In the world of cryptocurrency, 2022 was a year like no other. Over the course of the year, the value of cryptocurrencies fell by a staggering 50% from its 2021 peak. In 2022, the world was hit by inflation of the magnitude not experienced since the 1980s.
The banks had to act, so they started increasing interest rates to curb economic growth and get a grip on inflation. Tighter fiscal policies dampen investor risk appetite. It creates a more conservative environment with less speculative investment. It left many people wondering what causes inflation, and where it would all end.
In 2021, expansionary monetary policies, record-low interest rates and strong economic growth encouraged speculative investments in assets like cryptocurrencies. This led to unprecedented growth in cryptocurrency acceptance and price.
Cryptocurrency market capitalization breached the $3 trillion mark. Prices of the two biggest cryptocurrencies, Bitcoin and Ether both reached record highs. People who had stayed out of cryptocurrency trading were encouraged to trade by the profit investors were making.
The Cryptocurrency Decline of 2022
Higher interest rates encourages investment in traditional, less risky investments. As interest rates rose, cryptocurrency holders sold their crypto assets. Higher interest rates reduce individual and organizational disposable income. So, there is less investment funding.
By Q3 2022, cryptocurrency market capitalization had dropped by more than $1.3 trillion dollars. Bitcoin lost 2/3 of its value, dropping from a high of $67,000 to less than $16,000. TerraUSD, stablecoins, collapsed shocking the cryptocurrency investment community.
Many investors lost vast amounts of money. Still, by the end of the year, cryptocurrencies had started to stabilize, and investor confidence improved. This 2023, the economic environment, and inflationary pressures will continue to place pressure on the cryptocurrency market. Yet, they should ease toward mid-year.
Cryptocurrency Sentiment For 2023
Many financial forecasters are betting on a turnaround in the cryptocurrency market in 2023. Digital currencies are now widely accepted by several large institutions.
The drop in cryptocurrency value was not the result of any fundamental blockchain weakness. In fact, over the year, some cryptocurrencies have strengthened their blockchain offerings. Ethereum changed from Proof of Work to Proof of Stake in September, which could substantially improve the value of ETH. The new system increases transaction speed and substantially reduces energy needs.
External Factors Influencing Cryptocurrency Values
The collapse of FTX and the arrest of Sam Bankman-Fried may have left some cryptocurrency traders with concerns about the safety of their funds, and it is essential that potential investors do due diligence before committing funds to any investment.
With global inflation the most volatile it has been in decades it is unlikely that interest rates will come down any time soon. Cryptocurrencies have previously weathered storms like that experienced over the last year. They’ve survived and grown. Still, easing inflation and reduced interest rates are the only medium-term phenomenon likely to give cryptocurrencies the real boost they need.
Is a Cryptocurrency Rebound Likely?
Investors may be tempted to buy while prices are low. The predictions about short-term price movements in crypto markets are mixed. Many believe that prices may fall still further before they recover. Still, if you’re looking for a medium to long-term investment, the bigger cryptocurrencies like Ethereum and Bitcoin should weather the current storm and pick up value in the months to come.
n fact, optimistic predictions forecast Bitcoin prices of between $70,000 to $100,000 by year-end. Still, there are also less optimistic predictions of a drop to $10,000. The upside predictions are supported by the upcoming Bitcoin halving due this year.
Where Bitcoin leads other cryptocurrencies will follow. So, investors may stake their claim in one of the newest cryptocurrencies. To survive, new cryptocurrencies must have sustainable projects. Unless they do, they may follow in the footsteps of high-profile cryptocurrencies like FTX and Genesis that crashed out of the market in 2022.