The State of the Crypto Market in 2022

Cryptocurrencies have had a wild ride this year. In less than eight months, Bitcoin (BTC -1.28%) fell 70% from its November 2022 highs. Ethereum (ETH -4.49%) took a 78% clobbering in the same period. The stock market also felt like a whirlwind at the same time, but S&P 500 (^GSPC -1.29%) the market index lost only 22% of its value.

Bitcoin price data from YCharts

The markets took a sharp turn in June. Bitcoin and the S&P 500 have posted double-digit percentage gains since the bottom of the summer, while Ethereum ran more than 70% higher. That increase may sound big, but don’t forget that Ethereum started its rally from rock bottom price levels. Overall, both Ethereum and Bitcoin are down more than 60% since their peaks last November.

A significant part of the fuel moving in the market came from the economy. Inflation is rising, not just in America, but all over the world. In addition, geopolitical tensions in Asia and Europe put more strain on supply chains and financial systems that were already under stress from the corona crisis.

However, the crypto industry has seen some important developments in recent months. These events are likely to look important as crypto investors look back on 2022 from the future.

Guidance from the UN

The United Nations Conference on Trade and Development (UNCTAD) sent mixed signals in a recent policy review.

First, the International Forum for Global Economic Development noted that cryptocurrencies present both opportunities and risks to national economies. In particular, developing countries should approach digital currencies with caution. Cryptocurrencies provide instant access to modern payment systems, but their volatile nature also exposes crypto holders to sudden price changes. An unexpected price drop can destroy your family’s finances if your savings are fully invested in Ethereum or Bitcoin. When you scale that problem up to an entire nation’s economy, the stakes are even higher.

UNCTAD also recognized the benefits of a borderless payment system on a global scale. Therefore, the globalization agency proposed that economic leaders should come together and develop laws and regulations for crypto trading in the spirit of cooperation. If anything, the risky quality of cryptocurrencies should inspire improvements to traditional fiat currencies and old-fashioned banking systems.

“It is argued that a domestic digital payment system that serves as a public good can fulfill at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries,” the report said. “Given the risk of highlighting the digital divide in developing countries, UNCTAD urges governments to maintain the issuance and distribution of cash.”

More nations are looking at crypto-based legal tender ideas

El Salvador has used Bitcoin as legal tender since 2021, along with the US dollar. The Central African Republic followed suit four months ago, adding Bitcoin as a digital alternative to the CFA franc.

El Salvador is building a new city around the concept of Bitcoin mining, financing this project with its existing digital currency portfolio. In the Central African Republic, the government has issued a new blockchain network called Sango, partially backed by Bitcoin reserves. In a strange twist, you can now become a citizen of the Central African Republic by putting aside $60,000 in Sango-based security. Then, after five years, you will get your Sango capital back along with your new passport.

However, these developing countries struggle with the practical side of relying on Bitcoin. Digital payment systems are not yet popular and not everyone has the technology they need to use fully digital systems. The world is watching El Salvador and the Central African Republic deal with their problems. So far, the results have not been good.

The central banks of Thailand and Australia are looking at central bank digital currency solutions. These large economies must consider the risks and opportunities of digital currencies on a different scale than the much smaller economic systems mentioned above. Lessons learned from all these early experiments will help the rest of the world build better rulebooks.

Other countries proceed in different ways

At the same time, several countries are setting up regulatory frameworks for mining, owning, trading and sending cryptocurrencies. In some cases, their new rulebooks could lead to digital forms of legal tender, either directly like El Salvador or through Bitcoin-backed official currencies like in the Central African Republic.

For example, the European micronation of Andorra approved crypto legislation in early June that allows the government to issue its own digital token. The landlocked state isn’t about to replace the euro with a Bitcoin clone anytime soon, but these small steps could lead in that direction. Furthermore, the Andorran government officially considers cryptocurrencies a form of currency and not an investment asset.

In South America, the government of Paraguay recently approved a comprehensive set of crypto regulations with a different focus. The bills didn’t say much about treating Bitcoin-like cryptos as an official currency, but they cleared the way for crypto mining businesses to set up in Paraguay. The country has plenty of green energy, generated by the huge Usina and Itaipu hydroelectric dams. Using excess energy in Bitcoin mining facilities can make economic sense. The country currently exports reserve power to Brazil for pennies on the dollar, and a crypto-mining option could be more profitable.

Is this a good time to buy cryptocurrencies?

In the summer of 2022, the world came a little closer to usable digital currency systems on a global scale. This work is important for reasons ranging from consumer protection to deep institutional investor interest, and it’s okay if it takes some time. After all, getting it done is more important than getting it done quickly. Meanwhile, Ethereum will perform its long-awaited “Merge” in September.

All in all, the reasons to take crypto investing seriously are piling up, and tokens are still cheap. Bitcoin and Ethereum look like solid buys right now – as long as you don’t mind dealing with a bumpy road in the months ahead. It takes time to build a stable regulatory system in the long term.