Crypto Compass

State of Crypto 2023

Crypto Compass is excited to be back and bringing you up to speed on the latest news and trends in the blockchain space. If you read the first few posts of this series, you have a good sense of what cryptocurrency is and how it works. However, the crypto industry is a new and constantly changing landscape, so it’s important to stay up to date on the latest developments.

In this post, we’ll catch you up on everything you need to know, from a rough 2022 to a quiet but impressive 2023, and the latest developments in blockchain tech. So, whether you’re a seasoned crypto investor or just getting started, read on to stay informed about the latest happenings in the world of crypto.

2022 Drama

2022 was a hard year for the crypto industry, but a lot of lessons were learned. To summarize what could be its own blog post altogether: the stablecoin TerraUSD collapsed in the first half of the year, then rising interest rates made riskier assets like crypto less attractive to investors, so we saw a price drop in almost all cryptocurrencies. The price drops revealed several companies with structural issues and irresponsible lending. The cherry on top of this disastrous sundae was a few Chapter 11 bankruptcy filings. Again, this is an oversimplification, but the point is crypto had a bad year.

That said, the bad year taught us a lot of good lessons. The first: crypto doesn’t exist in an economic vacuum. When interest rates moved higher, crypto assets weren’t the only thing that suffered; stocks did too. This is econ 101, when interest rates are higher, that means it’s easier to earn some interest on some pretty low risk investments. So, a lot of people sell off their riskier assets like stocks and crypto to buy new, higher interest rate bonds.

The main difference between crypto and stocks was that for crypto, lower prices revealed some companies that didn’t stand on strong foundations. You can draw a parallel to this and the start of the internet: the concept of the internet was great, but when it was first getting started there were a ton of players. A lot of which went out of business and left only the good ones standing. In a way, it was a silver lining to have some of the bad eggs weeded out of the crypto space in 2022.

It’s worth mentioning, however, that the issues in 2022 were people-related issues. The technology that drew people into the crypto space (blockchain technology and decentralized/ digital money) worked just fine. Crypto had a bad year because of poor risk management by companies and fraudulent activity by individuals.

This is largely due to a lack of regulation— unlike banks, there were no regulatory authorities requiring these crypto companies to keep enough resources on hand, or checking if they were lending responsibly. This is tricky because the whole point of crypto is it was supposed to be peer-to-peer, without a third party. But the company-to-investor side of things should have some layer of regulation that doesn’t affect the technology but does protect the investor. The lesson we should be taking from these crypto fails in 2022 is that we need more than just a technological system, but one beholden to laws and standards as well (even if we’re not sure what that looks like yet).

What About Now?

While crypto may seem relatively quiet in the headlines lately, it’s still evolving. In fact, Bitcoin and Ethereum have been on a tear in 2023 so far, up 63% and 42% as of writing this. There are a number of factors we’ve seen in 2023 that can be attributed to the surge in Bitcoin price. Increasing institutional adoption is one, with even more hedge funds and investment banks starting to invest in Bitcoin. We’ve also seen crypto prices reacting to the Fed’s decisions about interest rates, so the overall sentiment that we may be close to the end of rate hikes has also been a boon to crypto prices.

Probably a bigger drive to prices, the decentralized finance (DeFi) space has continued to grow in 2023, with new projects and applications, which has helped increase demand for cryptocurrencies are they are the underlying technology for many DeFi applications. The point is, while 2022 was a bad year for crypto, it wasn’t the end of some bubble. the industry has picked up speed and has continued its growth trajectory in 2023.

New & Noteworthy – PayPal Stablecoin

Tons of new coins and apps in this space are being created every day, so I won’t try to bring you up to speed on all of them (I don’t think anyone is up to speed on all of them). However, one that’s being talked about a lot right now is PayPal’s new stablecoin, PayPal USD.

A stablecoin is just a digital asset with a value that is pegged to a physical asset. So, when the physical asset’s value changes, the digital asset’s value moves in lockstep. For example, there are stablecoins that are pegged to the value of physical currencies. In theory, 1 stablecoin pegged to 1 US dollar will always be worth $1. It’s a way of having the benefits of digital currency without the price fluctuations we see in other digital currencies, like Bitcoin or Ethereum.

As everyone knows, PayPal makes money by charging a fee for facilitating customers’ payments. If people transition to transacting with crypto on the Ethereum blockchain, PayPal loses that fee. PayPal is creating its own stablecoin to become a bigger player in peer-to-peer transfers and stay relevant in the online payments space. It’s a big deal for crypto because it’s yet another example of a large company betting on the future implications of digital currencies and adjusting their business model accordingly.

New & Noteworthy – AI in Crypto

Another new and noteworthy topic in crypto: artificial intelligence (AI). AI and crypto are similar in that they both have major implications for future efficiency and technology. They are different in that traditional AI has effectively required large amounts of centralized data, which is what the crypto world wants to get rid of.

For example, crypto doesn’t want a company to store and have access to all of your data. However, a company launching an AI system will be more successful the more big data their system has access to. Again here, I’m oversimplifying, but the point is that at their core they seem like opposites. Surprisingly, as counterintuitive as it sounds, implementing blockchain technology in AI products could be the solution to this. As a result, we’ve started to see some examples of AI cryptocurrencies, which are tokens that power AI blockchain platforms. The idea is using some of the popular principles in blockchain technology like encryption to help make AI more efficient while making your data more secure. This is still relatively new, but it’ll be interesting to see what results from the convergence of these two hot topics.

 To Wrap Things Up

In summation, 2022 was a bad year for cryptocurrencies with lots of headlines and lots of lessons. 2023 has been a positive year for crypto so far in terms of asset prices and new developments, although seemingly quieter on the headlines front (aside from updates to the 2022 drama).  PayPal launched a stablecoin in another big bet on crypto and attempt to keep up. And finally, AI is moving into the crypto space.

This article is intended strictly for educational purposes and is not a recommendation for or against cryptocurrency.