Meandering sideways

The following is Blockworks 2022 review of financial markets & crypto.

*TLDR: Crypto’s 2022 Final Grade: F-

---

In financial history books, 2022 will be remembered for the worst bout of inflation in 40 years and the worst rout in stocks and bonds in 80 years.

The latter point is statistically accurate — traditional 60/40 portfolios have had their worst year since 1937 — but highly misleading.

By fluky coincidence, the all-time high in the S&P 500 happened to be January 3, the very first trading day of 2022. 

So the year-to-date performance in equities conveniently doubles as the high-to-low performance of the bear market. That’s never happened before and it makes all the YTD comparisons vs. history kind of meaningless: 2022 vs. any other calendar year is apples to oranges.

As bear markets go, this one was actually pretty harmless: The S&P spent just five weeks below the -20% level that denotes a bear market and the VIX never closed above 36. (By comparison, the volatility index hit a high of 82 in March 2020.)

I’d argue that 2022 barely cracks the top 5 bear markets of living memory, falling in behind the existentially risky 57% decline in 2008/9, the hope-destroying 43% grind lower from 2000-2003, the 34% freefall in 2020, and the terrifying 22.6% one-day crash of 1987.

Nothing in the 2022 bear market was similarly scary — unless you happened to be all-in on long-duration government debt (like the 100-year Austrian bonds now trading in single digits).

Or crypto.

Crypto’s 2022 Final Grade: F-

In 2022, we learned that: 

• The 2020/21 bull market was a Ponzinomics bubble.

• Crypto remains, for the most part, a greater-fool asset class.

• The industry’s profitability was a mirage, based largely on the pseudo-arbitrage in GBTC.

• DeFi is the opposite of censorship resistant.

• Blockchains are the opposite of anonymous.

• There will never be a decentralized, on-chain dollar.

• There was too much money in crypto, not too little.

• DAOs are neither decentralized nor autonomous.

• We're not all going to make it.

We did not see the emergence of an alternative asset class as we hoped at the start of the year — crypto, as many naysayers predicted, was a bubble.

But here’s the good news: Bubbles can be productive. 

And busts can, too.

Speculative over-investment often builds the infrastructure that enables the booms that typically follow busts.

And in 2022, it feels like we made every mistake there is to make, so I’m ready to call it: The crypto bust is over. 

That does not mean it’s time to pile back in. 

It’s hard to imagine a V-shaped recovery in crypto prices. My guess is that, pricewise, we remain in the wilderness for a good while longer: Meandering sideways is my base-case scenario for 2023.

But meandering might be the best thing for us.

The root cause of much of crypto’s troubles in 2022 was that there was too much money sloshing around and not enough productive things to do with it. 

That led to a lot of destructive behavior, like unsecured lending to inept hedge funds and careless investment in fraudulent exchanges.

There’s substantially less money around now, and that will lead to much better behavior. 

Scarcer capital should mean that investment funds and developer resources are focused on only the most promising, most useful projects.

Without an inflated market for empty governance tokens to sell into, builders will be incentivized to create value by building real utility.

Which is not to say the bubble was all for naught — inflated prices can be useful, too: The 2020/21 boom in yield farming bootstrapped this new financial system we call DeFi.

But DeFi has not attracted many real users: The primary use case for crypto is still just trading it for other cryptos.

Now that prices have deflated, however, the focus will be squarely on creating value, not pumping prices — pumping prices only works in bubbles, so it’s time to find out what works in busts.

For crypto, 2022 was the year of discovering 10,000 ways that won’t work.

With luck, 2023 will be the year the light bulb turns on.

See you tomorrow!

- Ope