CoinDesk Market Outlook: 4Q Crypto Gloom Spills Into 2023

As if 2022 weren’t already brutal enough on crypto investors, the fourth quarter brought an ugly coda with the collapse of Sam Bankman-Fried’s FTX exchange – triggering another leg down in prices, spurring a fresh bout of contagion and enshrining the year as one of the worst ever in the digital-asset industry’s history.

The CoinDesk Market Ex Stablecoin Index (CMIX), a broad benchmark encompassing 163 digital assets, fell 12% from September through Dec. 15, and the gloom is hard to shake off as analysts turn their sights to 2023.

The CoinDesk Market Ex Stablecoin Index (CMIX): CMIX is a broad-based index designed to measure the market capitalization weighted performance of constituents in the CoinDesk Market Index (CMI) excluding stablecoins. Inclusion of a digital asset in CMIX is subject to minimum trading and exchange eligibility requirements.

The crypto industry’s self-inflicted wounds – U.S. prosecutors and regulators this month accused Bankman-Fried of orchestrating a $8 billion scheme to defraud investors – came as the Federal Reserve kept ratcheting monetary conditions ever tighter to bring down soaring inflation, adding stiff downward pressure on prices for cryptocurrencies and other risky assets.

Last year’s price run-up in the largest cryptocurrency, bitcoin (BTC), to a record $69,000 brought rampant speculation and risk-taking by crypto traders who used “leverage,” or borrowed money, to amplify their bets. The unwinding of that leverage over the course of 2022 served to accelerate the market’s descent. The CoinDesk Bitcoin Price Index has tumbled 65% this year to about $16,594 at the time of writing.

"It kind of almost got out of hand, and in a lot of ways it did get out of hand,” said Greg Magadini, director of derivatives at crypto analytics firm Amberdata. “Now we're getting a recalibration of excess leverage. We're also getting consequences for people who've kind of taken advantage of that opportunity.”

Ether (ETH), the native cryptocurrency of the Ethereum blockchain and the second-biggest by market cap, slid 5.5% in the quarter through Dec. 15, and it’s down 68% in 2022, its worst performance since the crypto winter of 2018. The broad downward market pressures and a dropoff in activity outweighed any pickup in sentiment that came from the blockchain’s successful upgrade this year – the “Merge” – to a more energy-efficient “proof-of-stake” network from a “proof-of-work” system similar to Bitcoin’s. More recently, speculation has mounted that the change might make ether more prone to regulation as a security under U.S. regulations.

Coming into the fourth quarter, crypto traders and analysts were speculating whether markets might be starting to heal from the steep losses earlier in the year inflicted by the collapse of Terra and the knock-on casualties of crypto financial firms Celsius Network, Voyager Digital and Three Arrows Capital.

The epic unraveling of FTX – initiated by an exclusive CoinDesk report that the Alameda Research trading firm’s balance sheet was dependent on sister company FTX’s in-house utility token, FTT – soon dashed the optimism.

FTT was, unsurprisingly, one of the biggest losers in digital-asset markets, plunging about 95% just in the fourth quarter alone. (The FTT token wasn’t part of the CoinDesk Market Index because it didn’t meet the key requirement of being listed for at least 30 days on at least two eligible exchanges. It was only listed on one.)

Among the biggest losers in the CMIX from the FTX fallout was the Solana blockchain’s SOL token, the largest among a handful of so-called “Sam Coins” that had been championed by Bankman-Fried. The SOL price tanked 58% during the quarter.

The contagion spread to Maple Finance, a decentralized lending platform that suffered some $54 million of loan defaults, some of them linked indirectly to the FTX failure. Maple’s MPL token was the quarter’s single biggest loser in the CMIX, diving 78%.

A few winners worth mentioning: Dogecoin (DOGE) rallied 42% for the quarter to date (QTD). The meme coin doubled in October following Elon Musk’s dramatic $44 billion takeover of Twitter. (By the end of the quarter it was looking a bit dog-tired, shaving some of those returns.) Litecoin (LTC) jumped 35% in the quarter, with its third mining-reward halving approaching in 2023; the scheduled blockchain event will cut LTC's pace of supply expansion by 50%.

Recent signs have emerged in digital-asset markets that the FTX turmoil may have passed.

Whether that translates to a market turnaround in 2023 might depend, to a certain extent, on the direction of U.S. Federal Reserve monetary policy. Bitcoin’s overall price direction is still closely linked to the trajectory of traditional markets, and the largest cryptocurrency by market value often sets the course for broader digital-assets markets.

Matt Hougan, chief investment officer at the crypto asset manager Bitwise, says the digital-asset markets are entering a “period of indifference.”

“If you look back at other previous bear markets, they go through this classic style of people not believing it’s happening, and people being angered that there’s a period of capitulation. And [people say the] worst, and crypto is dead,” Hougan said. “We’re going to have to go through a period of six months where no one outside of the crypto industry cares about crypto.”

He added: “That’s sort of what leads into the next bull market that’s happened each time in the past, and I see no reason to believe that this time will be different.”

As of Dec 15, 2022, CMIX lost 12% QTD, and included 163 digital assets assigned to 33 industries in 21 industry groups in six sectors according to the CoinDesk Digital Asset Classification Standard (DACS).

• 144 constituents remained in CMIX the entire fourth quarter, with 126, or 88%, losing and 18, or 13%, gaining.
• Best performer: Mask Network gained 151% and is part of the DACS Shared Storage industry in the Computing sector.
• Worst performer: Maple lost 78% and is part of the DACS Lending/Borrowing Industry assigned to the Credit Platform Industry Group in the DeFi Sector. (NOTE: Both the best and worst performers are relatively small, with a combined total weight less than 0.05% of CMI at the end of the period.)
• Biggest sector: CoinDesk Currency Ex Stablecoin Index (CCX), comprising 62% of CMIX.
• Best-performing sector: CoinDesk Currency Ex Stablecoin Index (CCX), the only sector to outperform CMIX, despite its loss of 10%. This was mainly driven by bitcoin, which lost 11% and is the largest asset in its sector at roughly 87%. Bitcoin is also the largest asset in CMIX, covering 53%.
• Worst-performing sector: CoinDesk Culture & Entertainment Index (CNE), losing 35%, mainly driven by its Metaverse Industry Group, which makes up more than two-thirds of the sector.

More from this report

(Fourth quarter performance as of Dec 15, 2022.)

The CoinDesk Currency Index, Excluding Stablecoins (CCX)

The CoinDesk Smart Contract Platform Index (SMT)

The CoinDesk DeFi Index (DCF)

The CoinDesk Culture & Entertainment Index (CNE)

The CoinDesk Computing Index (CPU)

The CoinDesk Digitization Index (DTZ)