Following last year’s industry setbacks, the cryptocurrency sector witnessed another year of ongoing prosecutions, bankruptcies, and security breaches. Despite negative headlines dominating the news this year, the crypto industry appears to have regained momentum fueled by positive developments. The potential introduction of Bitcoin spot exchange-traded funds (ETFs) also provides investors with optimism, signalling a move toward greater mainstream acceptance of digital assets.
Coming from a year of underperformance, Bitcoin started this year at a mere US$16,605 ($22,263) apiece, over 64% lower than the price it fetched at the beginning of 2022. As a small return of confidence occurred when the traditional financial systems were reeling from a series of shocks in the middle of the year, Bitcoin saw its price break above the US$30,000 level on July 14 before plateauing at around US$26,000 until October.
Bitcoin prices started to rise gradually in October before breaking above the US$40,000 level in late November — the first time since April 2022. Although this is due to many factors, one main reason cited by many is the possible US listing of a Bitcoin spot ETF, which could be approved as early as January.
“The long-awaited approval of a spot Bitcoin ETF is expected early next year,” says Independent Reserve Singapore CEO Lasanka Perera. “Given the continued interest in crypto as an asset class, this will provide an alternative way for investors to gain exposure to Bitcoin without having to hold Bitcoin, potentially leading to increased adoption and driving the price upward,” he adds.
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Independent Reserve Singapore CEO Lasanka Perera. Photo: Independent Reserve
Similar to gold spot ETFs, the Bitcoin spot ETF seeks to provide investors with direct exposure to the current market price of the digital asset. This may provide greater access to investors wanting to add exposure to digital currencies to complement their portfolios. As of Dec 8, 13 firms, including Blackrock, Fidelity and Grayscale Investments, have pending applications with the US Securities and Exchange Commission (SEC) for Bitcoin spot ETFs.
In February 2021, Canadian asset manager Purpose Investments made history by launching the world’s first Bitcoin ETF — Purpose Bitcoin ETF — backed by physically-settled Bitcoin. The ETF provides investors with a more direct way to invest in Bitcoin other than close-ended funds like the Grayscale Bitcoin Trust launched in 2013. Grayscale is currently seeking full approval from the SEC to convert the fund into an ETF.
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Rally sustainability
While the recent rally has instilled some investor confidence, there is a possibility that it may be short-lived. At press time, the digital asset is currently down over 7% from the month’s peak on Dec 6, attributed to a broad sell-off as speculators take profits. Amid this, the question arises: Can the rally be sustained? Perera is optimistic, particularly with the halving approaching in 2Q2024.
Halving is a quadrennial phenomenon where the block reward — or the number of Bitcoin miners get by successfully mining a block of the cryptocurrency — falls to half its value. In 2024, the Bitcoin block reward will drop from 6.25 BTC per block to 3.125 BTC per block.
“As an asset that has already been 93% mined and with only 1.5 million remaining Bitcoin available for mining, Bitcoin sees high upside potential. Bitcoin halvings historically coincide with the start of bull markets. Reducing the supply of newly minted Bitcoin by half creates a scarcity effect, potentially pushing the price higher due to increased demand,” says Perera.
Cynthia Wu, founding partner and chief operating officer at crypto services platform Matrixport, echoes Perera, adding that Bitcoin has historically exhibited pronounced bullish tendencies following mining reward halvings. This established pattern suggests an additional vector that could potentially contribute to a bull run for Bitcoin in 2024.
Matrixport founding partner and chief operating officer Cynthia Wu. Photo: Matrixport
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Over the last three halvings in 2012, 2016, and 2020, Bitcoin saw short price corrections followed by a prolonged bull run between six and 12 months. After the last halving in 2020, the value of Bitcoin rose by 366% and 559% over the next six and 12 months, respectively.
Perera also cites institutional interest as one of the drivers moving forward. He says there has been a marked increase in market interest stemming from developments such as the Bitcoin spot ETF as well as SEC’s recent approval for US asset managers such as VanEck, Bitwise and ProShares to provide a future-based Ethereum ETF. Notwithstanding potential volatility if delays or complications arise in the approval process, these will bode well for the industry, Perera highlights.
“We have also seen growing institutional adoption, with major players like BlackRock, Fidelity, and Goldman Sachs offering crypto-related services. This signals a broader acceptance of digital assets within mainstream financial institutions,” he adds.
As US inflation data softens, the resurgence of interest in risk-on assets, including cryptocurrencies, has also contributed to a positive shift in market sentiment recently. Institutional investors are increasingly allocating a portion of their portfolios to Bitcoin, indicating growing confidence in the long-term potential of the asset which could provide significant support for the price.
Additionally, Bitcoin’s inflation rate is much lower than current global markets, due to fall further from 1.74% to around 0.86% in April 2024 when the halving event occurs, Perera notes.
The year also saw defining developments in the field of tokenised real world assets (RWAs), Wu points out. Since the middle of the year, industry players have brought the best of mainstream finance and blockchain together and began offering tokenised US treasuries on-chain — growing by 600% in 2023 alone, according to data by RWA monitoring platform RWA.xyz.
