Crypto Quarterly is The Logic’s recurring series assessing the overall state of the crypto market, with a focus on Bitcoin, Ethereum, Flow and Cosmos’s Atom, four cryptocurrencies with strong ties to Canada.
It was a heck of a ride in the world of crypto in 2022, but the rollercoaster has overwhelmingly gone in one direction: down.
Crypto had its fun in 2021, with multimillion dollar digital art sales, celebrities hawking JPEGs and the price of dog-themed tokens surging through the roof. In 2022, the lights came on and the party was over—revealing some ugly truths about what had been lurking behind the boom times of the previous year. Between the summer’s crypto crash, brought on by the collapse of the TerraUSD stablecoin, and November’s rout, catalyzed by the failure of the Bahamas-based cryptocurrency-trading platform FTX, it’s unclear how many more ugly truths are left to flush out of the system.
Talking Points
- The collapse of FTX capped off what was already a very rough year for the crypto sector. Major Canadian crypto stocks lost 60 per cent to more than 90 per cent of their value in 2022
- Following the bankruptcy of some of the biggest and most risk-loving traders, the crypto holders that remain are going back to basics, pulling assets from centralized platforms into non-custodial wallets at unprecedented rates
Some crypto assets fared worse than others in the fourth quarter—Ether was down just 9.8 per cent from Oct. 1 to Dec. 31, while Flow lost almost two-thirds of its value over the same period. But the effect of FTX’s collapse was dramatic. The entire cryptocurrency market lost 22 per cent of its value from Nov. 7, when rival platform Binance announced plans to sell its holdings of FTX’s native token FTT, to Nov. 9, when Binance backed out of a deal to acquire FTX.
As of Dec. 31, the total value of the crypto asset market was nearly US$800 billion. That’s almost two-thirds less than the US$2.22 trillion it was worth on Jan. 1, 2022, and approaching three-quarters less than the US$2.97 trillion it was worth at its peak on Nov. 10, 2021.
Sebastien Davies, market strategist at Vancouver-based AQN Digital, an investment fund manager for digital assets, noted crypto prices diverged from equities in November, with the former tanking while the latter finished the month up despite the fact the two asset classes usually move in tandem. Davies said it’s particularly notable that widespread predictions of inflation and interest rate hikes easing weren’t enough to save crypto prices from being pulled down by the FTX debacle.
“It stands out, because most assets right now are all kind of moving with the macro environment,” Davies said.
The summer’s crypto collapse led to a cascade of bankruptcies, including crypto lenders like Celsius and Voyager Digital. Insolvency lawyers are sharpening their pencils in anticipation of contagion from the collapse of FTX continuing to affect the sector. Law firm Davies Ward Phillips & Vineberg made crypto the focus of a recent quarterly report on insolvency trends, summarizing Canadian case law on crypto bankruptcies and suggesting “all stakeholders should remain vigilant as market conditions and case law are changing rapidly.”
Prominent Canadian crypto stocks had a tough year. By the end of December, Ethereum investor Ether Capital had lost 65.9 per cent of its value over the course of 2022, while Vancouver-based WonderFi, owner of the crypto-trading platforms Bitbuy and Coinberry, was down 94 per cent.
Canada is home to many prominent public Bitcoin mining companies, a sector that has been hit particularly hard. Hive, Hut 8 and Bitfarms all plunged in the days following the collapse of FTX and observers are predicting the combination of the crypto price rout and rising energy costs may lead to Bitcoin miner insolvencies.
Centralized cryptocurrency-trading platforms are another type of business hit hard by the collapse of FTX. Such platforms act as bank-like intermediaries for people who want to buy and sell crypto—a financial system function that Bitcoin creator Satoshi Nakamoto specifically aimed to eliminate. Crypto purists, especially Bitcoiners, have long advocated for investors to learn how to store and safeguard their digital assets themselves, warning of the dangers of holding coins centralized platforms that have a history of hacks, theft and collapse.
Crypto holders are finally heeding that advice—at least for now. People who own digital assets pulled them off centralized platforms at a record rate following the collapse of FTX, moving them to self-hosted wallets and decentralized exchanges instead. Self-hosted or non-custodial wallets are controlled solely by the user, rather than a third party like a crypto exchange, while decentralized exchanges make use of self-hosted wallets to execute peer-to-peer crypto trades automatically using software.
The move is part of a trend of reduced risk in the crypto-trading world. AQN Digital’s Davies said major leveraged trading firms like Three Arrows Capital and FTX-linked Alameda have been wiped out, leaving a much more cautious user base behind. “The holders or the diamond-hand people are the only ones left.”
If this is the end of risky, highly leveraged, complex crypto trading, that would be a positive development, said Adam O’Brien, chief executive of the Edmonton-based non-custodial Bitcoin trading platform Bitcoin Well.
“I think it’s a great thing,” he said. “I think that finally now, people see the massive value proposition that is being fully non-custodial.”
Still, O’Brien said investors may not have seen the bottom of this crypto bear market.
“There’s lots of downward pressure. We’ve got lots of headwinds right now,” he said. “I think Bitcoin leaving exchanges is the start of a shift towards tailwind, but I don’t know that it’s necessarily enough to confidently say everything’s shaken out.”
