Blockchain: when will the crypto winter thaw?

Crypto prices have been skyrocketing since the start of the year, but contagion from the FTX collapse continues to spread. Broker Genesis filing for Chapter 11 bankruptcy last month suggests it’s still too early to call the end of the crypto winter.

• Coinbase CEO says “crypto isn’t going anywhere”, but the company is trimming its workforce.
• - Goldman Sachs analysts believe regulation is the key to a flourishing crypto market.
• Blockchain and crypto thematic ETFs have surged since the start of the year.

Share prices for crypto players Coinbase [COIN], Hut 8 Mining [HUT], MicroStrategy [MSTR] and Block [SQ] have skyrocketed since the start of 2023, causing many to wonder if blockchain’s most recent dark spell has passed.

When Coinbase announced it was laying off 950 employees – roughly 20% of its workforce – last month, CEO Brian Armstrong blamed “unscrupulous actors in the industry” for putting pressure on the crypto, which was already trending downwards due to macroeconomic headwinds.

In a 10 January note to employees, Armstrong warned that there could be further contagion ahead, but that, ultimately, “crypto isn't going anywhere”. He shared his belief that the industry’s challenges will only validate the company’s long-term strategy.

The Coinbase share price has jumped 110.8% since the start of 2023 through 3 February, although it’s down 63.7% over the past year.

Other stocks with exposure to blockchain and cryptos have risen as well. The Hut 8 Mining share price has popped 180% year-to-date, while the MicroStrategy share price is up 99.2%. Jack Dorsey’s Block [SQ] has gained 31.4%.

Signs of a crypto recovery

A number of cryptocurrencies, including Bitcoin and Ethereum, have been doing well since the beginning of the year. There are also signs that the industry is recovering from the collapse of beleaguered crypto exchange FTX.

The value of non-fungible tokens (NFTs) may have tumbled in recent months, and with it NFT trading activity, but the English Premier League recently signed a multimillion-pound deal with Sorare’s blockchain-based NFT fantasy football game.

Amazon [AMZN] is also reportedly set to get in on the act. According to a report by blockchain news site Blockworks, the ecommerce giant is expected to launch its NFT offering this spring. It is thought this will include blockchain-based gaming.

While interest in the crypto space is on the rise again, there’s still volatility in the market. Crypto broker Genesis filed for Chapter 11 bankruptcy last month, while fellow lender BlockFi, which filed for bankruptcy back in November, was granted court approval on 30 January to start selling mining equipment and machines in order to raise funds to repay creditors.

Near-term headwinds

The Genesis bankruptcy would seem to indicate that, despite other positive signs, the crypto market is still in the midst of a so-called crypto winter. The question is when volatility might cool off.

“We believe crypto will likely flourish once again after the recent crises, as did a long history of other assets that were at the centre of a speculative bubble and subsequently exposed fraud, like natural gas did after the collapse of Enron,” wrote Jeff Currie, Goldman Sachs’ global head of commodities, and commodities strategist Daniel Sharp, back in December.

The key to crypto’s success, they continued, “rests on regulators correctly figuring out what to regulate in the ecosystem to protect investors – the point of trust, not the ‘trustless’ blockchains themselves.” Regulators shouldn’t interfere with blockchain systems, because “their decentralisation is a critical part of the value proposition.”

Mark Yusko, CEO of Morgan Creek Capital Management, told CoinTelegraph last week that, despite the recent upswing in crypto prices, Bitcoin’s bull run – or “crypto summer” – will start in the second quarter of this year. Bitcoin’s next halving event is currently predicted to occur on 24 May 2024 and the market anticipation of this usually starts around nine months before, he said.

Funds in focus: Bitwise Crypto Industry Innovators ETF

After a disastrous 2022, funds have been flowing back into blockchain and crypto thematic ETFs this year, vastly outperforming the broader market and major indices.

The Bitwise Crypto Industry Innovators ETF [BITQ] has Coinbase as its largest holding, with a weighting of 11.52% as of 3 February. The fund is up 78.2% year-to-date, though it’s down 64.7% in the past year.

The VanEck Crypto and Blockchain Innovators UCITS ETF [DAPP.L] also has Coinbase as its top holding, having assigned it 9.32% of its portfolio as of 3 February. The fund is up 84.4% year-to-date, though it’s down 68% in the past year.

The Global X Blockchain ETF [BKCH] has Coinbase as its second-biggest holding, with a weighting of 12.69% as of 3 February. The fund is up 75.4% year-to-date, but down 68.6% in the past year.