The Paper reporter Wang Huirong
In 2022, the encryption industry is facing a cold winter, and the total value of the cryptocurrency market has shrunk by more than 1.45 trillion US dollars. During this period, many encryption companies have collapsed one after another, triggering a chain effect in the market.
The total market value of cryptocurrencies fell by more than 1.45 trillion US dollars
According to CoinMarketCap data, the total cryptocurrency market cap (Total Cryptocurrency Market Cap) dropped from US$2,250.255 billion in the early morning of January 1, 2022 to US$798.688 billion in the same period of 2023, a decrease of US$1,451.567 billion, or 64.5%.
In addition, the price performance of Bitcoin (Bitcoin) and Ethereum (Ethereum) in 2022 is similar to the trend of the overall cryptocurrency market: the price of Bitcoin dropped from $46,311.74 at 8:00 am on January 1, 2022 to $16,547.91 in the same period in 2023. The price of Ethereum dropped from $3683.05 at 8:00 am on January 1, 2022 to $1196.71 in the same period in 2023, a drop of 67.5%.
"Bitcoin and other encrypted assets have been highly financialized, so there is a high probability that the price will not be able to escape the cyclical law." Yu Jianing, executive director of the Metaverse Industry Committee of the China Mobile Communications Federation, analyzed to The Paper (www.thepaper.cn). The bull-bear cycle of encrypted assets led by Bitcoin is roughly a 4-year cycle. It is currently in the middle of the halving cycle, and it is inevitable to enter the callback cycle.
Yu Jianing believes that this round of deep adjustments in the encryption market is mainly closely related to the global financial market.
The current market is still at the bottom of the Fed’s interest rate hike stage. Since the beginning of this year, the Fed has always been hawkish in monetary policy management, and is determined to return inflation to the 2% target.
The global financial market is facing severe challenges. The Nasdaq index once hit a new closing low since July 2020, and the S&P 500 index also fell by more than 27.5% from its January high. The encryption market cannot escape the tension in capital.
An observer of cryptocurrency also told The Paper (www.thepaper.cn), "The encryption market will experience a large bull market in 2021, and the valuation of encrypted assets will be relatively high. Secondly, the US dollar will raise interest rates sharply in 2022. Risky assets have experienced a large decline. As an emerging market, the encryption market is still in the period of infrastructure construction and exploration, and there is no clear valuation method, so it is more affected by market sentiment and has greater volatility.”
In terms of the market, Yu Jianing pointed out that with the gradual reduction of prices, some institutional users have entered the stage of stop loss.
For some institutions, once their investment target reaches the stop loss line, they must liquidate and exit the market. Therefore, these funds that boost the price of Bitcoin in the bull market are also factors that accelerate the decline in the bear market.
Yu Jianing also mentioned that the serial thunderstorms of encryption companies and DeFi (decentralized finance) projects, as well as the large-scale serial liquidation of the institutions involved in them, led to stampede selling.
A number of encryption institutions have been hit by thunderstorms one after another
Last year, the turmoil in the cryptocurrency market was accompanied by a series of bankruptcy of many encryption companies.
In May 2022, the LUNA coin project, known as "Moutai in the currency circle", collapsed.
In July of the same year, three arrows capital (Three Arrows Capital), a hedge fund in the currency circle, Celsius Network and Voyager Digital, an encrypted lending platform, filed for bankruptcy one after another; the AEX (Anyin) exchange, a currency trading platform, suspended platform-related services and cooperated with the police investigation .
Near the end of 2022, the bankruptcy of the leading cryptocurrency exchange FTX, the encryption hedge fund Alameda Research, etc., and FTX founder Sam Bankman-Fried (Sam Bankman-Fried) were accused by the United States of eight counts of fraud and money laundering Criminal charges made the cold winter of the cryptocurrency market even worse, triggering an earthquake in the currency circle.
The cryptocurrency lending platform BlockFi subsequently filed for bankruptcy. Mark Renzi, its financial advisor for bankruptcy proceedings, said that two consecutive hedge fund failures, FTX's rescue of it, and broader market uncertainty have jointly forced BlockFi to go bankrupt.
He pointed out that, similar to the bankruptcy filings of Voyager Digital and Celsius Network, the collapse of encrypted hedge fund Three Arrows Capital has accelerated the turmoil in the cryptocurrency market, making BlockFi face a liquidity crisis.
Yu Jianing believes that the crisis of these institutions in this market is essentially due to their insufficient understanding of encrypted assets and insufficient control of system risks, and even the platform embezzled users' funds and eventually became an irreparable situation.
"After experiencing the previous bull market, many institutions are too optimistic about the overall financial market and the encryption market. The rapidly falling market, as well as the excessive collateralization and revolving lending of DeFi have made these institutions deeply locked up, and even a mortgage asset liquidation crisis. For the industry , It is undoubtedly the most profound warning. Eliminating such institutions in a crisis may also be a cleansing of the chaos in the industry."
Yu Jianing pointed out that judging from the thunderstorm cases of several major institutions in 2022, there are still many problems in this market.
For example, the financial reporting and disclosure of the centralized platform, the transparency of customer asset management, and compliance management still need to be improved and compliance management. There are too many high-leverage operations by venture capital institutions, and the operation mechanism of DeFi projects still needs more in-depth research and exploration by the industry, etc. , although these are all factors that affect the internal cycle of the encryption industry, they still bring many restrictions to the responsible innovation and sustainable development of the encryption industry.
The above-mentioned cryptocurrency observers classified the thunderstorm incidents of crypto institutions in 2022 into two categories: one is algorithmic risks on decentralized chains, such as LUNA; FTX.
