Crypto has entered a bear market in 2022. Here's how cybercrime and NFT swindles have helped fuel the downturn.
- Cryptocurrency and NFT markets have plunged in 2022 after having a banner year in 2021.
- Cyber attacks — including a $625 million swindle — NFT scams, and a broader bear market have all sent investors fleeing.
After the digital asset boom in 2021, the market has reversed course this year as investors shed positions in cryptocurrencies and NFTs amid a broader bear market and a slate of high-profile cyber-attacks in the sector.
The crypto market has cratered from its peak valuation of $3 trillion in November to $1.3 trillion this week. Bitcoin has lost 38% year to date, while ether — the second-biggest crypto and frequent gauge for sentiment — has plunged more than 53%. And weekly NFT sales have tumbled 80% from their early January peak of nearly $1 billion.
A key event in the downturn came in April, when North Korean hacking outfit Lazarus perpetrated a $625 million crypto hack on the popular Axie Infinity play-to-earn game. And since then, there have been three attacks on the hugely popular NFT company Yuga Labs. Hackers this weekend just made off with roughly $360,000 worth of Bored Ape NFTs.
Hacks have influenced the downturn "in some respects" as some people may have lost faith, but that doesn't mean the technology is no longer promising, Ari Redbord, head of legal and government affairs at TRM Labs, told Insider.
"You are seeing the early days of a growing ecosystem that doesn't have the foundational infrastructure to stop the attacks," he said. "None of this works if people don't trust the system they're engaging with, so it's really important to stop these bad actors."
Redbord maintained the digital asset downturn reflects the nascent nature of the industry. Regulators, he explained, are only just starting to gain interest, and businesses are still finding their footing when it comes to protecting consumers.
But while cyber-attacks highlight the need for regulation, they didn't necessarily play a role in the bear market, said Bill Birmingham, chief investment officer at Osprey Funds. If anything, he noted, cybercrime may only delay institutional adoption of digital assets.
"The people who tend to get hacked are usually at the extreme end of the risk-spectrum and for the most part they're already fully sold on the concept of crypto," Birmingham said. "I don't think this is going to change their point of view at all."
Crypto and NFTs also haven't tumbled on their own this year. The stock market has also traded in the red, and the tech-heavy Nasdaq is down roughly 23% on the year.
The abrupt reversal in sentiment, Birmingham explained, is a result of the easy-money policies of the pandemic winding down.
"We saw a massive amount of liquidity created in response to COVID," he told Insider. "[Government stimulus checks] combined with people staying home, you had a lot of things leading to that liquidity finding its way to crypto. Now the central bank is tightening interest rates and those stimulus checks have stopped, you see a natural end to liquidity taking down crypto prices."
The dramatic volatility in the digital asset market shouldn't be surprising, according to Georgetown University finance professor James Angel.
"Bitcoin goes through phases of euphoria where some people think it will go to infinity and then phases of disillusionment when people figure out there is not much you can do with it," Angel told Insider. "Speculating is no longer fun when you're losing money so people move on to other forms of entertainment."