The entire digital asset industry will commemorate Bitcoin's 14th birthday next week, when Satoshi Nakamoto minted the first Bitcoin block on January 3, 2009. Since then, the industry has had reason to celebrate both big and small milestones, ranging from the first time the cryptocurrency was used to acquire a real-world item a year later, two large pizzas, to be exact - to the long-awaited launch of the United States' first Bitcoin futures exchange-traded fund, issued by ProShares in 2021.
The industry's journey has been anything but linear. Now in its adolescence, Bitcoin is still going through growing pains as regulation catches up with innovation, and the entry of new players - institutional or otherwise - continues to shape its future. What lies ahead for Bitcoin in 2023 as the industry grapples with the recent collapse of some of its biggest titans?
Reality versus impressions
Suppose 2022 is remembered for anything in the history of digital assets. In that case, it will be as the year of the Great Crypto Collapse — aside from market swings and price drops, incidents of fraud and mismanagement have embattled the industry. First, there was the spring collapse of Terra-Luna and the subsequent losses suffered by the crypto hedge fund Three Arrows Capital, which provoked a wave of bankruptcy filings. One of the largest cryptocurrency exchanges, FTX, has filed for bankruptcy after misusing customer funds.
This year's events have shaken institutional investors who had been gradually warming to digital assets. Crypto funds and projects were lauded as "buttoned-up" success stories, promising high returns with little correlation to other assets - a highly lucrative opportunity in the face of a looming recession, high inflation, and ever-increasing return mandates.
The CFA Institute's 2022 Investor Trust Survey discovered that 94% of state or government pension plan sponsors worldwide were investing in cryptocurrencies. Meanwhile, according to Fidelity Digital Assets, nearly a third of institutional investors worldwide had invested in digital assets by the first half of 2022.
Caution will reign in the coming year, with institutional money flowing into the space likely to decline, particularly as investors seek to mitigate the effects of broader macroeconomic headwinds. Crypto may have been used to diversify portfolios, but it will lose its luster as bad actors squander all of the excellent work done thus far, resulting in price drops.
However, there is a silver lining: increased demands for due diligence and an emphasis on corporate governance. This may prompt primary influence from limited partners who want to see venture capital funds seated on the boards of their crypto-related portfolio investments.
Better oversight is required to build the trust and legitimacy that the industry needs to go mainstream, given that a lack of transparency and inadequate risk management triggered this year's events. At the same time, the underlying technology continued to function flawlessly.
This year, investors' attention has yet to be solely focused on cryptocurrency. Environmental, social, and governance investments have increased as the finance industry seeks to transition from high-carbon, high-risk assets to future growth areas. Impressive ESG asset results have sweetened the deal, with 60% of institutional investors polled by PwC stating that ESG investing has already resulted in higher performance yields when compared to non-ESG investments.
Those who own both green and crypto assets must balance Bitcoin's growth potential with its carbon footprint. For years, critics have raised concerns about the sustainability and energy efficiency of Bitcoin mining, while supporters emphasize using renewables or surplus energy to power operations, reducing energy waste.
In any case, regulators are moving quickly. In November, New York signed a two-year moratorium on new permits for fossil fuel-powered, proof-of-work (PoW) mining operations as the state looks to re-evaluate its economic development opportunities in light of climate goals.
In the same month, Bitcoin mining revenue fell to its lowest level in two years, while the network's mining difficulty reached a new all-time high of 37 trillion, necessitating more computational energy and, as a result, more energy expenditure, which has a cost.
Meanwhile, the European Union launched the Markets in Crypto Assets (MiCA) framework, which aims to make the crypto industry more sustainable as a whole. Though explicit references to PoW were eventually removed from the bill, sustainability is undoubtedly an area where the E.U. Policymakers will be keeping an eye on things for the foreseeable future.
Beginning with zero
Uncertainty, on the other hand, brings opportunity. While low prices have allowed determined HODLers to purchase more BTC at a lower cost, institutional investors have seen it as an opportunity to short the market.
According to CoinShares, 75% of all institutional crypto investments in the last few weeks of November went to short crypto investment products. If prices remain unchanged, combined with the current economic environment, investors may hold their positions to avoid losses. Following recent events, we have reached a point of seller exhaustion. Institutions may return to crypto in search of an opportunity to invest in an undervalued asset.
For better or worse, the challenges that have beset the crypto ecosystem in recent months will serve as a litmus test for both investors and projects. Bitcoin has survived previous cycles and will no doubt survive this one as well, thanks to its role as a value store and enabler of new projects and innovations.
Bitcoin, like any other adolescent, will eventually experience a confidence crisis. In the short term, greater regulation may jeopardize the platforms and services that have enabled new investors to enter the space. However, the same regulatory framework should give institutional and sovereign players more confidence to enter the scene in the long run, with the assurance that Bitcoin and crypto are here to stay. The dedication of its early supporters, devoted builders, and innovators who continue to have faith in its promise of enabling a better financial ecosystem will make all the difference now, more than ever.
Why do you think it will survive its growing pains? Drop your comments by sharing this article on social media.