Will cryptocurrencies and digital assets recover soon?

We are in a crypto winter. Bitcoin lost about 58% of its value in the second quarter of 2022, and about $1.2 trillion has been wiped off the entire cryptocurrency market. With private and institutional investors experiencing significant losses, regulators are watching closely and crypto regulation has increased worldwide, especially in the United States. Despite falling valuations and exchange closures, crypto will survive the winter and regulation – far from stifling the innovation for which the sector has become known – should bring much-needed confidence to new incumbents and new entrants which can only be a good thing. And of course, when markets fall, they present buying opportunities for investors willing to play the long game, a strategy better suited to incumbents in traditional financial markets.

Regulation is coming

A common concern in the industry is that as regulators and additional technology become involved in the crypto ecosystem, innovation will slow down. Regulation is inevitable – the IMF has said that cryptoassets are no longer a niche and that regulators must catch up. The European Central Bank has called on eurozone countries to harmonize different rules around crypto regulation before EU-wide laws take effect and the end of 2023. The US is also pushing for more regulation, with the US Treasury Department calling for new laws to address gaps in crypto regulation. .

When you strip everything down to the bare essentials, the fundamentals behind trading crypto are similar to how traditional financial markets work. Introducing regulation will provide greater stability, security and efficiency which it can be argued will lead to more, not less, innovation, competition and choice. Better supervision and governance will also further strengthen its role as an additional form of currency, and quell the doubters who say it is like the Wild West. Ultimately, it is about giving choice and security to both existing players and new market players.

Better analytics: the catalyst for crypto longevity

Alongside the need for stronger regulation is the need for better analyses, and again technical experience and understanding gained in traditional financial markets can be used to great effect here as well. Surprisingly for a sector that has cultivated an image of being fast and furious, crypto trading is not as high speed as many would imagine. Scratch the surface of the slick front-office exchanges and underneath is a patchwork of blockchain technology, much of which is quite clumsy. The risk of fraud through market manipulation between pricing and settlement is high, and companies will need to adopt proven technologies and procedures to identify and stop such transactions.

There is an advantage here for firms entering crypto from traditional financial markets in that knowledge gained from deploying analytical technologies for market surveillance and fraud purposes will not only be directly applicable in the crypto space, they will also help firms gain a quick and deep understanding of how these decentralized markets work.

By design, these markets are far more distributed and changeable than other, more established markets. Although actual transactions may not be as fast as other asset classes, the pace and development of the sector is significant. R&D cycles and processing times for the development of new products must match the pace of the market, and for that companies need an analytics stack that can handle the enormous amounts of data being created. Monitoring platforms are built to do just that, capturing, processing and analyzing massive amounts of data in a variety of formats, created by a myriad of systems and market players. Applied to crypto, they can help firms better analyze the market, test and implement customized proprietary pricing, hedging and trading strategies while managing the associated risk in real time.

Prepares when the ice melts

There are signs that the crypto winter is coming to an end and with it an increasing level of maturity that will be welcomed by regulators and investors alike. A recent Bloomberg article reported high-profile resignations from crypto founders known for “bombastic” personalities and social media feuds with competitors and skeptics. In their place come more moderate, experienced managers from the traditional financial world.

We absolutely believe that the market will stabilise. While increased regulation will be essential, it should not be seen as the sole driver of stability. Adoption of proven technologies and processes that have enabled traditional financial markets to grow and innovate can and should prove transformative in crypto if businesses adopt them.

About the Author: James Corcoran is the Chief Growth Officer for KX. His background is in financial services with a track record of implementing high performance trading and analytics solutions for many of the world’s largest capital markets institutions.