As we head into fall, cryptocurency’s winter continues, fueling skeptics’ insistence that the industry is doomed, that the asset class is unsustainable, and that Bitcoin, the industry’s flagship cybercurrency, is going to zero.
But while crypto prices have reached surprising lows—trading around $19,000 on Monday—and industry layoffs and firm shutdowns have made headlines, reports of crypto’s death are greatly exaggerated. Have companies fallen victim to the current crisis and will there be more closures going forward? Yes. Will there be a reduction in the number of tokens and coins? Absolutely.
But ultimately, I’m confident the skeptics will be proven wrong. Not only is Bitcoin here to stay, but a stronger crypto sector will emerge. If, that is, regulatory clarity emerges, creating a stable foundation for the industry’s long-term viability.
Here before. In the run-up to the dot-com crash of 2000, investors funneled money into internet startups, many of which had weak business fundamentals and no viable plan to turn a profit. This led to unrealistic valuations that drove up stock prices. Flush with cash, dot-coms spent lavishly on marketing, culminating in the dot-com Super Bowl of 2000. Sound familiar? This year’s Super Bowl was dubbed the Crypto Bowl.
There are about 19,000 cryptocurrencies today—many of which were created in response to demand and not based on legitimate underlying technology or protocols. When the dot-com bubble burst, tech stocks declined precipitously and many start-ups went under, including notable ones like Pets.com.
What emerged from the rubble were companies like
which, although it had not yet turned a profit at the time of the crash, did have smart fundraising strategies and a shrewd business model. Likewise, we may see thousands of crypto coins go to zero, but we will also see strong, proven coins emerge. Bitcoin in particular has shown its resilience time and time again over the last 14 years, demonstrating its staying power as a store of value, method of exchange, and a unit of account.
Bitcoin was the dominant institutional crypto asset before this year’s crash and, even in its current devalued state, still is. This is important because we see institutional participation as the biggest factor that will drive the stabilization of the crypto market.
Some institutions may have been unsettled by the crypto crash, but if there is one thing that institutional investors know, it’s that bear markets and bull markets happen in the life of global capital markets. In our view, Bitcoin’s dominance will continue because, unlike some other cryptocurrencies, it has the necessary volume, liquidity, and holdings within institutional portfolios to be considered by institutions as a viable investment.
Regulation required. But to ensure the long-term viability of cryptocurrency, ease of market access is paramount—that requires direct connection to regulated exchanges and access to the associated data and liquidity.
While such market access now exists to some extent, institutions are seeking increased regulatory clarity before driving more assets into crypto. Essential to that effort is governance and regulation by existing bodies to better align the asset with the compliance frameworks of financial institutions.
For example, gaining clarity on how crypto is classified—as a security or a currency—would better allow institutions to understand how crypto should be treated within their own firms. To make this a reality, all crypto market participants—from buy-side institutions to exchanges to regulators—must impose rules to develop a mature market structure that will stand the test of time.
Cryptocurrency will emerge from this winter, but a strong foundation is needed to promote the transparency and governance this still-young asset class needs. Without such a foundation, the size of the marketplace, the interconnectedness of counterparties, and the underlying contagion risk—all of which contributed to the downturn in late 2021, could set the stage for another downturn in the future.
David Mercer is the CEO of LMAX Group, a global financial technology company headquartered in the U.K. with offices in nine countries, LMAX is an independent operator of institutional execution venues for FX and cryptocurrency trading. In 2021 LMAX Group sold a minority stake to J.C. Flowers & Co.
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