Crypto winter is here: Prices tumbling, investors quitting as major players collapse
Cryptocurrency prices have crashed, major players have toppled, and investors are pulling out in one of the harshest crypto winters ever, with some regular customers losing everything.
SINGAPORE: The cryptocurrency ecosystem - which has taken a hammering after reaching euphoric highs last year - is expected to be more regulated moving forward, forcing players to be more diligent in following the rules, said one observer.
In the past year, cryptocurrency prices have crashed, major players have toppled and investors are pulling out their funds in one of the harshest crypto winters ever, stoking fears that the troubles in the crypto sphere could even spill over into more traditional assets.
“One of the reasons why we have such extensive contagion in crypto is because there is no lender of last resort and without a lender of last resort, contagion flows to the system with no breaks,” said Mr Paul Brody, global blockchain leader at professional services firm EY, on Tuesday (Dec 20).
“My expectation is that we will not only see a much more regulated crypto ecosystem, but we will see a crypto ecosystem with frankly a lot less crypto in it and a lot more stablecoins.”
Stablecoins are designed to have a stable value, typically by being backed or pegged to an underlying asset such as a currency.
A MORE DILIGENT CRYPTO SPACE
Citing Japan as a benchmark, Mr Brody said it has a rigorous regime - after the collapse of Tokyo-based bitcoin exchange Mt. Gox - that “depends not just on companies behaving themselves, but on government inspection and the requirement for third party auditors''.
“I think we're going to see more regulation or a regulatory environment that looks more like Japan's, with a requirement for inspection by third parties in order to be in this business,” he told CNA’s Asia Tonight.
“I think we want a much more diligent crypto sector coming out of this. I hope to see that, and it will be very good for the industry.”
Cryptocurrency prices are down more than 50 per cent from their all-time highs last year, and trading volumes have shrunk. The fall of stablecoin TerraUSD and sister coin Luna in May sparked off a domino effect that saw investors losing billions of dollars globally.
The arrest of FTX founder Sam Bankman-Fried last week over an alleged mismanagement of funds that saw the collapse of his now-bankrupt cryptocurrency exchange, caps a rough year for the industry.
“One of the big problems that we're having right now is that normally in any kind of collapse, you have something that people talk about as a flight to quality. Investors look around for the most stable, the most mature, the best regulated player out there,” said Mr Brody.
“And what they're looking around and discovering is there are very, very few publicly traded, deeply regulated, exhaustively audited players out there, and that's actually I think, having a negative impact on this.”
CRYPTO WINTER WON’T END SOON
The fallout does not look like it will end soon and will likely keep the value of cryptocurrencies down for a while, especially with the economy in worse shape than previous crypto winters.
Mr Brody believes this crypto winter is not worse than the previous ones, “but it feels a lot worse, first of all, because the market is so much bigger”.
“And secondly, it feels worse because the level of fraud and misrepresentation and sort of systemic contagion is much more substantial than prior crypto winters, which had been less painful,” he added.
Yet just a year ago, the scene was booming, with prices reaching highs.
Then, investors described the largest cryptocurrency, Bitcoin, as the future of money. But Bitcoin, which has experienced many big swings, is now down about three-quarters from last November's US$69,000 peak.
Non-fungible tokens (NFTs), which are crypto assets representing a digital item such as an image or video, also exploded in popularity last year, with celebrities jumping on the bandwagon and simple cartoons selling for millions of dollars without physical objects changing hands.
Mr Brody said the current personality-driven nature of the crypto world comes from “a very immature ecosystem”, and the industry needs to move away from that.
However, Mr Brody remains optimistic about the crypto space going forward.
“I'm really hoping to see a shift away from what's really been an obsessive focus on financial services and sort of moving money around,” said Mr Brody, who drives EY initiatives and investments in blockchain technology across consulting, audit and tax business lines.
“Instead, what I really want us to see, and what I hope to see, is a world of much more sophisticated business-to-business digital applications that run on blockchain ecosystems, but are not focused solely on just moving money around or financial services.”
Cryptocurrencies themselves are not the most valuable part of the crypto ecosystem, he added.
“It's the decentralised computing and business architecture that presents the real value, real opportunity for long-term value creation.”