5 Lessons From 2022 That Changed Crypto Forever and What Bitcoin Mining Needs to Survive in 2023
5 Lessons From 2022 That Changed Crypto ForeverThere is much work to do to build that system in 2023 and beyond. But it starts with the lessons of 2022. There are many. Here are the five that I think are the most important:
1. Crypto does not exist in an economic vacuum.
With all the headlines generated by the collapse of FTX in November, it’s easy to forget that far bigger losses hit cryptocurrency markets in the first months of the year – not because of a crypto-endemic scandal but because the Federal Reserve was hiking interest rates. That put an end to the surfeit of dollars pouring into speculative assets around the world, including cryptocurrencies. The macro environment matters.
2. Leverage, taken too far, always leads to contagion.
The domino effect, seen when the failure of one crypto institution quickly spreads to another, is hardly without precedent. It was there in the 1997 Asian financial crisis, the 1998 Long-Term Capital Management collapse, the 2008 subprime mortgage crisis and many other such moments in financial history. They all had the same characteristics: an overly bullish belief in the upward momentum of financial assets fueled an excessive buildup of loans to speculators. When those beliefs proved unfounded, the rush to the exits exposed an interdependent network of creditors and debtors as they dragged each other down in unison. Crypto speculation was never going to be immune from this, regardless of the decentralized nature of the underlying protocols.
3. DeFi is resilient, but needs constant economic and technical auditing.
Most of the high-profile collapses in 2022 – FTX, Celsius Network, Voyager Digital, Three Arrows Capital, Genesis – involved custody-holding CeFi (centralized finance) companies that put customer funds at risk. That has galvanized supporters of DeFi (decentralized finance), who rightly note that the most robust decentralized market-making and exchange systems survived, precisely because they lack a trusted intermediary capable of such abuse. (Genesis is owned by Digital Currency Group, which is also CoinDesk's parent company.)
Yet as of October, Chainalysis estimated that DeFi investors had lost a record $3 billion year to date because of smart contract breaches, “rug pulls” by founders, and because the underlying tokenomics of some protocols were deeply flawed. (The destructive collapse in the Terra ecosystem was exemplary of the latter instance.) DeFi is a wild, volatile, confusing, unpredictable place. To achieve widespread participation, it needs a more comprehensive audit model in which trustworthy independent analysts or bounty-hunting developers assess projects’ code security, founder practices and tokenomics.4. Back to basics: Crypto cannot be sustained on “number go up.”
In 2020 and 2021, when social media-driven meme coins were turning kids into instant millionaires, when DeFi projects were paying yields unavailable anywhere else in the world and when institutional and retail investment sent crypto’s market capitalization up 15-fold to almost reach $3 trillion, we should all have been asking tougher questions. The most important one should have been: what’s underpinning all this?
If we peel back the layers of interlocking protocols and the justifications for the returns they were promising, we’re left with little more than speculation for speculation’s sake. Most of that was built on momentum trading, on “numbers-go-up” expectations. It’s time to get back to basics and seek out real-world utility. Token returns need to point back to actual value cases, whether its cross-border payments, decentralized energy, new marketing models offered by non-fungible tokens (NFTs) or one of many other promising use cases.
5. Crypto needs an informed, independent, hard-hitting press.
Sure, this one’s self-interested, but 2022 proved it to be undeniably true that this industry needs a robust “Fourth Estate” to hold accountable the people and entities working within it. Permissionless blockchains should be viewed as public goods – much as the air we breathe, the water we drink or the highways we drive on are public goods. They must be protected as such, which means there must be transparency (balanced with a respect for individual privacy). And while we are all enormously proud of the catalytic role CoinDesk played in exposing the FTX house of cards, it raises the question of why this wasn’t caught earlier. Answer: There aren’t enough crypto-savvy, professionally managed, independence-protected journalists covering this market. (That’s why we got those naive softball articles from the New York Times and others that glossed over SBF’s fraudulent behavior and got my colleague David Morris fired up.)
Still, here’s a hill I will die on: The requisite transparency isn't something that can be achieved solely through the work of “citizen journalists” on Twitter or elsewhere. Those who claim the FTX debacle was brought to the fore by crowd-sourcing the sleuthing work of ordinary people on social media ignore the fact that the meltdown was triggered by an investigative article by Ian Allison, a trained journalist working within the structure of a professionally run newsroom, with editors and management who have carved out a position of independence from their proprietor to earn the trust of their readers. (CoinDesk is a subsidiary of DCG but operates independently and abides by a core code of ethics.) Before Ian’s piece, where was all that Twitter wisdom-of-the-crowd discovery?
If this industry is to thrive it can’t again be blindsided by revelations of wrongdoing as extreme as those uncovered in 2022. That requires vigilance to transparency and recognition that journalists who dig into issues at relevant institutions are doing a service to the longer-term interests of this industry rather than undermining it.
Bitcoin Mining: Here’s What it Needs to Survive in 2023The crypto market lost around $1.3 trillion in 2022. Moreover, the price of Bitcoin (BTC) fell by over 60%. As a result, the Bitcoin mining industry also took a hit in 2022. Miners are taking on some of their worst losses as sell pressure reaches new highs.
Additionally, several mining company stocks fell by more than 90% due to the falling price of Bitcoin and the lack of profitability in the mining sector. Core Scientific ($CORZ), Riot Blockchain ($RIOT), Bitfarms ($BITF), Iris Energy ($IREN), and CleanSpark ($CLSK) fell by around 99%, 85%, 91%, 92%, and 79%, respectively. Furthermore, Core Scientific has even reached the point of bankruptcy.
However, a few things need to happen for the Bitcoin mining industry to turn around. Firstly, the price of BTC needs to pick up steam. Without BTC prices increasing, sell pressure would continue to mount with rising electricity costs. For BTC prices to gain steam, more investments are needed. And for more capital to flow in, interest rates need to cool down. Once interest rates go down, funds become cheaper to deploy, which leads to more investments.
However, BTC might have to overcome more obstacles before sailing into the greens.
More hardships for Bitcoin miners in 2023?
According to specialists in bitcoin mining, there is little chance that the industry will see relief anytime soon. The worst is yet to come in terms of capitulation and bankruptcies, especially in the first half of 2023, according to Jaime Leverton, CEO of Canadian mining firm Hut 8 (HUT).
Marathon Digital CEO Fred Thiel refrained from speculating on how many additional miners would file for bankruptcy in the upcoming months. But he said that individuals who relied on equipment borrowing to finance growth would probably still have challenges.
In 2023, the overleveraged Bitcoin miners will experience the most pressure, according to Andy Long, CEO of bitcoin miner White Rock Management. Long added that some miners might benefit from purchasing more effective mining equipment in large quantities at historically low costs.
Nonetheless, the immediate future of Bitcoin miners seems uncertain. At press time, BTC was trading at $16,648.96, up by 0.7% in the last 24 hours.