Crypto industry undercapitalised as startups lose confidence over volatile market

By Onome Amuge.

The crypto industry is slowly losing the momentum in capital deployment enjoyed in its heyday as increasing regulatory scrutiny and skeptical investors has seen the crypto market slump sharply from the highs of 2021, leaving many young startups struggling to raise funds.

Erik Svenson, co-founder and CFO of blockchain infrastructure firm, Blockstream,while confirming the grim scenario,noted that  the capital crunch is affecting the bitcoin ecosystem as well, with bitcoin-focused companies falling behind as “fewer cheques are being written”.

Svenson opined that investment into crypto kind of peaked early last year before slipping, adding that bitcoin itself has always been an area that has been undercapitalised.

Consequent reports have shown that the entire crypto market has been swinging from side to side, comfortable in smooth curves and in limited range. This is blamed on the nature of the cryptocurrency market which is highly volatile and changes unexpectedly.

Crypto experts believe that the current situation is difficult and  the road to recovery is very long as most of the currencies still lag very much behind their all-time highs. Bitcoin, for instance, is estimated to be more than 50 per cent below its all-time high level which touched in November 2021 at $69,000. Similarly Ethereum which is now trading at the levels of $1,800, touched the all-time high levels of $4,000, way back in 2021.

According to experts, the prime reason for the market downturn is the downfall of one of the largest global cryptocurrency exchanges, FTX. FTX’s bankruptcy, and its spat with Binance, they noted, not only triggered a huge sell-off in the market but has also reduced liquidity from the crypto market.

Binance, the world’s largest global cryptocurrency platform, was all set to buy rival FTX, but soon walked away from the buyout deal proposal, citing multiple issues with FTX’s finances and regulatory investigations. Binance’s decision stunned the crypto investors and left Bitcoin to tumble to the lowest level in two years, which touched $69,000 in November 2021.

These surprising turns of events, led to a turmoil like situation in the crypto industry , which resulted in high level of distrust and skepticism among the investors towards centralized crypto establishments and on the regulation front.

The FTX contagion effect is quite evident, several questions have now been pointed out on the survival of other trading and lending firms such as Gemini, Coinbase. Experts believe that their survival strictly depends upon their regulation, governance and management practices.

Apart from the FTX sudden fallout and its contagion effect, the rising interest rates and the recent hawkish tone of the U.S. Federal Reserve’s tighter monetary policy has also been attributed for the downturn in the crypto ecosystem.

Moreso, the after-effects of the Russia-Ukraine war, tightened tax regulations and the eventual FTX collapse, has seen the crypto market literally engulfed in the roughest storms during the past few years.

Data showed that the overall cryptocurrency market lost around $1.4 trillion in value in 2022 as various crypto firms filed for bankruptcy. Crypto investors also lost nearly $4 billion to hackers in 2022, according to Chainalysis, a blockchain analysis firm.

Though 2023 is perceived to have given the burnt crypto market a fresh start and showed positive signs and upside recovery, experts believe crypto prices are highly volatile and extremely speculative, and it is advisable to invest only a miniscule amount which one can afford to lose.

Seasoned investors are also advised to look up to invest in stable and firm digital coins such as Bitcoin or Ethereum in the systematic investment planning (SIP) format.