Crippling Inflation and the Evolving Crypto Landscape

Throughout 2022 and 2023, the cryptocurrency market faced significant challenges. The industry made headlines for negative reasons, such as FTX’s bankruptcy and the imprisonment of Sam Bankman-Fried, as well as the collapse of the Terra Luna ecosystem, which lost $50 billion. Concurrently, the United States experienced a 40-year high in inflation, and the country’s national debt continued to rise. There were some positive developments, including Ethereum’s transition to proof-of-stake and Bitcoin’s increased hashrate. The market eventually rebounded strongly in 2023. Here are some noteworthy events that occurred during this period.

Crippling inflation and other macroeconomic factors contributed to Bitcoin’s 77.2% drop from its previous all-time high to a cycle low in November 2022. The United States Consumer Price Index (CPI) inflation rate reached its highest level since 1982, hitting 9.1% in June 2022. Fortunately, the inflation rate started to decline, reaching around 3% by June 2023. Since June 2023, Bitcoin has experienced a significant increase of over 135%, surpassing its previous all-time high. Due to inflation, Bitcoin has yet to reach its inflation-adjusted all-time high.

The national debt of the United States continued to rise throughout 2022 and 2023, increasing by 4.35% to $33.2 trillion. According to U.S. Treasury data, the debt has since risen to $34.5 trillion. This exponential rise in debt has put the country on an unsustainable fiscal path, according to Federal Reserve Chair Jerome Powell. Fortunately, the U.S. debt to gross domestic product ratio has decreased to around 123%. Researchers from the University of Pennsylvania warn that the financial markets can only tolerate another 20 years of accumulated deficits based on current fiscal policies before the debt dynamics unravel.

Coinbase CEO Brian Armstrong believes that increased Bitcoin adoption in the United States could help control excessive deficit spending and maintain the strength of the U.S. dollar. He sees Bitcoin’s inclusion as a return to financial discipline. The example of El Salvador’s Bitcoin investment, which could potentially allow the country to pay off its debt to the International Monetary Fund if Bitcoin reaches $100,000, supports this perspective.

Between 2022 and 2023, the cryptocurrency industry faced significant challenges, impacting various firms’ financial standings and resulting in bankruptcy, liquidations, and legal actions. The Gary Gensler-led Securities and Exchange Commission (SEC) played a significant role in regulating the industry and bringing enforcement actions against fraudulent individuals. FTX experienced a massive collapse, losing over $8 billion in misappropriated customer funds. Other notable firms such as BlockFi, Three Arrows Capital, Celsius, and Voyager also faced bankruptcy.

The collapse of the Terra Luna ecosystem, resulting in a loss of $50 billion, shocked the cryptocurrency industry in May 2022. Former Terraform Labs CEO Do Kwon played a central role in this collapse and became a fugitive, facing fraud charges in South Korea and the United States. The SEC intensified its efforts to catch fraudulent individuals in the industry following Sam Bankman-Fried’s conviction for fraud. Binance, the world’s largest cryptocurrency exchange, and its former CEO, Changpeng Zhao, faced legal action by the SEC and pleaded guilty to money laundering violations. The SEC also sued Coinbase for unlawfully listing cryptocurrencies it considered securities.

In March 2023, three cryptocurrency-friendly banks, namely Signature Bank, Silvergate Bank, and Silicon Valley Bank, collapsed, leading to concerns about the resilience of the U.S. banking system. Even U.S. Federal Reserve Chairman Jerome Powell was puzzled by the collapse of Silicon Valley Bank.

Despite these setbacks, the cryptocurrency industry continued to progress. Notably, Ethereum successfully transitioned to a proof-of-stake consensus mechanism in September 2022, significantly reducing its energy consumption. Bitcoin’s network became more secure, with its hashrate increasing by 200% between 2022 and 2023.