"The risk of the former is that there are obvious weaknesses in the algorithm design, and it is easy to be attacked; the risk of the latter is that the model of traditional financial institutions is moved to the decentralized market, and there is no supervision of the traditional financial market, which magnifies the centralized Risk. The commonality between the two is the greed of human nature. In a field that lacks supervision like the encrypted market, whether it is algorithm loopholes or the greed of asset managers to misappropriate user assets will be infinitely magnified. This will inevitably make encrypted market participants hope that supervision will intervene Or achieve a more transparent and fair market in other ways.”
In addition to the aforementioned negative thunderstorms, it is also worth mentioning that Ethereum will be officially merged in September 2022, and the Ethereum mainnet will transition from Proof of Work (PoW) to Proof of Stake (PoS), marking the beginning of the era of large-scale graphics card mining. End.
The encryption industry may face stricter regulation in 2023
The violent turmoil in the encryption market and the successive collapses of many institutions have attracted the attention of regulatory agencies around the world.
In November, Chen Maobo, the Financial Secretary of the Hong Kong Special Administrative Region of China, stated that it is necessary to steadily promote the development of the virtual asset industry in Hong Kong.
"We must not only make full use of the potential brought by innovative technologies, but also carefully guard against possible fluctuations and potential risks, and we must prevent these risks and impacts from being transmitted to the real economy."
In the same month, the Monetary Authority of Singapore (MAS) issued a statement on issues related to the collapse of the cryptocurrency exchange FTX, emphasizing that "even if a cryptocurrency exchange has obtained a license in Singapore, its current regulation is only to address money laundering risks. not to protect investors. This is similar to the approach currently taken in most jurisdictions."
In December, the Division of Corporate Finance, a division of the U.S. Securities and Exchange Commission (SEC), said U.S. companies should disclose to investors their exposure to the crypto asset market and how recent crypto market turmoil has affected their businesses.
The above-mentioned cryptocurrency observers said that in the past year, the regulation of the encryption industry is still in the exploratory period.
"The key is that the regulatory authorities have not yet qualified the encrypted assets. Before the encrypted assets are qualified, it is difficult for countries to come up with a systematic and comprehensive regulatory plan. After the qualitative, the corresponding market supervision methods will be fully applied. In the future With the increasing influence of the encryption market, the trend is bound to increase regulation.”
Yu Jianing pointed out that the application requirements for licenses in different countries are inconsistent. Some countries and regions have qualified requirements and have detailed requirements for all links in the platform operation, while some regions are relatively loose.
Therefore, once there is a problem with the encryption institution, investors will suffer losses. Due to the difficulty of determining the operating entity of the overseas trading platform and the difficulties involved in jurisdictional obstacles, it is relatively difficult to deal with the trading platform, and investor protection cannot be truly implemented.
Yu Jianing believes that it is extremely necessary to tighten the supervision of encrypted assets in various countries to protect the asset safety of domestic investors and prevent financial risks.
The regulatory authorities of various countries may focus on the following aspects: 1. Clarify the legal status of encrypted assets, the regulatory standards and regulatory responsibilities of financial regulatory authorities and the government; Laws and regulations; 3. Formulate encrypted asset industry standards, improve the access and exit mechanisms of related companies such as encrypted asset trading platforms, encrypted asset funds, etc.; prevent illegal and criminal acts such as money laundering, terrorist financing, and tax evasion, and maintain financial stability.
How to prevent risk overflow in the encryption industry?
In 2022, many traditional financial institutions are exploring the layout of the encryption industry: In April 2022, the German banking giant Commerzbank applied for an encryption asset license, becoming the first large German bank to apply for an encryption asset license; in October 2022, Singapore Star Development Bank (DBS) announced the launch of its own encrypted asset trading function.
At the same time, there are concerns about the potential spillover risk of the encryption industry to the traditional financial industry.
On November 22, the official website of the Hong Kong Monetary Authority released the research report "Assessing the Spillover of Cryptocurrency Volatility to Traditional Financial Assets: The Role of Asset-backed Stablecoins" (hereinafter referred to as the "Report").
The "Report" focuses on Tether, the world's largest asset-backed stablecoin, and reveals that the risks borne by encrypted assets may spill over to the traditional financial system and pose a potential threat to financial stability.
On January 3 local time, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a joint statement on the official website of the Federal Reserve that encrypted assets pose risks to banks, and emphasized that risks related to encrypted assets cannot be transferred to the banking system. .
Yu Jianing said that with the entry of institutional players represented by Wall Street funds into the encryption industry, the connection between the encryption industry and the traditional financial industry has become closer.
The above-mentioned cryptocurrency observers believe that the encryption industry has unique advantages in settlement confirmation and transparency, and this advantage is especially suitable for the financial industry, so the encryption industry and the traditional financial industry will become more and more closely related to the general trend.
But the road in the middle is tortuous, and there will be many emergencies, such as the FTX thunderstorm, which caused heavy losses to many traditional financial institutions that invested in the company and affected the confidence of traditional finance.
Yu Jianing believes that the encryption risks faced by the banking industry come more from money laundering and fraud crimes.
Compared with traditional money laundering crimes, money laundering crimes using encrypted assets are less likely to be discovered and tracked.
For law enforcement agencies and banks, monitoring and tracking the flow and whereabouts of criminal funds is more difficult than traditional money laundering crimes. The difficulty lies in the characteristics of anonymity, decentralization, and global circulation in encrypted asset money laundering crimes.