While the surge of the largest cryptocurrency in the world has led some to declare the end of the crypto winter, it may still take some time for a complete recovery.
Last year, when Bitcoin’s value dropped from over $30,000 to below $20,000 in just over a week, Three Arrows Capital’s co-founder Su Zhu referred to the downward trend as the final blow to his hedge fund.
Fast forward to the present day and the leading cryptocurrency has retraced its steps from $20,000 to $30,000 over the past month, but the crypto industry is a far cry from what it was the last time Bitcoin reached that milestone. Several more companies have gone bankrupt in a domino effect since the Three Arrows collapse, including Voyager Digital, Celsius, FTX, Blockfi, Genesis Global, and other startups that were once high-fliers.
It is evident that, although the current mood is more positive compared to last year’s apocalyptic atmosphere, Bitcoin’s encouraging comeback alone will not suffice to repair all the damage incurred during last year’s scandal-ridden downturn.
Speaking at a crypto conference in Paris, Oliver Linch, the CEO of the trading platform Bittrex Global, expressed that despite the positive sentiment around recent market developments, the past 10 months of scandals cannot be ignored. However, there is a growing sense that these events may be put behind them and the focus can shift back to the valuation and assessment of cryptocurrencies without the distraction of rumours and wrongdoing.
The alleged wrongdoings have resulted in a surge of regulatory attention and high-profile enforcement actions in the US. Notable examples include Sam Bankman-Fried of FTX, who is facing fraud charges, Do Kwon, the co-founder of Terra blockchain, who is being prosecuted for his role in the project’s collapse, and Binance and its CEO Changpeng “CZ” Zhao, who has been sued by the Commodity Futures Trading Commission for various violations. Additionally, Coinbase Global Inc. has received notice of a pending lawsuit by the Securities and Exchange Commission. While Binance and Coinbase have denied any wrongdoing, Bankman-Fried has pleaded not guilty.
The recent failures of crypto-friendly banks such as Silvergate Capital Corp., Signature Bank, and Silicon Valley Bank have had a significant impact on the crypto industry. Although these banks were often cited as a catalyst for Bitcoin’s success, as they represented an alternative to untrustworthy traditional banks, their downfall also resulted in the severing of crucial links to the US financial system. As a result, the promising future of the crypto industry has become increasingly uncertain.
Many retail investors who were burned by last year’s price decline are still recovering from their losses and are hesitant to take on new risks. As a result, the amount of money invested in decentralized finance (DeFi) projects remains subdued. While the total value of coins locked in DeFi projects has increased by over 25% since January, with about $50 billion invested, it is still far below the peak of $180 billion reached in December 2021, as reported by the DeFiLlama website.
Despite recent market developments, the crypto industry continues to face challenges such as a lack of job opportunities and limited hiring. Blockchain project Concordium’s co-founder and chairman, Lars Seier Christensen, noted that the demand for talent still exceeds supply, as evidenced by the more than 350 applications they received for a couple of recent job openings. He also commented that the industry is maturing and recognizing that the abundance of funding available a few years ago has dwindled.
Additionally, investments from venture-capital firms have significantly slowed down. According to PitchBook, private funding for crypto startups globally decreased by 80% to $2.4 billion in the first quarter, compared to an all-time high of $12.3 billion during the same period last year.
According to Matteo Dante Perruccio, the international president of crypto wealth manager Wave Digital Assets, much of the crypto industry remains cautious and is adopting a wait-and-see approach. He noted that there has been a shift towards quality, with companies that were not affected by the crypto winter seeing the greatest benefits.
One noticeable difference in the recent market rally is that while Bitcoin has surged by an impressive 83% this year, newer cryptocurrencies have not matched this growth. For instance, Ether, which outperformed Bitcoin in 2020 and 2021, has only risen by 71% this year. Furthermore, the Bloomberg Galaxy DeFi Index, which monitors the most prominent decentralized finance protocols, has only regained around one-tenth of the 2,000-point drop it experienced last year.
Clara Medalie, the director of research at market-data provider Kaiko, suggested that the recent market rally may be due to a combination of seller exhaustion, a renewed bullish narrative following the banking crisis, and generally low liquidity. Despite the uncertainty, the industry has continued to evolve, with Ethereum successfully completing an upgrade to its network known as the Shanghai update.
This upgrade enables investors to withdraw locked-up Ether coins in exchange for rewards as part of a proof-of-stake system that safeguards the network. This development could attract billions of dollars into Ether, despite SEC Chair Gary Gensler’s belief that the token should be regulated as a security. As a result, Ether’s price rose above $2,000 for the first time in six months.
Simon Taylor, the head of the strategy at fraud prevention startup Sardine, commented that although there is not as much enthusiasm as during the $30k or $40k rally, there is still progress happening behind the scenes. Additionally, the macro picture has changed, potentially for the better, as central banks’ tightening cycle may be nearing its end, creating favourable conditions for a crypto boost.
One significant question is the level of enthusiasm that traditional financial institutions will have going forward and whether they will be willing to fill the roles once played by failed crypto startups such as FTX. However, there are indications that this may be changing, with Nasdaq Inc. planning to launch its custody services for digital assets by the end of the second quarter.
A Citigroup research study suggests that by 2030, as much as $5 trillion could shift into different forms of money, including central bank digital currencies and stablecoins. Additionally, the report proposes that another $5 trillion of conventional financial assets may be tokenized, leading to a significant increase in blockchain technology adoption.
However, Michael Purves, CEO of Tallbacken Capital Advisors, notes that institutional investors will require a higher “show me” threshold this time around, as the role of cryptocurrencies in a portfolio remains uncertain. While once considered a hedge against inflation, akin to modern-day gold, cryptocurrencies performed poorly during the recent surge in consumer prices, the worst since the 1980s.
According to a recent note to clients, institutions began to take Bitcoin seriously after it surpassed $20,000 in 2020 and played a crucial role in driving it to $69,000. However, the note suggests that this time around, institutions may be more hesitant due to Bitcoin’s historical lack of portfolio diversification. With larger concerns to contend with, institutions may be wary of investing in Bitcoin.
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