Good morning! This is a year-end special edition of The Signal. This week we will publish a series of articles on what happened during 2022 and also give a peek into what to expect in 2023. Today, it’s all about crypto.

Are you a fan of Dan Harmon’s Community? If yes, you’d agree that ‘Remedial Chaos Theory’ is one of the show’s best episodes. If not, you may nevertheless have seen this gif at least once in your life:

This is the perfect encapsulation of crypto’s year that was. Companies either died, went postal, or became evil incarnate, leaving the house up in smoke.

On that note, here’s a rundown of who fits in what category.

I.           RIP       

The list of goners is long, but we’ll focus on the biggies for brevity’s sake: Terraform Labs, Three Arrows Capital or 3AC, Voyager Digital, Celsius Network, BlockFi, FTX, and Alameda Research.

Terraform Labs’ co-founder Do Kwon—the man who triggered crypto’s freefall this year—is on the lam in Serbia, or so South Korean authorities believe.

The gist of the Do Kwon horror story is that his Terra blockchain network had two sister coins: the stablecoin TerraUSD or UST, and the native token Luna. Stablecoins are supposed to be pegged to, and backed by, traditional or fiat currencies such as the US dollar. Turns out UST was backed by an “algorithmic stablecoin”, not a fiat currency. That “algorithmic coin” was the sister token Luna. To sum up, Terraform Labs was running on hot air.

What ensued was a collective meltdown once people got to know. In May 2022, users liquidated their holdings, which in turn tanked the prices of both UST and Luna. Crypto exchanges delisted both. This selloff wiped out roughly $500 billion from the crypto market in two weeks.

That domino led to the eventual demise of lending platforms 3AC, Celsius, and Voyager, which were all either exposed to each other or Terraform Labs.

This brings us to the biggest crypto bust of 2022: Sam Bankman-Fried’s (SBF’s) now-bankrupt exchange FTX and its sister company Alameda Research, a crypto hedge fund.

We at The Signal have covered FTX extensively. But in case you missed it, this is the report that unleashed hell. CoinDesk found that SBF—the ‘crypto saviour’ who’d buttered up regulators in Washington D.C. and offered to bail out the bankrupt companies mentioned above—was siphoning customers’ deposits from FTX to Alameda. And like Terra, Alameda’s assets were backed not by traditional currencies or even Bitcoin but by FTX’s native token, called FTT. Suffice to say it was a sh*tcoin whose value was artificially inflated. What does this mean? Well, if large holders (‘whales’ in crypto nomenclature) offload a native token, it’ll eventually become as worthless as an opinion offered by someone you don’t care for.

That’s exactly what happened. Changpeng Zhao (CZ), the CEO of crypto exchange Binance—FTX’s rival at the time—dumped his FTT holdings upon reading the CoinDesk report. What ensued was a bank run by all and sundry, and the vapourisation of billions of dollars.

This panic also led to the demise of yet another crypto lender. BlockFi filed for bankruptcy in November because of its exposure to FTX.

More on CZ in a while.

II.                Going postal

Pardon us for being petty, but… lol. Non-fungible tokens or NFTs aren’t cryptocurrencies, but the two are inextricably linked in Web3, the much-hyped third iteration of the internet that’s (ideally) supposed to run on blockchain-everything.

NFTs were the rage in early 2022 mostly because a gaggle of celebrities (and Boomer and Gen X businesses ¯\_(ツ)_/¯ such as auction houses) wanted to hawk their wares in a bid to stay relevant. But the spate of crypto fails, coupled with the global economic downturn, sandpapered the sheen off digital collectibles. The result: even the Bored Ape Yacht Club (BAYC), which at one time was the most valuable NFT collection, lost $2 billion in market cap. NFT trading dropped by 77% in the third quarter of 2022 compared with the second quarter. The market share of OpenSea, the largest NFT marketplace, also dropped from 90% to 66%, no thanks to a breach that prompted users to migrate to alternatives such as Magic Eden and LooksRare. And for those of you wondering about the Indian NFT market—BollyCoin, which was the most famous domestic collection out there, has seen 93% of its value wiped out in less than a year.

