Central Europe Private Equity Confidence Survey
2 February 2023
3 February 2023
Cryptocurrencies and other crypto assets have enjoyed years of growth since the pandemic until last year, when their entire ecosystem took a sharp plunge. One of the main tenets of cryptocurrencies and blockchain is the idea of decentralization: no one entity is in charge and no one player can destabilize the others. The year 2022 has shown more than once that the digital asset ecosystem is much more interconnected and concentrated than even its biggest players may have realised.
The euphoria in the cryptocurrency market lasted from the second quarter of 2020 to the last months of 2021, and was created during the COVID-19 pandemic, when countries around the world provided financial support to mitigate the negative economic impact of the pandemic. This resulted in a significant influx of capital into global markets. This increased people's willingness to take risks and the flow of funds from institutional investors into the cryptocurrency markets increased significantly. At its peak, the Bitcoin price reached a record high of over USD 68 000 and the market capitalisation of the entire cryptocurrency market reached USD 3 trillion, roughly equivalent to the GDP of the United Kingdom.
This period also brought many large IPOs of cryptocurrency exchanges, such as Coinbase, BlockFI, Exodus and Kraken, in addition to various types of new cryptocurrencies and NFT tokens. Coinbase went public through a direct listing, in which no new shares are issued or sold, and had an opening price set at $250 per share. It ended the first day of trading at $328 with a market capitalization of $85.7 billion, which was roughly only $25 billion less than Goldman Sachs' market cap at the time.
At the beginning of last year, however, this positive trend and sentiment began to change. All triggered by the fall of the "stablecoin" TerraUSD, which was supposed to maintain a 1:1 exchange rate to the USD, but fell to 35 cents in May. This collapse caused a massive sell-off across the industry. For example, many users of the Celsius platform suddenly asked to withdraw their money from the network, which the company was unable to comply with. Celsius declared bankruptcy in July, and is currently trying to return the capital blocked in various loans to users. These events have created a "domino effect" for the following companies: Three Arrows Capital, Voyager Digital, Genesis Global Trading and FTX.
Crypto hedge fund Three Arrows Capital was another in a string of companies whose demise began with the fall of TerraUSD and its sister token Luna. Its fall also affected Voyager Digital, Blockchain.com and Genesis Global Trading. Voyager Digital was a publicly traded crypto exchange that once had a multi-billion dollar valuation. However, it declared bankruptcy in July 2022, announcing that it was owed more than $650 million by its fund Three Arrows Capital. Genesis Global Trading also lent $2.3 billion to Three Arrows, and also declared bankruptcy in January this year. Last but not least, the cryptocurrency exchange Blockchain.com had to lay off a quarter of its staff due to outstanding loans of USD 270 million made by Three Arrows Capital.
The last company to declare bankruptcy was FTX last November, which made money by charging transaction fees every time someone used it to buy and sell cryptocurrencies. The company's valuation plunged from $32 billion to bankruptcy levels in a matter of days. Its collapse rocked the volatile cryptocurrency market, which lost billions of dollars, and dropped below a total market value of $1 trillion. Currently, the cryptocurrency market is in a so-called "crypto winter", which has been likened to a bear market in the world of stocks.
Cryptocurrencies have been around for more than a decade, but only now have efforts to regulate them risen to the top of the political agenda. The spectacular rise and steep fall of crypto asset market capitalizations, and their penetration into the regulated financial system, have led to increased efforts to regulate them. The European Union has reached a preliminary agreement on a new regulation called Markets in Crypto Assets (MiCA), which is designed to increase investor and consumer safety in the cryptocurrency market, and is expected to come into force in 2024. It mainly covers anti-money laundering, consumer protection, liability of cryptocurrency companies and environmental impact. The European Union is a pioneer in digital regulation and the scope of MiCA means it will have a significant global impact.
Cryptocurrencies are also popular in the Czech Republic. For example, based on data from Bit.plus, the largest domestic trader, Czechs bought cryptocurrencies worth CZK 5 billion in 2021 and CZK 3.5 billion in 2022. Among the most interesting Czech companies in the field of blockchain and cryptocurrencies are SatoshiLabs, which is the creator of one of the most successful crypto wallets Trezor, and its subsidiary Tropic Square, which is working on its own security chip. The Swiss investment company Auzera has invested over 100 million crowns in the latter in 2021. Also worth mentioning is Braiins, a company that focuses on the Bitcoin mining process.
The popularity of cryptocurrencies is a testament to the desire of people to constantly seek assets with multiples of appreciation, but which are always associated with high, sometimes unreasonable, risk. And this always confirms the relevance and long-term existence of the traditional ones that can be relied upon. How the cryptocurrency market will evolve this year is rather crystal ball fortune telling, but what is clear is that the events of the past year described above are very likely to have a long-lasting negative effect, both on the world of cryptocurrencies and on the broader financial markets.