The 2023 of cryptocurrencies: the unknowns of a sector that has lost the confidence of investors

2021 was considered by many to be the year of cryptocurrency maturity. 2022 has subverted that judgment. Not that the former was a hasty judgment. Nor wrong in itself. Since 2020, the digital assets sector has begun to attract large investment funds. The big investment banks. It has attracted investment, a huge amount of money. So much so that the trend of the main ones, Bitcoin, Ethereum, had begun to follow that of the Nasdaq, Wall Street’s list of technological stocks. And like Google, Apple, Zoom and Tesla, crypto grew. Their market capitalization exceeded $3 trillion late last year.

Money that came from institutional investors, of course, but from savings accumulated by small investors. Retailers, as they are called. A somewhat cold term used to indicate all those people who bought cryptocurrencies hoping to earn from their increases, often with money that came from savings accumulated during the long months of the pandemic and inflated by the enormous amount of liquidity placed by governments to support the economy and consumption.

The popularity achieved thanks to exchanges. Then, the crashes

Purchases made above all thanks to the great popularity acquired by exchanges: cryptocurrency trading platforms, where fiat currency, dollars, euros, becomes tokens within a blockchain. Very few could have predicted that these very platforms would become the main players of 2022. The year that will go down in history as the one in which two of the biggest crashes in the history of crypto occurred. And of finance. That of Earth-Moon, and that of Ftx.

Two different stories. The first introduced the sophisticated and at times dizzying world of stablecoins. The second is the ease with which scams can be created around cryptocurrencies. Leveraging two principles: popularity and greed. In both cases, the cryptocurrencies themselves have little to do with it. They are the tool with which the scams were built. Not a scam per se. But an entire sector of the economy has built up around them. That grinds billions of dollars. And the consecration to “mature asset” is largely due to the role played by digital currency trading platforms. Like Ftx. But also like Binance, Coinbase. Capable of making cryptocurrencies popular. Bring them to the general public.

The black year of cryptocurrencies

A year ago Bitcoin traveled around 50 thousand dollars. Today it is around 17 thousand. A year ago we expected the complete revolution of the NFTs, non-fungible tokens, or digital collectibles in Italian. Today their market has contracted. Almost until it disappears. A year ago, no one could have predicted the collapse of Celsius, possibly the first crypto platform to aspire to become a bank. Then it happened. Along with the aforementioned cases of FTX and Terra-Luna.

Some collapses are due to illegal behavior. Scams. Resulting in a drop in investor confidence. Already acquired and future. But it is undeniable that crypto in 2022 suffered from the same elements that afflicted the economy more generally. The global geopolitical crisis and inflation have caused many to review their investments. Even in digital assets.

Proof-of-reserve to recover trust

The most pressing issue at the moment seems to be trust. That in cryptocurrencies, as an investment, an asset, has collapsed perhaps even more than their value. One of the ways to try to recover part of it seems to be the Proof-of-reserve: a mechanism that allows us to verify at any time, via blockchain, the solvency of the exchange to which we have entrusted our money.

This is an independent audit, conducted by a third party who receives another network’s balance sheet data and verifies that the accounts are in order. The auditor who uses this system first of all records an overview of the financial statements of an exchange, archiving the data relating to customer accounts. Later, he obtains a “cryptographic fingerprint” that represents the aggregate data of all the accounts. Finally, simplifying a lot, verify that the balances are equal to or greater than the customers’ deposits, demonstrating that the assets are backed by reserves.

Will 2023 be the year of crypto regulation?

No one has a crystal ball to predict the future. Also because making forecasts on these assets, so volatile and prone to sharp changes in value, is impossible. But perhaps one thing can be foreseen. Because it’s already happening. The sector, after the crashes, the scams and the people who have seen their savings vaporized, could face stricter regulation by the states. The states of the European Union and the USA are moving in this direction.

Last October, the EU adopted Mica, an acronym that stands for Market in Crypto-Asset. A set of rules to regulate the industry. Designed to protect users and improve the financial stability of the players in the sector. 126 articles dealing with the offering and marketing of Crypto-assets. With an increasingly central role of the ESMA, the European financial instruments authority, and of the EBA, the European banking authority. Bringing digital assets closer, perhaps paradoxically, to the year of maturity.

Rules also requested by entrepreneurs in the sector

The need for rules makes clear a statement by Eric Demuth, founder and CEO of Bitpanda. Leading European trading platform trading crypto and other digital assets: “FTX crash will hurt – really hurt. It will hurt investors. It will hurt legit crypto companies. It will hurt now and it will hurt for a long time. I hope this is a wake-up call for our sector and for all people, an invitation to carefully study who to entrust your money to. I hope you remember this moment and decide to say enough to those who pretend to be a spokesperson for our industry. No more wild west-style unregulated companies trying to artificially inflate themselves by gambling with user funds.”

Then, an invitation. Almost an appeal to crypto investors: “Cryptocurrency investors: stop trusting false promises, stop trusting appearances and stop following the hype. This is not a game, it’s your money. Stop allowing these people to get away with it. Choose a company you know, choose a company you trust, choose a regulated company, even better if regulated locally.”