February 9, 2023

Filipino Guardian

Sentinels of Filipino Free Press

Cryptocurrencies at the crossroads after annus horribilis

REUTERS

SINGAPORE – To paraphrase Britain’s Queen Elizabeth, 2022 is not a year for which the cryptocurrency world should look with unalloyed glee.

Crashes, contagions, collapses followed one another so quickly that by the end of the year, investors were asking themselves serious existential questions.

After all, the largest cryptocurrency, Bitcoin BTC=BTSP, hasn’t stayed afloat for more than a week at a time, falling about three-quarters from last November’s $69,000 peak.

The market value of the roughly 22,000 tokens and coins is now less than a third of where it peaked at $3 trillion in November 2021, and many of them are in a coma if not dead.

It was a brutal reality check for an industry that is entering 2022 with dreams of widespread mainstream institutional acceptance, Bitcoin displacing even gold as a global inflation hedge, endorsements from Tesla Inc CEO Elon Musk and the wild celebration von launched multi-billion dollar non-fungible tokens.

Not only did cryptocurrencies suffer from the Fed’s over-hawkishness, its crash triggered the crash of a stablecoin called TerraUSD, which then sparked a “Lehman moment” as funds and brokers like Celsius and Voyager went bankrupt.

What some saw as the final nail in the crypto coffin was the collapse of Sam Bankman-Fried’s FTX exchange last month.

WHY IT MATTERS

Unlike 2017, when Bitcoin crashed just as spectacularly, this time there are far fewer die-hard crypto fans predicting a rebound.

Rather, 2022 has become “I told you so” case for regulators who have largely stayed away from the crypto world or even banned cryptocurrency trading.

The European Central Bank is calling Bitcoin’s modest rally this month an “artificial last gasp on the road to irrelevance.”

In fact, the only mitigating factor this year has been that mainstream finance has largely avoided contagion. The excesses, uncontrolled lending and fumbling of billions of dollars has happened overwhelmingly within the crypto ecosystem.

At the same time, the notion that decentralized finance and private cryptocoins can operate and thrive in the shadow of the traditional banking system now seems delusional.

As retail and institutional investors lose confidence in crypto operators, a host of policymakers and even crypto barons are joining US SEC Chairman Gary Gensler in calling for regulation.

WHAT HOLDS 2023?

UBS strategist James Malcolm points to the increasing correlation between cryptocurrencies and US microcap stocks as evidence of how Bitcoin and other tokens on the fringes might survive as niche and diversified assets in investment portfolios.

“It’s wrong to say that this thing will curl up and die entirely because there are elements of it that may be useful in other areas and there is likely a modest cryptocurrency market that will continue to thrive on the fringes of financial markets,” he said says.

Yet the kind of regulation investors need to feel safe dealing with crypto brokers and exchanges, be it transparency or capital adequacy, could take months, if not years, to implement.

“Some wealth managers see this as a 10- to 15-year journey to bring digital assets fully mainstream,” Morgan Stanley said in a note summarizing the bank’s talks with the crypto industry.

Over the next year, traditional finance could use the crypto malaise to up their game: snapping up platforms and assets in the blockchain world, issuing tokenized bonds and stocks, or maybe even launching more central bank digital currencies.

As UBS’s Malcolm says, this could show that crypto should be “an evolutionary rather than a revolutionary development in financial markets.” – Reuters