial platforms such as BlockFi, Celsius and Voyager, as well as the implosion of FTX,” Corva said, “crypto investors have learned the hard way that when you don’t hold the private keys of your digital assets in your hands, you no longer technically own that property.”
Another big lesson many in the world have learned, he said, is that cryptocurrencies and bullion don’t mix.
“Crypto assets are extremely volatile, and when you trade them with leverage, you’re basically playing with fire,” Corva said. “Not only have major crypto hedge funds such as Three Arrows Capital collapsed due to their over-leveraged trading, but many retail investors have also lost money as more crypto derivatives products have entered the market this year.”
Heading into 2023, Corva said he believes the crypto industry needs to focus on product-market fit.
“With regulators trying to rein in what has turned out to be an industry that can’t manage itself,” he said. “Developers in the space will need to ship products that have real-world use cases to better illustrate the value of this technology.”
“Just a lot of developer activity on the blockchain is not a good enough reason for people to invest in crypto coins and tokens for the long term,” Corva said. “I hope that in 2023, developers will consider real-world applications for what they develop. And I hope that the UX and UI for decentralized applications (dApps) will continue to improve.”
Institutional investors at a crossroads
Winston Ma, an adjunct professor at New York University School of Law, said that in the post-FTX era, institutional investors — especially the largest sovereign wealth funds and pension funds — are at a crossroads regarding Web3 and crypto investment in 2023.
“As a result of FTX’s bankruptcy, Singapore government-backed Temasek has announced that it has fully written off their $275 million investment in the crypto exchange,” he said.
In its announcement, Ma noted, Temasek said there were “misperceptions” that exposure to FTX was “an investment in cryptocurrencies.”
Instead, Temasek continues to recognize the potential of blockchain applications and decentralized technologies “to transform the sector and create a more connected world,” and Ma said this type of bifurcating approach is likely to be seen across the institutional investor space.
“They will shift their focus to the infrastructure 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 benefit.”
“They are usually technical in nature, require a high level of expertise; also, they take more time to build and realize, which matches well with the patient, long-term capital of sovereign wealth funds and pension funds,” he added.
“Therefore, in 2023 we could see institutional investors like SWFs and pension funds focus more on investing in Web3 technology and less on token-related projects, as VC funds have tended to do historically.”