When Bitcoin fell from about $30,000 to under $20,000 in less than a week last year, Three Arrows Capital co-founder Su Zhu called it the "nail in the coffin" for his hedge fund.
Flash forward to now, and the largest cryptocurrency has recently retraced that route from $20,000 to $30,000 — but the sector is a ghost of what it was the last time the coin reached that threshold. This is due to the domino-like series of bankruptcies that followed Three Arrows' demise: Voyager Digital, Celsius, FTX, Blockfi, Genesis Global, and other erstwhile high-flying firms.
While the mood has improved since last year's apocalyptic mood, the hopeful Bitcoin resurgence will not be enough to repair all of the harm done by last year's scandal-filled fall.
"The feeling here doesn't appear to be that the last few weeks imply that we can pretend that the last 10 months never occurred," said Oliver Linch, CEO of the trading platform Bittrex Global, on the sidelines of a crypto conference in Paris. "But there is undoubtedly a sense that this marks the end of those scandals and that we can return to judging - and valuing - crypto without all the noise from rumors and misbehavior."
In the United States, the alleged misbehavior has sparked a flood of regulatory inquiries and high-profile indictments.
Among the most notable are: FTX's Sam Bankman-Fried, who is facing fraud charges; Do Kwon, co-founder of the Terra blockchain, who is facing prosecution for his role in the project's demise; Binance and its CEO Changpeng "CZ Zhao, who has been sued by the Commodity Futures Trading Commission for a variety of alleged violations; and Coinbase Global Inc., which has received notice that the Securities and Exchange Commission intends to sue it.
Binance and Coinbase have both denied any wrongdoing, while Bankman-Fried has entered a not-guilty plea.
Then there's Silvergate Capital Corp., Signature Bank, and Silicon Valley Bank, which all failed recently. While often cited as a bullish catalyst for Bitcoin, because it resurrected its origin story as an alternative to untrustworthy banks, the failure of those lenders also severed key links to the US financial system, contributing to the crypto industry's once-promising future being as uncertain as ever.
Many retail investors who were damaged by last year's price drop appear to be nursing their wounds rather than taking on fresh risk since the quantity of money invested in decentralized finance initiatives remains low. While the overall value of coins locked into DeFi projects has increased by more than 25% since the beginning of January, it is still a fraction of the $180 billion peak achieved in December 2021, according to the DeFiLlama website.
At the same time, the industry has lost thousands of jobs, and hiring has not recovered. Concordium, a blockchain startup, got more than 350 applications for two recent job positions, according to its co-founder and chairman Lars Seier Christensen, indicating that supply continues to outnumber need. "The area is maturing a little bit, understanding that the money tree that was there a few years ago has faded a little bit," he added.
Venture capital investments have slowed substantially. According to PitchBook, global private fundraising for crypto businesses decreased to $2.4 billion in the first quarter, an 80% drop from the all-time high of $12.3 billion in the same period last year.
"A lot of the business is still waiting to see what happens," said Matteo Dante Perruccio, international president of crypto wealth management Wave Digital Assets. "There has been a flight to quality, and the winners are the firms that have not been affected by the crypto winter."
Another difference is that the 83% increase in Bitcoin this year has not been matched by newer currencies. Ether is up 71% this year after outperforming Bitcoin in 2020 and 2021. Just roughly one-tenth of last year's 2,000-point dip has been recoupled by the Bloomberg Galaxy DeFi Index, which measures the major decentralized-finance systems.
"We may be witnessing a case of selling tiredness paired with a revived optimistic narrative following the financial crisis, all mixed with usually low liquidity that has aided BTC's price toward the upward," said Clara Medalie, director of research at market-data supplier Kaiko.
Despite all of the doom and gloom, the evolution of the sector has proceeded.
This week, Ethereum performed what looks to be a successful network update. The so-called Shanghai update, which allows investors to withdraw Ether coins that they had locked up in exchange for rewards as part of a "proof-of-stake" system to protect the network, has the potential to attract billions of dollars into Ether even though SEC Chair Gary Gensler has stated that the token should be regulated as a security. For the first time in six months, the price of Ether surpassed $2,000 this week. "I don't think there's the enthusiasm or passion we had at $30k or $40k," said Simon Taylor, head of the strategy at Sardine, a fraud prevention firm whose clients include fintech and crypto companies.
The big picture has also shifted, maybe for the better. A year ago, the Federal Reserve and other central banks were just getting started on what would become a series of interest-rate increases that would reverse a years-long policy of loose money. With the conclusion of the tightening cycle approaching, the conditions may be ideal for another crypto rise.
One major unknown is how eager established financial institutions will be in the future, and if they will be willing to assume the responsibilities formerly filled by failing crypto firms like FTX. There are some signs that this may be the case. Nasdaq Inc., for example, anticipates launching custody services for digital assets by the end of the second quarter.
According to a Citigroup research report, as much as $5 trillion may migrate into new forms of money, such as central bank digital currencies and stablecoins, by 2030. According to the paper, another $5 trillion in traditional financial assets might be tokenized, assisting in the widespread use of blockchain technology.
Even said, according to Michael Purves, CEO of Tallbacken Capital Advisers, the "show me" bar for institutional investors will be greater this time around, because the function crypto is designed to perform in a portfolio is a shifting goal. Originally hailed as an inflation hedge akin to Internet gold, it plummeted during the worst consumer-price increase since the 1980s.
"Institutions began to take Bitcoin seriously once it surpassed $20,000 in 2020, and they played a crucial part in the ensuing rise to $69,000," he said in a recent client letter. "But, its longer-term history of failing to provide portfolio diversity will weigh hard on institutions, which likely have more difficulties to deal with this time."
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