Crypto Currency

‘Crypto winter’ to ‘ice age’? What 2023 holds for digital assets

5 Mins read

‘Crypto winter’ to ‘ice age’? What 2023 holds for digital assets

Cryptocurrency investors may be used to volatility, but 2022 tested the faith of even the staunchest believers as exchanges and funds across the industry went into meltdown. Valuations plunged, companies folded and thousands were laid off.

Can the industry emerge from the downturn stronger? After a brutal year, even those who believe it can predict a long and rocky road ahead.

It all kicked off in Singapore. The crash of the crypto hedge fund Three Arrows Capital (3AC) in July following the collapse of the Luna digital token triggered a sharp fall in the overall value of the market known as the “crypto winter.”

The chaos that followed claimed even bigger names, most notably another company with roots in Asia, FTX. The exchange’s founder, Sam Bankman-Fried, has gone from paper billionaire to facing fraud charges in the U.S. after his company collapsed in November.

Sam Bankman-Fried, founder and former CEO of crypto currency exchange FTX, leaves a Bahamas court building in Nassau on Dec. 19.   © Reuters

Crypto’s season of reckoning is all the more painful for the bull run that came before: The market capitalization for all digital coins reached a peak of around $3 trillion in November 2021, before plunging to less than $1 trillion in the middle of this year.

Bitcoin — the most popular cryptocurrency and the largest by total value — fell to below $16,000, down nearly 80% from the all-time high it hit late last year, and is now trading under $17,000.

The rout has not only suppressed investor appetite for the digital asset but also led to thousands of job cuts in the sector, leading several industry players to predict the crypto winter will stretch on into something more serious.

“This is now the crypto ice age,” Alex Au, founder of Hong Kong asset management firm Alphalex Capital, told Nikkei Asia. “I think that 2023 will continue to be subdued in the crypto market, mainly because of people’s confidence.”

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Au, who is also co-founder of the Hong Kong Digital Asset Society, says it could take two years to recover.

After FTX’s troubles came to light, exchange balances globally plummeted by $20.7 billion in 11 days to $102.8 billion on Nov. 13, according to data provider CoinGecko.

According to Au, most investors will wait out the downturn, storing their digital assets in a “cold wallet” — a digital wallet that is not connected to the internet, to prevent hacking. High global interest rates to combat soaring inflation have also prompted some investors to liquidate their digital assets in order to invest in other areas.

“The market will remain dormant for quite some time,” Au said.

That paints a stark contrast to the previous two years, in which crypto-related companies across Asia hired and expanded aggressively.

Crypto investment platform Paradigm now has slashed salaries, while exchange ByBit announced a second round of layoffs this year, slashing 30% of its staff.

The recent reckoning has spooked regulators in Asia who had been starting to warm to crypto.   © Getty Images

Singapore-based Amber Group, a digital asset market maker, halted expansion and laid off more than 15% of its 1,000 employees in the second half of 2022.

An exchange is where people trade cryptocurrencies, while market makers trade on behalf of clients.

Annabelle Huang, managing partner at Amber Group, told Nikkei Asia that cutting jobs would allow the company to focus more on high net worth individuals and wealth management services for digital assets.

“I think right now, it’s because the market itself is quite dead,” Huang said of the lack of confidence in cryptocurrencies. “Everybody’s spooked and don’t know where to trade. Everyone’s waiting for the dust to settle.”

The financial services firm said less than 10% of its trading volume was exposed to FTX but refused to disclose the exact amount.

The recent storm has also spooked regulators in Asia who had been starting to warm to crypto.

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Thailand has slowed license approvals for digital asset trading for exchanges and proposed new reserve requirements that would in effect exclude small exchanges from the market. In October, Singapore proposed rules banning credit lines to fund cryptocurrency purchases, while Hong Kong recently passed laws to regulate all cryptocurrency exchanges. China has already barred cryptocurrencies outright.

Hong Kong and Singapore, rival financial hubs also competing to be Asia’s crypto capital, have been attempting to strike a balance between encouraging the sector and protecting investors.

Hong Kong, the birthplace of Bankman-Fried’s FTX, was long considered an ideal place for crypto companies to domicile, for its high-quality market and loose regulations. But in 2019, the introduction of tighter policies sparked an exodus of entrepreneurs to Singapore and other less strictly regulated cities.

Customers at the 2020 Taipei International Finance Expo. In Asia, 80% of high net worth individuals and 70% of family offices continue to be interested in digital assets as an investment vehicle.   © Reuters

The pendulum started to swing back a month ago, when the Hong Kong government said it would loosen rules restricting crypto trading to investors with a portfolio of at least $1 million and allow retail investors some exposure to cryptocurrencies through exchange-traded funds. It also signaled it might legalize retail crypto trading next year. However, the latest moves were announced just before FTX crashed, and authorities have since championed regulatory compliance and industry transparency as a means to strengthen Hong Kong’s position as a crypto hub.

Meanwhile, Singapore has aggressively marketed itself as the region’s crypto hub, hosting several large cryptocurrency events and welcoming many Chinese startups looking for a new home after Beijing’s crackdown last year.

But the city-state has also emphasized prudence, with the Monetary Authority of Singapore warning investors in October not to “speculate” on digital tokens for profit.

On the investor side, the crypto winter has not scared everyone off, with pockets of Asia’s rich looking for investment opportunities. In the region, 80% of high net worth individuals and 70% of family offices — organizations set up to manage the assets of very wealthy people — continue to be interested in digital assets as an investment vehicle, according to Matrixport, a Singapore-based digital assets financial services company.

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The conclusion was drawn from a joint study with Longitude Research published in November, which polled 1,500 affluent investors from markets like Singapore, Hong Kong and Taiwan following the crypto crash midyear.

“Our study showed that nearly half of the investors recognize most assets will be digital in the future, and interest in digital assets remains high even after the onset of the crypto winter,” Eugene Lim, head of private wealth at Matrixport, told Nikkei Asia. “Such interest is more pronounced in Singapore, closely followed by Hong Kong and Taiwan.”

Still, Asia’s family offices remain on the whole cautious about crypto, according to Ray Tam, CEO of Revo Digital Family Office. Cryptocurrencies account for no more than 1% of the typical Asian family office portfolio, he said.

While the ultrawealthy remain largely on the sidelines, crypto believers insist there is a silver lining in the millions of dollars wiped from the market.

“Now is the best time for me to deploy,” said Lucy Gazmararian, founder of blockchain venture fund Token Bay Capital. “Speculation is gone, scammers can’t make millions overnight, you’re left with very high-quality teams at much lower valuations.”

Huang, from Amber Group, shared a similar view, saying now is the perfect time for crypto companies like themselves to refine and update their strategy.

“Hopefully in 2023 and beyond, most of the well-capitalized platforms are able to survive, are able to adopt better risk management and [a] better operating framework going forward so that the industry can come out of this stronger,” she said.

But others in the industry say it could take years to repair the damage the year’s worth of scandals has dealt to cryptocurrency. Startups in the crypto world sell tokens, digital assets they have designed, to raise money, Au said.

“But in this crypto ice age it’s very difficult to sell tokens, it’s hard to make people believe they can take that high risk. So if they can’t sell tokens, then they can’t kick-start any projects.”

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