By nearly any yardstick, 2022 was a disaster for cryptocurrencies. It's not only that the crypto market lost nearly $2 trillion in overall market capitalization or that Bitcoin (BTC -3.42%) and Ethereum (ETH -2.59%) are both down more than 65% for the year. There was also a complete loss of trust in the system itself.
Crypto lenders, stablecoins, and cryptocurrency exchanges imploded throughout the year. And many of the highest-profile names in the crypto industry turned out to be nothing more than fraudsters (or worse).
Looking ahead to 2023, however, I'm still bullish on the long-term prospects for crypto. Here's why.
Volatility
Long-time crypto investors recognize that volatility has always been a feature of the crypto market. This is nothing new. Even with Bitcoin down 65% for the year, it's possible to point to equally bad years over the past decade.
In 2014, for example, Bitcoin was down 58%, and in 2018, it was down 73%. Both times, the cryptocurrency rallied and actually moved higher afterwards.
Despite both of these crashes, Bitcoin was still the best-performing asset class in the world during the decade from 2011-2021, delivering annualized returns of 230%. Think about that for a second: Bitcoin had two epic collapses over a 10-year period and still ended up trouncing every other asset class in the world.
That's one key reason why I remain bullish on Bitcoin: It has a historical track record of bouncing back after every major crypto market decline. In other words, I've learned to stop worrying and love the volatility.
New-use cases for crypto
The crypto market continues to evolve and find new-use cases. When Bitcoin appeared in 2009, Satoshi Nakamoto imagined a peer-to-peer electronic cash system as the primary-use case. By the time Ethereum appeared on the scene in 2015, that thinking had evolved. New smart contracts ushered in a period of innovation, including the arrival of non-fungible tokens (NFTs), Web3 gaming, the metaverse, and decentralized finance (DeFi).
Image source: Getty Images.
Looking ahead, I think we'll continue to see new-use cases emerge. For example, one line of thinking suggests we'll see the "tokenization of the world," in which every physical asset in the world is eventually turned into a fractional, sharable, tradable digital asset. Decentralized exchanges are already working on this technology, such that these digital assets can be traded just like crypto tokens.
At the very least, we can expect to see radical improvements in crypto payment technology and the embrace of cryptocurrencies, like Bitcoin, for online payments. With each new-use case, the value of the total crypto market will continue to grow.
The arrival of institutional investors
Until recently, the crypto market was almost exclusively the domain of the small retail investor. As such, it was very easy to be skeptical about crypto's overall growth trajectory. Big-time institutional investors often said they could see no purpose for crypto other than money laundering or other criminal activities.
From this perspective, it was very easy to become bearish anytime the crypto market collapsed. To an outsider, it looked like another Dutch tulip bulb craze.
But that's no longer the case. Wall Street is increasingly embracing blockchain and crypto technology, while big-time institutional investors are now getting into the mix. This summer, for example, included a massive new collaboration between BlackRock Inc. (BLK -0.50%), the largest asset manager in the world, with Coinbase (COIN -5.10%), the largest U.S.-based cryptocurrency exchange.
As BlackRock acknowledged, institutional investors were clamoring for crypto, and Coinbase made for a natural partner. With the arrival of so much new institutional money, I think we will see improved risk management within the crypto world, as well as new investment products.
A much brighter 2023
For all of these reasons, I think 2023 is going to be much brighter than 2022. We've literally hit rock-bottom right now, and it's no time to be selling crypto. Most likely, we will see the arrival of new crypto legislation next year that will provide much better clarity and certainty to the crypto market, which has been likened to the "Wild West" in the aftermath of the FTX market shenanigans. This, too, should help assure nervous investors.
Crypto is still risky and volatile, of course, but I think the arrival of new institutional money into crypto, combined with greater regulatory oversight and clarity to keep out the bad actors, will help mitigate some of that risk. The innovative nature of the crypto and blockchain industry will eventually lead to the return of the bulls that have been hibernating during a long crypto winter.