III.              Evil incarnate

One word: Binance.

When CZ offloaded his FTT holdings, he not only killed FTX and Alameda, but also morphed into the new saviour of crypto. He’s now acquiring the bankrupt Voyager for cheap, and is frontmanning efforts to make crypto seem more transparent. He did this by sharing Binance’s proof-of-reserves (PoR).

As we wrote last month, this is an eyewash. What’s the point of showing just the assets side of your balance sheet? Shouldn’t people know about your liabilities and the liquidity at your disposal?

Hold up, we’re getting ahead of ourselves here. Because, as it turns out, Binance’s assets in themselves are as rickety as a neglected 200-year-old building. Which brings us to…

…The year ahead

I.                  Binance will eat humble pie

We told you this almost two weeks ago, but it bears repeating: Binance (or its numerous tentacles units) may not survive 2023. One, it’s far more opaque than FTX was. Two, Mazars, the auditing firm that vetted its PoR statement, deleted its assessment and distanced itself from the sector after realising that, well, crypto clients will not share all their information with you unless they’re public (like Coinbase is). Three, Binance is likely going to be slapped with criminal charges by the US Department Of Justice (DOJ) for money laundering and sanctions violations. Four—and most important—over 70% of its holdings are in a native token, a Binance-backed stablecoin, and Tether. Aka, its assets aren’t as foolproof as CZ would have you believe.

And that’s a natural segue to…

II.                …Goodbye, Tether

If you thought 2022 walloped crypto, wait for 2023. This is the year the world’s largest stablecoin may collapse, per numerous hedge funds that are shorting it. The reasons are many. Tether’s financials aren’t audited. People have been suspect of its reserves since *2014* and are increasingly redeeming their holdings: a report earlier this month by The Wall Street Journal revealed that Tether’s assets just baaaaarely cushion its liabilities. It doesn’t help that Tether was/is exposed to both FTX-Alameda and Binance. Former US Securities and Exchange Commission (SEC) official John Reed has slammed Tether as a “Ponzi house of cards”. Last but not least, Tether is the subject of an ongoing DOJ probe into bank fraud.

All this matters because Tether is the backbone of the crypto ecosystem and the world’s third-most traded token. Can you imagine the collateral damage if it falls face down in the bog?

III.              Ethereum Becomes The Top Dog

It’s not all doom and gloom. Not for Ethereum founder Vitalik Buterin anyway.

2022 was a black-letter year for crypto save for Ethereum, which executed the great Merge—the upgrade that shifted its blockchain from the energy-guzzling proof-of-work (PoW) to a more efficient proof-of-stake (PoS) protocol. Sure, its native currency ETH has dropped 70% in value since the 2021 peak, but analysts reckon it will become the numero uno blockchain over the coming year. The Ethereum Merge marked crypto’s greatest event since (Bitcoin founder) Satoshi Nakamoto’s first Bitcoin genesis block in 2009.

Why does this matter? Ethereum’s PoS protocol will now more than ever become the bedrock of decentralised apps (dApps), finance, and autonomous organisations, which will in turn drive adoption and capital.

As for Bitcoin: depending on who you ask, the world’s largest cryptocurrency may hit a new low of $5,000 next year, or skyrocket to $250,000. We’re betting on the former.

To sum up: 2023 will be the year that separates the crypto wheat from the crypto chaff. Regulators will make sure of that. Expect Binance to no longer be the alpha it is today, and expect Ethereum to become the alpha it hasn’t been thus far. NFTs won’t die, but they will become more utilitarian (as they should). Sh*tcoins won’t last (small mercies), and neither will Tether.

That's all from us. Hound us this time next year if we were wrong. Until then, have a glorious 2023.

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