As we head into fall, cryptocurrency 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.
Getting clarity on how crypto is classified – as a security or a currency – will better enable institutions to understand how crypto should be treated in their own firms.
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But while crypto prices have hit surprising lows — trading around $19,000 on Monday — and industry layoffs and shutdowns have made headlines, reports of crypto’s death have been greatly exaggerated. Have businesses fallen victim to the current crisis and will there be more closures in the future? Yes. Will there be a reduction in the number of tokens and coins? Absolutely.
But in the end, I’m sure the skeptics will be proven wrong. Not only is Bitcoin here to stay, but a stronger crypto sector will emerge. If that is, regular clarity creates a stable foundation for the industry’s long-term viability.
Here before. In the run-up to the dot-com crash of 2000, investors poured money into Internet startups, many of which had weak business fundamentals and no viable plan to make money. This led to unrealistic valuations which drove share prices up. 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 called the Crypto Bowl.
There are around 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 plummeted and many startups went under, including famous ones like Pets.com.
What emerged from the ruins were companies that
Amazon.com
which, although not yet profitable at the time of the crash, had 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 past 14 years, demonstrating its staying power as a store of value, a 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, it 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’s one thing 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 essential – it requires direct connectivity to regulated exchanges and access to 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 this effort is the governance and regulation of existing bodies to better align the asset with financial institutions’ compliance frameworks.
For example, getting clarity on how crypto is classified – as a security or a currency – will 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 interconnection of counterparties and the underlying risk of contagion – all of which contributed to the decline at the end of 2021, could lay the foundation for another downturn in the future.
David Mercer
Photo illustration of staff; Courtesy of LMAXGroup
David Mercer is the CEO of LMAX Group, a UK-headquartered global financial technology company with offices in nine countries, LMAX is an independent operator of institutional execution venues for foreign exchange and cryptocurrency trading. In 2021, LMAX Group sold a minority stake to JC Flowers & Co.
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