2022 was a challenging year for the crypto market, raising doubts about the future of cryptocurrencies. To delve into the future of the crypto market, CFA Society Toronto hosted a webinar on April 18, 2023, titled Winter Is Here – Crypto Markets in 2023 and Beyond, as part of their Innovation Series. The webinar featured two guest speakers: David Duong, CFA, Head of Institutional Research at Coinbase, and Eric Richmond, Chief Operating Officer at Coinsquare. They addressed various topics, including lessons learned in 2022, regulation, controversies, and using cryptocurrencies to power blockchain.

Have there been any positives since 2022?

Cryptocurrencies experienced significant liquidation and price declines in 2022, leading many to question their diversification benefits and intrinsic values. Despite the negative sentiment, Duong highlighted positive takeaways since the start of 2023:

• Cryptocurrencies’ high correlation with other asset classes in 2022 has decreased substantially in 2023.
• Earlier this year, the collapse of regional banks in the US highlighted the potential benefits of decentralized assets such as cryptocurrencies.
• Many cryptocurrencies have shown strong price recovery, albeit some key constituents like Bitcoin and Ethereum are still below their all-time highs.
• The technology infrastructure built in recent years to facilitate market functioning has proven effective.

The FTX scandal and increased scrutiny of the crypto market

FTX, a cryptocurrency exchange and hedge fund, faced widely publicized bankruptcy proceedings in November 2022. The failure of FTX prompted a thorough scrutiny of the crypto market in general. Despite the negative impact, Richmond believes that the collapse of FTX has brought some benefits to the crypto market and participants. The losses incurred by investors from FTX’s demise led to heightened regulatory scrutiny of the crypto market and exchanges in both the US and Canada. Particularly in Canada, where regulations were already more uniform before the FTX debacle, oversight has increased. Although regulation exists across the border in the US, it remains fragmented and less clear across different regulatory bodies. However, the US appears to be more effective at enforcing the regulations that are in place. Ultimately, the FTX collapse is expected to lead to better investor protection.

Regarding the price action of cryptocurrencies following the collapse of FTX, Duong highlights that the impact on the value of cryptocurrencies was less severe than anticipated. The bankruptcy proceedings resulted in the locking up of cryptocurrency supplies for investigations by regulators, reducing supply and improving market balance, contributing to more stable prices. Additionally, the banking crises in the US during the first quarter of this year led individual investors to hold onto their cryptocurrencies instead of trimming their holdings and depositing the proceeds in the banking system.

Continued strong interest in cryptocurrencies

Despite the price declines and FTX collapse, both Duong and Richmond agree that institutional interest in cryptocurrencies as an asset class has increased. This is positive, as it will enhance regulatory scrutiny of the crypto market and improve general liquidity as the market matures. While family offices were the typical early entrants in the market, hedge funds have become keen participants, with growing interest from pension funds. It is evident that cryptocurrencies are here to stay and are likely to establish themselves as an acceptable alternative asset class.

The intersection of traditional finance and decentralized finance

A common question is whether blockchain technology and decentralized finance (DeFi) compete with traditional finance (TradFi). Both Richmond and Duong agree that DeFi and TradFi are not substitutes, but rather are complementary. DeFi is useful in specific areas, such as providing decentralized settlement of transactions, transparency, and immediate settlement of contracts. However, DeFi will not replace TradFi on a large scale. It is essential to recognize that DeFi is still in its infancy and requires further development before becoming mainstream. Reputation and trust are necessary for any financial system and institution, and DeFi currently lacks some of that trust. DeFi also needs to provide users with a greater sense of security regarding the safety of their assets. TradFi, on the other hand, often includes insurance on deposits, which DeFi does not offer. Additionally, due to its decentralized nature, DeFi provides little recourse to individuals or companies if something goes wrong, such as funds being transferred to the wrong account. Despite these challenges, there is a consensus that DeFi will be successful and likely become more mainstream, coexisting alongside TradFi.

Ethereum remains the preferred blockchain

Regarding blockchain technology, Richmond highlights that Ethereum remains the most widely used blockchain for developers and the ecosystem of choice. Ethereum focuses on scalability, making it the largest protocol for developers. Consequently, Ethereum’s token, Ether (ETH), and Bitcoin are among the largest cryptocurrencies in circulation. Bitcoin and Ether together constitute 60 percent of the cryptocurrency market cap, and their popularity is expected to continue growing. However, investing in any cryptocurrency, whether it is Bitcoin, Ether, or other currencies, requires due diligence and research, just like any other asset. These markets are still at an early stage, and the regulatory framework is still evolving.

There are positive developments, but stay informed

Overall, despite the challenges faced by the crypto market since 2022, there are positive developments to consider. The decreased correlation with other asset classes, the recovery in prices, increased institutional interest, and the coexistence of DeFi and TradFi all indicate a promising future for cryptocurrencies and blockchain technology. However, it is crucial to approach these markets with caution and stay informed about the evolving regulatory landscape.