Crypto Winter of 2022: Bitcoin Experienced its Second-Worst Year to Date

• Bitcoin (BTC) experienced its second-worst year to date in 2022, predicted to remain flat through 2023.
• The crypto winter of 2022 was fueled by tightening macro conditions and exacerbated by crypto-specific leverage and risk management.
• The Federal Reserve’s effective funds rate grew from 0% to 4.25%, leading to a massive repricing of risk assets that all benefitted from easy money and a low-interest rate regime.

Bitcoin (BTC) experienced a tumultuous year in 2022, with its second-worst performance to date since its launch in 2009. According to Arcane Research, Bitcoin was down 65% by the end of the year, performing worse than it had in only one other year since its inception: 2018, when it was down 73%. In comparison to other assets such as gold and the S&P 500, cryptocurrencies took the biggest hit to value in 2022, with a sharp drop in May and mid-June of the same year.

The cause of this crypto winter of 2022 was attributed to tightening macroeconomic conditions, as well as crypto-specific leverage and risk management. The Federal Reserve’s effective funds rate grew from 0% to 4.25% over the course of the year, leading to a massive repricing of risk assets that had all benefitted from easy money and a low-interest rate regime in late 2022 and throughout 2021. As a result, Arcane Research predicted that Bitcoin would remain largely flat throughout 2023, but close the year at a higher price than it opened.

In addition to the Federal Reserve’s monetary policy, the rise in institutional and retail investors also contributed to Bitcoin’s volatility. Investment firms, such as Grayscale, have been buying up large amounts of Bitcoin, while retail investors have been jumping in on the action as well, eager to capitalize on the asset’s potential. This influx of new investors has caused prices to skyrocket, only to be followed by sharp corrections.

Looking ahead, it remains to be seen whether Bitcoin will continue to experience such wild swings in price or if the asset will be able to stabilize. What is certain is that Bitcoin’s future will depend on a variety of factors, including government regulation, institutional investor interest, and retail investor sentiment. As long as these factors remain favorable, Bitcoin could continue on its path towards becoming a mainstream asset.