After climbing to dizzy heights last year, markets are hemorrhaging value as prices plummet since the beginning of this year. Expensive assets that were worth millions of dollars as recently as last year have crashed from their earlier valuations. One of the world’s biggest financial instruments careened to a sudden and spectacular crash in less than a month, further deepening distrust of a financial system already in disrepute. And market bears are out in full force, predicting turbulent times and prolonged pain ahead.
You might be forgiven for thinking that these occurrences are the oft-repeated script of recessions in global financial markets. They actually describe the circumscribed world of cryptocurrencies for 2022.
For most of its short life, crypto has attempted to carve out a reputation separate from financial markets. But its evolution has been fairly similar to that of most traditional finance instruments – scams, frauds, and boom-and-bust price cycles. With the latest dip in prices, there is even talk of a recession in the crypto ecosystem. The recession, however, may turn out to be short-lived and supercharge the asset class for its next growth cycle.
A Crypto Recession
When calamity strikes the stock market, investors flee or pull back from risky assets. But cryptocurrencies are risky assets. The pandemic plenty of stimulus checks pushed investors to take more risks and skyrocketed prices for major tokens to record highs last year. That opportunistic money has left the crypto ecosystem, draining its market capitalization by almost $2 trillion since last November’s high.
Recessions are characterized by weak sales, spending cutbacks, and layoffs in entire sectors. Some of that is already happening as crypto companies downsize to fit declining demand for the asset class. Regulatory pincers are also tightening around cryptocurrencies as government agencies take a second look at the excesses of last year. Even as the prices of major cryptocurrencies are in doldrums, their use cases remain few. Crypto use cases and adoption for daily use remains abysmally low and the potential of using bitcoin as legal tender is still to be realized, El Salvador’s experiment notwithstanding.
A Recession Blessing
The overall prognosis for the global economy is dire. Russia’s invasion of Ukraine and record inflation rates have already thrown the world economy into a tailspin and experts are predicting a global recession.
Crypto’s limited sphere of influence might turn out to be a blessing because it will help the ecosystem remain insulated from broader economic forces. Prices and liquidity will remain low in the near term. But that shouldn’t be a problem for HODLers already hardened by crypto’s flighty price swings over the years. A high savings rate – amounting to 9% of GDP or roughly $2 trillion more as compared to before the pandemic – should also help them hang onto their investments.
Proof of their resilience lies in the Monthly Transacting Users (MTUs) figure for Coinbase, one of the biggest crypto exchanges by trading volume. The San Francisco-based company recorded 9.2 million MTUs during the first quarter of 2022, a drop of almost 20% from the previous quarter but still higher than the 7.4 million users who transacted on its platform in the third quarter of 2022.
More Money Is More Innovation
New money is also fast making its way into the ecosystem.
Large banks and financial institutions are increasing their exposure to cryptocurrencies and offering related services to their clients. The fight for a Bitcoin ETF, at least one based on futures, is over. [A spot Bitcoin ETF remains elusive]. The number of financial instruments available to investors to diversify their portfolio through crypto has also multiplied.
Andreessen Horowitz, one of the premiere venture capital firms in Silicon Valley, recently announced a $4.5 billion fund dedicated to cryptocurrency investment. That announcement headlines a slew of broadcasts from other VC firms, one of them started by a former exec from Andreessen Horowitz, about investments in cryptocurrencies.
A May report by research firm CB Insights revealed that blockchain and crypto startups raised $9.2 billion, besting the previous record of $400 million in 4Q 2021, in the first quarter of 2022. DeFi and NFT startups also set funding records, raising $2.1 billion and $2.4 billion respectively. Remember these records were set at a time when crypto prices, along with those of mainstream markets, were crashing.
Meanwhile, analysts are ignoring talk of a recession in crypto markets. According to a recent report from JP Morgan, the crypto ecosystem has received $25 billion in venture capital funding till date this year. Almost $4 billion of that figure came in after the implosion of Terra’s stablecoin UST. The new capital should come in handy to grow the crypto economy and generate new use cases for cryptocurrencies. It is tried and tested formula, one that has been used earlier. The caveat here is that the funding should continue to flow in the ecosystem.
The Silver Lining Of Regulation
Even the recent headline-generating crash of Terra’s stablecoin has worked in the crypto’s favor because it has increased calls for stablecoin regulation. Two Senators – one from Wyoming and another in New York – have introduced a bill to increase oversight of such coins.
For the dwindling tribe of crypto purists, regulation is hara-kiri in an asset class birthed in opposition to government control. For many institutional and retail investors, it is a welcome development. Bringing order and accountability to business operations in the Wild West of cryptocurrencies could spur more mainstream and institutional usage and investment in cryptocurrencies.
In the past, bursting of crypto price bubbles was the sign of an oncoming ‘crypto winter.’ The choice of words in that term was, perhaps, intentional because it meant a prolonged and dark period of depressing prices and news about its ecosystem. This time around, though, the dark clouds of recession in crypto might have many silver linings.