“With promises of stability and transparency, this potential has also been widely recognised by government bodies in leading financial hubs, as seen in the recent MAS [Monetary Authority of Singapore] partnerships [such as Project Guardian] that aim to explore the full potential of this on-chain innovation.
“Moving forward, we expect further convergence of blockchain technology and the financial ecosystem, ushering in a new era of finance. With the much-anticipated launch of Bitcoin ETFs on the horizon, the coming year will effectively validate crypto as a legitimate asset class that coexists and even thrives within the mainstream financial system,” says Wu.
Quoting managing director of the MAS Ravi Menon at this year’s Singapore Fintech Festival who said that “crypto native assets have failed as a medium of exchange or store of value”, Coinbase Singapore’s country director Hassan Ahmed points out that this does not negate that inherent value that crypto assets have.
Instead, Ahmed believes this points to other digital assets, such as stablecoins, doing a “better job” than Bitcoin or Ethereum, because the unit of account of goods and services is denominated in fiat currency.
He also finds that the larger infrastructure for decentralised digital assets and not being controlled by one centralised entity is good. He notes that stablecoins, tokenised deposits, CBDCs and RWAs are being explored at the moment but could not have been independently developed if Bitcoin and Ethereum had not started.
Regulatory clarity
Amid continuous failures, fraud, scams, and fund mismanagement within the crypto industry, there is a growing demand for stronger regulatory policies and supervision. Recognising this, global standard setters like the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) have intensified their efforts to establish appropriate market expectations.
The FSB published its global regulatory framework for crypto activities to promote the comprehensiveness and international consistency of regulatory and supervisory approaches on July 17. The framework takes account of lessons from recent events in crypto markets and feedback received during the FSB’s public consultation.
FBS’s recommendations suggest that authorities require cryptocurrency issuers and service providers to have a comprehensive governance framework in place, aside from having an effective risk management framework.
The IOSCO published its final report with policy recommendations for crypto and digital asset markets on Nov 16. The recommendations cover a range of activities including offering, admission to trading, ongoing trading, settlement, market surveillance and custody, and marketing and distribution to retail investors.
IOSCO’s Fintech Task Force, established to oversee the recommendations, is chaired by MAS assistant managing director (capital markets) Lim Tuang Tee.
MAS is planning on introducing regulatory frameworks of its own. In October 2022, the regulator launched two public consultation papers seeking feedback on the proposed safeguards to reduce the risk of consumer harm from crypto trading, as well as supporting the development of stablecoins as a credible medium of exchange.
Although the guidelines are expected to take effect in phases from mid-2024, MAS has already announced new requirements for digital payment token (DPT) service providers to mitigate the risk of loss or misuse of customers’ assets.
MAS now requires providers to keep customer assets in a trust. The regulator is also restricting the facilitation of lending or “staking” of their retail customers’ assets, allowing them only to continue the service to their accredited and institutional customers. Staking allows investors to lend their coins to a developer to support the operations of a blockchain network.
Amid these developments, MAS continues to issue licenses to DPT providers in Singapore. Notably, crypto giants Crypto.com and Coinbase obtained their approvals in June and October this year, respectively.
Coinbase’s Ahmed praises MAS for being a “sophisticated regulator”, in which clear regulatory boundaries drawn up by the central bank have allowed companies to understand the confines in which they are allowed to operate.
Describing the regulatory uplifts around concepts such as asset segregation as “beneficial and healthy” for the industry, Ahmed believes that this will give individuals and institutions the comfort they need to continue investing in the crypto space.
Aside from MAS, other regulators have also placed measures — both the European Union’s Markets in Crypto Assets Regulation and Hong Kong’s virtual asset regime came into force in June 2023.
Coinbase Singapore country director Hassan Ahmed. Photo: Coinbase
“We see a lot of harmonisation across regulatory frameworks at this point,” says Ahmed. Commenting on the comparison between regulators in Japan, Hong Kong and Singapore, the ex-GoPay executive says that technical frameworks between each market “aren’t that far off”.
“My cheeky comment here would be that I think Hong Kong [as compared to Singapore] does a better job of marketing itself at the moment as a Web3.0 hub, and the political and economic appetite seems to be louder,” he adds.
Likewise, Independent Reserve’s Lasanka believes that regulatory clarity is a key factor in crypto industry developments, as it provides a more stable environment for the industry to grow responsibly.
“Added regularity clarity provides a robust framework for the industry, weeding out bad actors, promoting best practices, and benefiting the entire ecosystem. This is not to say that the road will be smooth, but the long-term outlook for Bitcoin appears to be increasingly positive,” he adds.
Ahmed, too, maintains a high degree of conviction in the future of digital assets. He notes that regulatory clarity is coming surprisingly fast, and use cases are increasingly being fleshed out despite the overall bear market the industry is in.
“We found that 83% of G20 countries and major financial hubs have provided regulatory clarity for digital assets,” says Ahmed. “So I think it all speaks to the fact that people are waking up to the promise of this technology. And now it’s more a question of, not if this technology will survive, but how big will this thing get?”
