By Frances Yue
After what industry participants call a large and messy โcleanupโ of the digital asset industry, cryptocurrency bulls are hopeful that the nascent space will be anchored by more established and regulated players in 2024.
Cryptocurrency investors may end up remembering 2023 as the year of the conviction of Sam Bankman-Fried, co-founder of bankrupt crypto exchange FTX, and his multimillion-dollar fraud. Or for the $4.3 billion fine and plea deal involving Changpeng Zhao, "CZ," co-founder of the world's largest cryptocurrency exchange, Binance.
It was also the year that several of the world's largest asset managers, including BlackRock, (BLK) Fidelity, and Invesco (IVZ), filed applications for exchange-traded funds that invest directly in bitcoin.
The ups and downs of a tumultuous year could prove pivotal for the cryptocurrency industry, especially as participants expect regulators to soon approve the new suite of ETF products, which could lead to large institutional inflows. It could also signal a changing of the guard.
Fueled by such enthusiasm, bitcoin (BTCUSD) has recovered dramatically in 2023, with a gain of more than 150% so far this year, according to data from CoinDesk. The cryptocurrency was trading above $42,000 on Friday, although still more than 35% below its all-time high in 2021.
In another green shoot, some in the industry believe the year's rally was primarily driven by financial institutions, with individual investors further sidelined by the collapse of several large cryptocurrency exchanges and lenders in 2022 and 2023.
Diogo Mรณnica, co-founder and president of cryptocurrency custodian Anchorage Digital, characterized this year as the first institution-driven bull market in the history of cryptocurrencies, as evidenced by transactions on its platform.
Still, others see a slightly different story developing, with the recent rally in meme coins potentially pointing to optimism among people still hoping to strike it rich with less established digital assets. Dogecoin (DOGEUSD) is up nearly 30% over the past 30 days, while Shiba Inu (SHIBUSD) is up more than 10% over the same period, according to data from CoinDesk. The Bonk meme coin jumped 100% in the last seven days and more than 700% in the last 30 days, according to data from CoinGecko.
"Who is buying these coins? It could show that retail interest is coming back," said Abraham Chaibi, co-founder of digital asset trading firm Dexterity Capital.
Whats Next?
Last year, the U.S. Securities and Exchange Commission shut down cryptocurrency exchange Kraken's staking services in the U.S. and charged Coinbase (COIN) with operating an unregistered national stock exchange, an agency of brokerage and clearing, while the cryptocurrency platform denied such claims.
In November, Bankman-Fried was found guilty of all seven counts of fraud. That same month, Zhao pleaded guilty to a criminal charge of violating the US bank secrecy law and agreed to resign as a director of Binance, as part of a broad settlement with US authorities. The plea deal was accompanied by a $4.3 billion fine to Binance.
โIt reminds me a little bit of previous cleanups,โ said Matt Hougan, chief investment officer at Bitwise Asset Management. In 2014, Mt. Gox, arguably the largest crypto exchange at the time, collapsed after being hacked. "But from its ashes rose custodians like Fidelity Digital Assets, BitGo and Coinbase Institutional," Hougan said in a call.
Hougan said he is hopeful that more regulated players will rise to prominence after the recent โclean-upโ in the industry.
After Zhao's plea deal, Binance will likely remain a major player, but not as significant as it used to be, Hougan said. "I think they are unlikely to play in this next cycle the role they played in the previous two. The role of the leading cryptocurrency exchange will likely be played by Coinbase and potentially another player globally," Hougan said.
Hougan expects the cryptocurrency market to experience a bifurcation in the future, with trading activity in large-cap cryptocurrencies such as bitcoin and ether primarily dominated by large regulated companies, and that of smaller tokens occurring primarily on decentralized platforms. .
Wall Street firms could play a special role in the digital asset industry as they have a customer base that may want exposure to cryptocurrencies but don't want to jump through regulatory hoops, said Peter Eberle, president and chief investment officer at Castle Funds. .
Still, as the crypto industry expands, โthe pie gets bigger,โ Eberle said. "It's not a zero-sum game where if they do well, the crypto companies don't do well," Eberle said.
The possible approval of bitcoin ETFs could also push the cryptocurrency industry in the right direction, according to Samir Kerbage, chief investment officer at cryptocurrency asset manager Hashdex.
"Because a lot of the service providers would have to comply with the way those ETFs operate, and that will be a big deal. That will guide the ecosystem in the right way as far as market structure is concerned," Kerbage said.
Up next in the coming year: Investors said goodbye to the era of cheap money. Now what?
-French Yue
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12-30-23 1305ET
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