Cryptocurrency: Cryptocurrencies rocked by tightening global liquidity

GLOBAL monetary tightening, which started early this year, has been a bane for riskier assets, including cryptocurrency. A multibillion-dollar cryptocurrency rout was ignited by aggressive interest rate hikes that resulted in easing liquidity in the financial markets.

Compared to its peak of nearly US$68,000 (RM301,870) in November 2021, bitcoin had plunged 75% to US$17,018 on Dec 16. On Nov 22, it tumbled to a low of US$15,632 — the lowest since November 2020.

Similarly, ethereum — the world’s second-largest cryptocurrency — also saw its price skid 75% to US$1,212 on Dec 16 from US$4,815 in November 2021.

According to cryptocurrency price and data aggregator CoinGecko, the total market capitalisation of cryptocurrency had shrunk by 72% to US$844 billion on Dec 20 against the peak of US$3 trillion in November 2021.

During the year, institutional investors continued to offload their position in the cryptocurrency market. Tesla, for one, sold a significant chunk of its stake in bitcoin, converting about 75% of purchases into fiat currency by end-June. This came a year after Tesla CEO Elon Musk championed cryptocurrency by buying into US$1.5 billion worth of bitcoin, and signalled that he would begin accepting cryptocurrencies as a form of payment.

String of collapses shakes investor confidence

This year alone, the cryptocurrency market has seen a string of casualties, further clouding the market outlook. One of them was the collapse of stablecoin project Terra in May. Its South Korean founder Do Kwon, 31, is currently facing various charges of violating capital market rules after US$60 billion worth of cryptocurrencies he created were wiped out. The South Korean government has sought help from Interpol to find Kwon, who said the charges against him had become “highly politicised”.

And the catastrophic bankruptcy of — at one time the world’s second-largest cryptocurrency exchange with a market value of US$32 billion early this year — caught investors by surprise. Its co-founder Sam Bankman-Fried was arrested in the Bahamas this month after US prosecutors filed criminal charges against him.

Having raised more than US$1.8 billion from investors, he was accused by US regulators of carrying out a multi-year scheme to defraud investors. The Securities and Exchange Commission (SEC) said Bankman-Fried concealed risks and FTX’s relationship with his trading firm Alameda Research. FTX filed for bankruptcy after it was revealed that Alameda had secretly borrowed and traded billions of dollars from FTX customers.

Faced with a liquidity crunch, FTX looked to rival Binance Holdings Ltd for a lifeline. However, the deal to take over the former was scrapped just a day after it was announced to the world. Founded by Zhao Changpeng in 2017, Binance is the world’s largest cryptocurrency exchange.

The ripple effect from FTX’s collapse has spread fast, with cryptocurrency lender BlockFi also filing for bankruptcy because of its exposure to FTX. Even Singapore’s state-owned investor Temasek Holdings has become the single-largest victim in the collapsed FTX, saying that it would write down the value of its entire investment of US$275 million in FTX.

BlockFi’s biggest competitors, namely Celsius Network and Voyager Digital, had earlier filed for bankruptcy, owing to extreme market conditions.

Commenting on the FTX debacle, Singapore-based Coinhako co-founder and CEO Yusho Liu tells The Edge, “To single out a contributory factor will be incongruous with the gravity and scale of the situation. Stricter due diligence from stakeholders across the board can help ensure stronger governance and accountability within an organisation.”

“As the crypto space is still relatively nascent, regulators and key players should work together to find a balance of competing interests between regulatory and user concerns, industry innovation and market needs. Through close cooperation, all relevant stakeholders can work together to create a responsible and innovation-driven environment.”

Liu notes that the cautionary stance taken by investors is a strong indicator of the bearish sentiment in the cryptocurrency space and broader markets.

“Though this period is tough for both key players and investors, especially so in the cryptocurrency space, we believe that projects and companies with strong use cases will be able to persevere and tide them through,” he says.

Taking a long-term perspective, Liu maintains that there will be enduring structural demand for cryptocurrency and the underlying blockchain technology.

As the cryptocurrency industry is still at a nascent development stage, Luno Malaysia Sdn Bhd country manager Aaron Tang tells The Edge that it is important that the regulatory framework does not stifle innovation within the industry while delivering effective customer protection.

To provide its investors with trust and confidence, he notes that Luno releases a proof-of-reserves report every quarter.

“Customers can be sure that Luno holds their cryptocurrency on a 1:1 basis and that it is available to them as and when they choose,” says Luno, adding that all its ringgit assets are administered by an independent registered trustee and stored safely in Malaysian bank accounts.

Despite the unfortunate events in the crypto industry, he believes in the future potential of cryptocurrency, but remains clear-sighted and sensible about the investment risks.

“Therefore, it is important for investors to stay updated with key happenings within the cryptocurrency landscape … We don’t support hype, nor do we let price swings distract us from cryptocurrency’s long-term potential.”

“Overall, general market conditions have been under pressure, given the global macro environment, as well as specific events within the crypto industry. Our emphasis now is to stay firm on our education-first approach and focus on equipping investors with proper knowledge and information. We believe that 2023 will see the cryptocurrency landscape continuing to mature and expand in terms of scale, utility and acceptance.”

Tokenize Technology (M) Sdn Bhd founder and CEO Hong Qi Yu says while the FTX fallout will dampen investor confidence, he sees ignited crypto flows to regulated platforms, including Tokenize.

“We see an increase in public awareness of the importance of a regulated exchange. Users now value security and trust more than the price or products that a platform can offer.”

Nonetheless, he stresses that the collapse of FTX does not mean regulation has failed; instead, it will help increase the need for regulated platforms globally.

“Despite the latest FTX incident, my projection on cryptocurrency in 2023 remains bullish and neutral,” says Hong.

The collapse of FTX could spur regulators into action, given that the crypto industry is still largely unregulated.

At a recent media briefing following the FTX fallout, the Securities Commission Malaysia (SC) highlighted that investors must go to regulated platforms when trading in cryptocurrencies. Furthermore, it assured the public that there has been an increase in the oversight of local DAXs to better protect investor interest.

SC: No slowdown in trading on regulated platforms

So far, the regulator has not seen any slowdown in crypto trading on Malaysia’s regulated digital asset exchanges (DAXs). Instead, it believes that the FTX saga will prompt more cryptocurrency investors to trade on regulated DAXs.

Malaysia’s average daily trading value in crypto on the regulated platforms amounts to RM16 million, which is still relatively small, according to SC data.

As part of the initiatives to further liberalise the capital market, the SC is opening up registration for new DAXs, in contrast to the regional markets’ move that turned less friendly towards crypto trading. The existing four registered DAXs with the SC are Luno, Tokenize, MX Global Sdn Bhd and SINEGY DAX Sdn Bhd.

Across the Causeway, Singapore’s central bank has put forward proposals for new regulatory measures on cryptocurrency trading and stablecoins. Among the measures published in two consultation papers are the prohibition on businesses from lending out cryptocurrencies owned by retail customers and ensuring that customer assets are segregated from their own assets.