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Dec 20 (Reuters) – Bitcoin bounces ahead to 2022. It ends the year going down the alley, taking away its cocktail of cheap money and leveraged bets that the establishment shunned.

The popular cryptocurrency has lost 60% of its value, while the crypto market has shrunk by $1.4 trillion, weighed down by rising interest rates, an erosion of risk appetite and corporate collapses, including Sam Bankman-Fried’s FTX.

Crypto funds saw net inflows of $498 million in 2022, up from $9.1 billion in 2021, according to digital asset manager CoinShares, reflecting how mainstream finance has been left out of the market through its annus horribilis.

James Malcolm, head of FX strategy at UBS, said he spent 70% of his time with clients talking crypto in the first half of the year. In contrast, during 10 days in North America last month, from Montreal to Miami, “I spent less than 2% of my time discussing crypto.”

Even last year, before the downturn began in November, cryptocurrencies were realistically considered to be two or three years away from mainstream institutional investor adoption, Malcolm added.

“Now it’s completely in the far, far future.”

Reuters Graphics

CRYPTO OPTIMIST FOR 2023.

All is not bad for crypto, however. 2022 was also the year the Ethereum blockchain finally pulled off its “Merge” mega-upgrade, which moved it to a less energy-intensive “proof-of-stake” system in September.

“This event was a technological feat and one of the only positives in an otherwise pretty dark year for crypto,” said Anthony Georgiades, blockchain co-founder of Pastel Network.

“These upgrades will make the Ethereum ecosystem much easier to use for people around the world. With all this progress, it’s hard to be bullish on crypto going into 2023.”

Ben McMillan, chief investment officer at IDX Digital Assets, says the growing popularity of blockchain-based tools, including decentralized exchanges and decentralized finance, is also an important development this year.

“So it’s very bullish for the ecosystem and something to focus on long-term,” he added. “We may see greater allocations to digital assets as risk appetite picks up again in 2023.”

Reuters Graphics

BITCOIN FACES A RECESSION

Bitcoin hit a record high of $69,000 in November 2021 and the crypto market reached $3 trillion, boosted by fiscal and monetary stimulus from countries around the world trying to contain economic damage due to COVID lockdowns.

But as societies reopened, rising inflation forced central banks to tighten interest rates and sent investors fleeing higher-risk assets such as tech stocks and cryptocurrencies.

Bitcoin, long touted as a convenient store of value in times of inflation because of its limited supply, has faltered during the test as investors turned to tried-and-tested safe havens like the dollar as exchange rates rose. It fell by about a third in January, outpacing the 8% drop in U.S. stocks.

“2022 was a new environment for digital assets. They’ve never been in a recession or a rising rate environment,” said Cathy Talati, director of research at digital asset firm Arca.

CLOSING THE END OF THE YEAR

As investors pulled money out of crypto, major projects came under strain. The first to crack was terraUSD, supposedly a “stablecoin” and its sister Luna. Coins fell in value in May, and investors lost an estimated $42 billion globally.

Shock waves echoed in the market. US crypto lender Celsius froze customer assets and revealed a $1.2 billion hole in June when it filed for bankruptcy. Singapore-based crypto hedge fund Three Arrows Capital collapsed the same month.

Bitcoin and other tokens weakened, halving in just 49 days since the end of May. Bitcoin fell more than 15% in a single day in June, its worst day since March 2020, when the chaos of COVID ravaged financial markets.

But the biggest crypto shock was yet to come.

In November, the major exchange FTX suddenly went bankrupt. Bitcoin has dropped by a quarter in four days as Bankman-Fried sought funds to save its exchange.

The cryptocurrency is now hovering around $16,000. Overall, 2022 was pretty much a crypto disaster.

Or, as economist Noel Acheson puts it, “the year the leveraged bubble popped, exposing the structural weaknesses of an industry that grew too big, too fast.”

  • Roll on 2023 Cryptoverse will be back on January 10th

Reporting by Tom Wilson in London and Medha Singh and Lisa Mattakal in Bangalore; Editing by Pravin Char

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and impartiality in accordance with the principles of trust.

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