This article first appeared in The Edge Malaysia Weekly on December 25, 2023 – December 31, 2023

IN 2022, global riskier assets, including cryptocurrencies, were hit by tightening liquidity in the financial markets as a result of aggressive interest rate hikes. Nonetheless, investors who had accumulated cryptocurrencies in the early part of 2023 and are still holding them would have made handsome gains.

This year, Bitcoin’s price has surged more than 150% to US$42,839 on Dec 20 from below US$17,000 at the end of 2022.

The second largest cryptocurrency, Ethereum, also saw its price surge 84% since early this year to US$2,211 on Dec 20. Other cryptocurrencies that have delivered impressive performance year to date (YTD) include Solana (+668%) and Avalanche (+282%).

Notably, their rally has outstripped that of global equities and commodities. And right now, all eyes are on whether Bitcoin will be able to retest its all-time high of nearly US$68,000 in November 2021.

According to cryptocurrency price and data aggregator CoinGecko, the total market capitalisation of cryptocurrency stood at US$1.72 trillion as at Dec 20, more than double the US$844 billion recorded a year ago.

The key factors that have contributed to the cryptocurrency rally were interest rate cut expectations, potential new US Bitcoin exchange-traded fund (ETF) trading platforms and the halving of Bitcoin.

The halving occurs every 210,000 blocks, with the next expected to happen in April 2024 when the block height reaches 840,000. It slows down the release of Bitcoin in circulation, capping the total supply of Bitcoins at 21 million. So far, 19 million bitcoins have been mined.

Yusho Liu, co-founder and CEO of Singapore-based Coinhako, says historically, the price of Bitcoin has seen significant upside in the weeks or months following its halving.

“We believe many traders will be following the news closely. Institutional adoption also continues to be a growth factor for the market and approval of Bitcoin ETFs will open access to more institutional investors. This will impact market movements next year,” he tells The Edge, adding that other contributing factors to cryptocurrency prices are interest rates, regulations and global conflicts.

With easing inflation, the US Federal Reserve is mostly done with rate hikes, while rate cuts are expected to begin in the second half of 2024, which bodes well for riskier assets.

On the Bitcoin ETF platforms, Reuters reported that 13 firms including Grayscale Investments, BlackRock, Invesco, and ARK Investments, have pending applications with the US Securities and Exchange Commission (SEC) for ETFs that track the Bitcoin price. Some funds are expected to receive the SEC’s approval by January 2024, and this will allow investors to tap the global cryptocurrency market via the tightly regulated stock market.

Luno Malaysia country manager Scarlett Chai views 2023 as a year of reflection and growth for the cryptocurrency space, as the industry rebuilt in the wake of the world’s second largest cryptocurrency exchange FTX’s collapse at the end of 2022.

“The year end has seen investors once again rally behind cryptocurrencies, with Bitcoin rising to US$45,000 for the first time in two years amid a flurry of interest from major traditional institutions like BlackRock, which in June 2023 announced its spot Bitcoin ETF application. This can be seen as the catalyst in driving the renewed confidence, signalling wider institutional interest in Bitcoin and the broader cryptocurrency market, which is certainly one to watch in 2024,” she says.

Citing a recent PwC report — which found that 42 countries this year have engaged in various cryptocurrency regulation initiatives — from holding discussions to passing laws, she observes growing global adoption of cryptocurrencies.

“We are seeing signs that the industry is maturing with growing interest in cryptocurrencies from institutions and expect even greater appetite with the introduction of regulation and licences globally.”

Commenting on the Bitcoin price outlook in 2024, Chai says: “We are excited to see where 2024 takes us but intense focus on the price and value of cryptocurrency can distract from its functional value. A big lesson of 2023 is not to get distracted by the noise and keep focused on the value and how cryptocurrencies can improve the world’s financial system. In addition, we always remind everyone to equip themselves with education about investing and the digital asset industry before they invest.”

That said, one should not forget two high-profile criminal cases that plagued the cryptocurrency market. Nearly a year after FTX filed for bankruptcy in late 2022, co-founder Sam Bankman-Fried, 31, was in November this year found guilty of defrauding customers to the tune of US$8 billion in one of the biggest financial frauds in history.

Over at the world’s largest cryptocurrency exchange Binance, former CEO Changpeng Zhao in November pleaded guilty to anti-money laundering violations. Binance has to pay more than US$4.3 billion to settle the charges — the largest penalty in the history of the US Treasury Department, while Zhao personally agreed to pay a US$50 million fine to keep Binance operating. Zhao was then succeeded by Singaporean Richard Teng.

In Hong Kong, a suspected cryptocurrency fraud involving at least HK$1 billion worth of virtual assets was uncovered. Hong Kong’s Securities and Futures Commission said the JPEX cryptocurrency platform had falsely promoted itself as a licensed platform with high return promises.

Coinhako’s Liu highlights that investor confidence in cryptocurrency trading is more strongly correlated to price movements. “Positive price movements in popular cryptocurrencies generally spark higher activity in the market and this has been consistent even in the last two months following the current ‘resurgence’ in Bitcoin prices. We have seen a spike in the number of user trading, as well as trading volume for both retail and institutional segments during this period.”

Luno’s Chai stresses that clear regulation and transparency from cryptocurrency exchanges is needed while at the same time ensuring customer protection. “The industry has gone from strength to strength. As bad actors are flushed out of the industry, cryptocurrencies can continue to evolve and legitimise, creating the foundations for greater adoption.”

At home, the Securities Commission Malaysia (SC) has granted conditional approval to Hata Digital Sdn Bhd to operate a digital asset exchange (DAX), marking the fifth local cryptocurrency trading platform licensed and regulated by the SC. The official operation is expected to commence in 1Q2024.

The four existing DAXs are Luno, Sinegy, Tokenize Xchange and MX Global.

Founded by Luno’s former Asia-Pacific general manager David Low, Hata is the first DAX to receive the digital broker approval from the SC, which allows it to show trade orders of other exchanges on its website or mobile application, and execute its users’ trades by matching them with those of other exchanges.

It is worth noting that Luno was hit by a hacking incident, which led to the Sessions Court awarding some RM700,000 to a businessman who had sued Luno for negligence after losing about RM600,000 in cryptocurrencies. Luno has assured that the court decision does not reflect a lapse in its safety and security measures.

Chai expects more institutional investments in the cryptocurrency space in 2024, with product offerings such as more coins and features, initial exchange offering as well as the development of digital asset custodians.

“We are likely to see increasing levels of transparency. At Luno, we will stay committed to setting the highest standards of regulatory requirements ensuring our customers can invest safely and responsibly while working closely with the SC to bring more innovative cryptocurrency offerings.

“We would like to see traditional financial institutions such as banks continuing to work closely with regulated digital asset platforms, given there is still a lot of hesitancy and misconceptions about the digital asset industry. We hope regulators such as Bank Negara Malaysia will continue to encourage this,” she says.

Regionally, Singapore is planning to tighten its cryptocurrency rules to protect retail investors, which includes banning monetary and non-monetary incentives such as referral bonuses for consumers.

On another front, the non-fungible token (NFT) market continued to suffer from the bubble burst this year, after reaching a peak two years ago. More than 95% of NFT collections are now effectively worthless, according to a report by dappGambl in September. In July, weekly traded value was about US$80 million, just 3% of its peak in August 2021.

NFTs are tokens that can be used to represent ownership of items, which is recorded on a blockchain. They are mostly used to represent digital art, music and other memorabilia, allowing holders to trade these tokens on a market.

Unlike cryptocurrencies, NFTs are unique by design and less liquid, and appeal to a small group of people.