Market Deep Dive: What would you consider to be the “finance word of the year”?

 

When looking back at 2022, what would you consider to be the “finance word of the year”? And which one would you choose for the crypto market?

For TradeFi a top candidate is “transitory”: we all remember how central bankers around the world insisted on rising inflation only being transitory due to the effects of Covid lockdowns. However, even before the war in the Ukraine began in late February, it became evident that inflation was not just going to simply disappear. The war was not the root cause of inflation but it did serve as an accelerator on account of a sudden supply shock in commodities due to the harsh sanctions that Western countries imposed against Russia.

For the younger generation in developed markets, (high) inflation is something they have only read about in history books (or heard happening countries far away); the excess supply of money provided by the central banks ever since the financial crisis in 2008 was taken as guaranteed. Whenever the market cried for help, central bankers stepped in to provide additional liquidity. That narrative is now dead. Inflation calmed a bit over the past months, but some analysts have pointed out that, historically, inflation comes in waves, much like Covid infections. Let us hope that this is not true.

Markets around the world have been suffering as a result. The bond market took a big hit from higher rates. The 10-year yield in the US moved from 1.6% to above 3.8% over the year, and the rates-sensitive Nasdaq crashed 33%, and the S&P 500 almost 20%. The year 2022 was one of those years where diversification did not help.

Now let us turn our attention to crypto. One suggestion for the word (or rather phrase) of the year is “deploying more capital – steady lads”. Everyone in the crypto community remembers Do Kwon desperately trying to prevent the unavoidable collapse of his Terra Luna imperium. Looking back, all the disasters that followed (Three Arrows Capital, Celsius, Voyager, Blockfi, etc.) can be traced back to Do Kwon. The de-peg of his UST was responsible for a series of reactions causing a bubble to burst. Bubble meaning an overheated crypto market, driven by over-leverage and greed. Even the bankruptcy of FTX/Alameda ultimately can be traced back to Do Kwon: as we now know it was back then that Alameda lost a great deal of money and started to extensively “borrow” customer funds to cover heavy losses. Of course, Do Kwon was just the trigger that uncovered a flawed ecosystem built around crypto that was doomed to fail.

We are ending the year with BTC trading 64% and ETH 67% lower. Most altcoins crashed even further. We are now in the midst of a crypto winter, and if we believe in repeating patterns, these winters can last a while. Let us hope that most bad players are out of the game now and that the next rally will be much more sustainable – and (not only) driven by greed.

 
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