In spring this year Level39, a tech start-up hub in London’s Canary Wharf, was buzzing with new cryptocurrency and blockchain businesses keen to make their mark. Oliver von Landsberg-Sadie, whose cryptocurrency brokerage BCB Group is among the hundreds of companies based there, said that from last October business was “off the charts” with crypto start-ups springing up. More recently though, a number of them have disappeared and no new ones appear to have popped up, Mr von Landsberg-Sadie said. In some cases “you see a whole vacant area where there was once a flourishing team”.
The shrinking workforce hints at problems in the wider cryptocurrency market, where there has been a major sell-off that has prompted some observers to draw parallels with the dotcom crash. The market capitalisation of all digital assets tracked by data company CoinMarketCap dropped to 10-month lows of $186bn this week from a peak of more than $800bn in January. Trading volumes have followed suit.
Bitcoin, the most popular cryptocurrency, has declined steadily from its mid-January high of nearly $20,000 to between $6,000 and $7,000. Another big cryptocurrency, ether, has lost about 85 per cent of its value over the same period and is trading at less than $200.
The crypto fever that drove prices to their peaks in mid-January was fuelled by hopes that digital currencies would revolutionise the financial industry and make fortunes for the faithful. But belief in this new asset class is now wavering, as the sector battles mounting concern and regulatory scrutiny over fraud and manipulation, and continues to be regarded with scepticism by the mainstream banking world.
At the same time, swaths of small speculative investors who latched on to rising crypto prices have lost out. “Legions of retail investors are the biggest losers, followed by institutional investors who were dumb enough to trust unprofessional ‘crypto fund managers’ with little by way of formal training in law or finance,” said Preston Byrne, a structured finance lawyer.
Some industry observers say the small traders have essentially borne the cost of a wave of innovation that gave birth to numerous start-ups in cryptocurrencies and blockchain, the technology that underpins them. But, said Mr Byrne: “The innovation that has come out of the boom is very unlikely to benefit retail investors.” Max Boonen, chief executive of cryptocurrency broker B2C2, said: “It’s clear that there’s some companies that are going to fail as their business cases are predicated on a different price.”
At particular risk are start-ups that raised funds by selling their own digital tokens, often in return for a mainstream cryptocurrency, using a funding mechanism known as an initial coin offering. These start-ups might then use their pot of digital cash to pay staff, for example.
Mr von Landsberg-Sadie noted that while there were a lot of fraudulent ICOs, “there’s also a lot of legitimate ICOs that [now] are less able to fund their projects”. Some crypto exchanges are also suffering: last week, one of them, Kraken, announced it was laying off nearly 60 staff in North America.
Even Vitalik Buterin, the creator of ether, said that there was no room for “1,000 times price increases” in crypto again.
There are other hurdles to more widespread adoption of cryptocurrencies.
The number and sophistication of hacks and scams leading to crypto theft is growing. Data from Crypto Aware, which tracks scams, shows about $1.8bn of cryptocurrencies have been lost so far this year, compared with about $1bn between 2011 and 2018.
The market has failed to shake off its early links to criminality, prompting warnings from regulators and Europol, particularly about money laundering. The market place also continues to be highly manipulated. Research firm Blockchain Transparency Institute last month estimated that more than $6bn of daily trading volume was being faked.
Cryptocurrencies – investing or gambling?
Unsurprisingly, regulators and lawmakers have not looked kindly on the sector. The US has refused to allow numerous proposed bitcoin exchange traded funds. A US judge this week ruled that ICOs were covered by securities law, meaning many will have to adhere to tough rules or risk being shut down.
Nevertheless, many believers will not be shaken from their conviction that the technology will find a place in society. Mr Byrne said that some in the sector were “relieved that the markets are cooling off because it will shake out the charlatans”.
“Investors and corporates alike [will focus] on what matters, which is deploying the technology in such a way as to deliver business value through process automation, not naked speculation on cookie-cutter copies of bitcoin,” he said.
James Smith, chief executive of Elliptic, a company that investigates criminal activity in cryptocurrencies, noted fast growth in areas such as crypto custody. If crypto can be stored more reliably, banks may become more open to getting involved, he said. Others simply point to bitcoin’s long history of price corrections from which it has always recovered. “I believe we are in store for another big bull run,” Mr von Landsberg-Sadie said. “This is not our first rodeo.”