Bitcoin has been the world’s most popular cryptocurrency for many years now. And, while crypto has seen incredible price hikes in the past, 2022 was an undoubtedly disastrous year for this asset, which faced an overall price drop of over 60%. So why did Bitcoin’s price fall so drastically throughout 2022?
Before we get into the factors that affected Bitcoin’s value in 2022, let’s quickly run over the volatility of this asset.
Cryptocurrencies are, by nature, volatile. Most cryptos aren’t backed by any collateral, and the market is so exposed to supply and demand that price hikes and drops are commonplace. All cryptos will see minor fluctuations in their value daily, but this usually isn’t very significant. When something happens that wobbles the market, this is when the big fluctuations hit.
Bitcoin may be valuable and popular, but it is just as vulnerable to changes in the market as other cryptos. The price will likely decrease if the demand for Bitcoin is less than the supply. However, if the drop in demand is extreme, the price can spiral downward in a matter of days. So, what caused Bitcoin’s price to shoot downwards in 2022?
1. The Terra Collapse
In May 2022, we saw one of the most brutal crypto collapses of all time. Terraform Labs launched two popular cryptocurrencies—Terra Luna (LUNA) and TerraUSD (UST)—that carved out solid positions in the market. While Terra Luna was a typical cryptocurrency, TerraUSD was a stablecoin pegged to the price of the US dollar (i.e., 1 UST = $1).
TerraUSD was an algorithmic stablecoin, meaning it relied on a computer algorithm to maintain its peg. This was done via its relationship with Terra Luna. The two assets were in a burn/mint mechanism, in which UST and LUNA were either burned or minted to keep UST as close to a dollar as possible.
Many chose to place their TerraUSD in the Anchor protocol, which offered users an incredible 20% return on their UST deposits. This was one of the driving forces of TerraUSD’s high demand. But that all changed when Anchor decided to switch its 20% rate to a variable rate, which caused many to withdraw their UST and sell it off. At this point, the supply of UST exceeded the demand, and Terraform Labs ran out of LUNA to burn to maintain the $1 peg.
So, both LUNA and UST crashed horrifically, sending a shock wave of cynicism and doubt throughout the industry. As investors began to get cold feet about the reliability of crypto, mass sell-offs started taking place en masse. Bitcoin was no exception to this, and so its demand dropped drastically. Then, the price followed.
During May 2022, Bitcoin’s price dropped by 20 percent in just one week. This was catastrophic for investors and platforms alike and fueled the sense of uncertainty that people already felt toward cryptocurrency.
2. Rising Interest Rates
During the COVID-19 pandemic, many nations worldwide printed an excess amount of cash, known as stimulus money, to support their economies amid the health crisis. But when more money is produced, inflation rises. To hedge this, in 2022, the US Federal Reserve increased interest rates (as was the case in many countries worldwide). But this decision was catastrophic for both the traditional and crypto markets.
In short, higher interest rates make borrowing pricier and make investing in stocks and cryptos riskier. So, 2022’s recurring interest rate hikes pushed investors to opt for saver options as an alternative to cryptocurrencies. As a result, the demand for cryptos took a sharp downturn, and prices soon followed. This affected just about every cryptocurrency in the market, including Bitcoin, fueling a further price drop.
3. Crypto Crimes and Scams
Crime is worryingly common throughout the crypto industry. Billions in crypto have already been stolen, with more investors falling victim to scams daily.
A cybercriminal can exploit crypto holders in various ways. For example, they could steal their exchange credentials via phishing, trick them into investing in a phony project, or even hack their wallet to get a hold of their private keys. Because many crypto investors are new to the market, they simply aren’t aware of how easily they can be scammed out of their assets.
What’s more, cybercriminals can exploit newer platforms with lower levels of security. Since new projects and platforms are always being developed in the crypto realm, it’s not exactly slim pickings for malicious actors.
What’s more, many cybercriminals use crypto as a form of payment on the dark web. Crypto is also used in fraud and money laundering simply because it is less traceable than traditional money. Bitcoin, Litecoin, and Monero are all popular currencies on the dark web, giving cybercriminals an added layer of anonymity.
Because crypto is used in a crime, many assume that these assets simply are not safe. On top of this, the frequency of crypto-related scams also put people off investing. While financial crime is just as common with traditional currencies, people prefer what they’re familiar with. And the simple fact of the matter is that with fiat currency, there is a chance your bank might be able to retrieve stolen funds. With crypto, this is out of the question. So, in this case, traditional money wins.
The wider crypto market often suffers when a huge scam is uncovered, as it furthers the notion that such assets are unreliable.
4. The FTX Collapse
After the May 2022 crypto crash, many thought that the worst of 2022 had passed. But this was certainly not the case. Instead, November 2022 had a particularly disastrous event waiting: the collapse of FTX.
FTX was once a hugely popular crypto exchange used by traders worldwide. Launched by Sam Bankman-Fried and Gary Wang in May 2019, this platform was a promising name in the crypto industry until it was revealed that there was a severe liquidity issue being faced.
In November, FTX paused withdrawals, meaning users could not move their funds out of the exchange. When this happens, it’s usually a bad sign. However, in the case of FTX, there simply was not enough money available to fulfill withdrawal requests.
So, the platform took away the ability to make these requests in the first place. Furthermore, FTX was set to be acquired by Binance, another crypto giant, but this deal fell through amid the controversy surrounding FTX and allegations against Bankman-Fried.
Shortly after this, FTX filed for bankruptcy. This was huge news, as FTX had established itself as a successful and reputable platform. This gave investors cold feet and led to another market-wide crash, likely prolonging the so-called “crypto winter.” Bitcoin’s price, already far lower than it was at the start of the year, took another downturn, dropping by over 25% in less than a week. This solidified 2022 as one of the worst years crypto had ever seen.
Will Bitcoin Go Up in 2023?
There’s no way of knowing whether the crypto market will recover in 2023, as so many factors may play a role in its trajectory. Time will tell whether the industry will have an easier time of it in the coming year or if we’re in for the same scandals and price drops.