* Written by Christopher Robbins
The year 2023 has started very well for the cryptocurrency market. The instability of many projects in the sector seems to have been resolved, at least temporarily, and it’s been a few weeks since the last cataclysmic headlines.
To make it happen, digital asset prices are on the rise, miners are said to be ready to restart their rigs, and retail speculators are once again eyeing the markets.
Despite the boom and enthusiasm in the cryptocurrency market recently, we must not quickly forget about the challenges of 2022.
Many structural difficulties for the industry remain, according to ZK Zheng, CEO of ZX Squared, a cryptocurrency hedge fund.
“2023 continues to be challenging for investors, especially during the first half of the year when they (the Federal Reserve, Federal Reserve, US central bank) are still hawkish (concerned about inflation), raising interest rates to control inflation,” he said.
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“The current cryptocurrency market cycle could end when the Fed stops raising interest rates (hopefully in the second half of the year) and any remaining leverage in the cryptocurrency market is eliminated. This includes debt lending related to some of the major players in the cryptocurrency market. Industry (investment firms, distressed assets, mining companies, etc.).”
Several notable developments of the past year will help set the course for this year – not only the failures of FTX exchange and crypto hedge fund Three Arrows Capital (3AC), but also the ongoing work to create a regulatory framework for digital assets and services in the financial sector by government agencies.
With some of the most dramatic declines in the digital asset space in 2022, along with the growing links between cryptocurrencies and the traditional financial system, 2023 is the year when regulators will need to play a more central role, according to Zheng.
“A cryptocurrency regulatory framework must be created and articulated for a new upcoming crypto bull market,” he said. “It is absolutely necessary to conduct regulatory and transparent audits to ensure that stablecoins are fully secured and centralized exchanges are well capitalized to prevent a repeat of failures such as those that occur in Terra (ecosystem) and FTX. This may also include action on how to handle party credit risk contrasts that were at the core of domino effects during the crypto winter”.
Nigel Green, CEO of one of the world’s largest wealth management firms, the DeVere Group, had a similar tone.
This week at the World Economic Forum (WEF) in Davos, Switzerland, he urged world leaders and influencers to address the issue of crypto industry regulations.
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The time for endless platitudes about increasing regulatory scrutiny is over. “Action is required,” he said in a statement. “If the participants of the World Economic Forum do not present the cryptocurrency regulatory agenda as a result of the 2023 summit, they will have failed spectacularly.”
Green gave three reasons why world leaders need to get serious about regulating cryptocurrencies:
- The growing role of crypto assets in the financial system
- The need for more scrutiny to protect investors after crashes like Three Arrows Capital and FTX
- The importance of strengthening the economies of emerging countries
Any regulatory framework must balance protecting investors and the financial system against the decentralized nature of digital assets with the need for freedom to innovate, according to Green.
Reins also commented on the recovery in digital asset prices, noting that the recent crypto winter seems to be melting.
“Of course, the cryptocurrency market is not going to go straight — there is no market — but we expect the bears to hibernate and the bulls to be ready to run,” he said in comments made over the weekend.
Cheng said regulatory clarity is essential for long-term investor optimism to return.
“Cryptocurrency market cycles come and go. This time is no different from the previous three bear market cycles during the short 14-year history of Bitcoin (BTC). The cryptocurrency market is driven by fear and greed, just like any other financial market.
“Bitcoin’s long-term thesis remains intact. Investor confidence in cryptocurrencies will return especially as the market becomes structured more favorably for institutional investors.”
* Christopher Robbins is a journalist.