Crypto has not had the best of years to say the least. While the rest of the economy experienced a downturn in 2022, the crypto world went into freefall.
The average value of bitcoin, the world’s largest and best-known cryptocurrency, fell by 64 percent, according to data from Google Finance. And then the trading platform FTX, a company that advertised everywhere in 2022, fell. Wall Street banks that previously sought to partner with crypto companies to give their clients access to the emerging markets are now skeptical of crypto. And co-founder Sam Bankman-Fried of FTX, who is pleading not guilty, will remain in the spotlight for now.
So yes, there are plenty of reasons to be pessimistic about crypto in 2023. But analysts Gautam Chhugani and Bernstein’s Manas Agarwal still see some hopeful signs.
In a note published on January 3, they wrote that the broader crypto ecosystem has plenty of potential despite the disastrous 2022. Its decentralized nature allows crypto to bounce back from debacles such as with FTX, it has strong roots with Ethereum, and it is likely to benefit from the inevitable regulation to come.
In their words, crypto has a “survival instinct.”
Crypto continues to make a comeback
Last year was not the first “crypto winter.” Bitcoin was already hit hard in 2014, falling in value by 58 percent that year. And in 2018, the currency continued to sink further for no less than a year and a half. But both times bitcoin revived very strongly.
Ethereum, the other major cryptocurrency, followed much the same pattern of massive retreat followed by a strong recovery between 2018 and 2020.
As Ross Gerber said in 2021 during Yahoo Finance Live, “Bitcoin and Ethereum are like cockroaches. They just don’t die.”
The decentralized system is one of the main reasons why crypto is like a cockroach. For example, Chhugani and Agarwal point out that the collapse of FTX has led to little pollution.
“FTX has been terrible for the reputation of the industry and has eroded the confidence of institutional investors who have invested in the platform,” the analysts said. “But FTX accounted for 10 percent of global trading volume and was mostly used by brokers, trading firms and large traders.”
Most of the crypto world is still decentralized. Take decentralized finance, or DeFi, which uses the same network of computers to provide financial services to people.
According to Chhugani and Agarwal, the collapse of FTX has accelerated the adoption of DeFi, which will attract many investors.
The rise of DeFi
Most DeFi projects are not feeling the fallout from FTX, and Bernstein’s analysts believe investors may well shift their focus to Ethereum and its mostly application-based ecosystem.
Ethereum is the foundation for many crypto applications, such as NFT-based games, decentralized social media, and online commerce. They often use either the Ethereum blockchain to build their applications or the Ethereum coin ether to complete the transactions. According to Chhugani and Agarwal, crypto reaches only 5 percent of the total number of Internet users, and applications are the main path to growth.
“We believe that the value of crypto will shift from speculative cryptocurrencies to more useful and application-built ecosystems like Ethereum,” they write.
The benefits of regulating the wild west in finance
Agarwal and Chhugani believe that regulation is coming for the crypto world and believe that the market will benefit from it.
Crypto fans are usually against regulation. Blockchain and bitcoin emerged in response to the 2008 financial crisis, and early adopters wanted to break away from the heavily regulated world of traditional finance.
But as crypto became more and more mainstream, investors clamored for regulation. And after FTX’s collapse, that call has only become stronger.
According to the analysts, the new policy will ensure a more sustainable ecosystem and thus attract more institutional investors. In their view, established trading platforms will survive the current downturn cycle.
Agarwal and Chhugani still see great potential for crypto, especially if people move away from seeing it as a speculative means of making money quickly and focus on being part of the infrastructure as the internet evolves in the coming years.