Accounting firm KPMG has just published a report on the state of the technology sector in the first half of 2022, which naturally contains a crypto/blockchain component. A section that reports a fairly positive first half in terms of funding but announces a less optimistic continuation for crypto companies facing both a prolonged market downturn and weak macroeconomic outlook. Factors that are likely to deplete financial flows and force some of them to revise their capitalization downwards. As for the shaky players in the sector, their survival is no longer even a question.
The authors of the article note that, despite a noticeable slowdown in the 2nd quarter, investment performance “remained much higher in the middle of the year than in all years until 2021.” An indicator for them of “growing market maturity” and a range of technologies and solutions that attract capital.
In fact, industry players, according to their calculation method, would have raised $14.2 billion from venture capital companies over this period.
A result that, however, should not be repeated in the second half of the year, as the latest reports from CoinShares actually show. The reason: the context of multifactorial threats: an imminent potential recession, rising interest rates, rising inflation and a Russian-Ukrainian conflict that is likely to drag on.
Industry affected by macroeconomic conditions
Because, as noted in the KPMG report, the cryptocurrency market has become sensitive to the macroeconomic context, from which it eluded while it was a business of small private investors. But with the entry into the management of institutions and companies, the situation has changed. The price of cryptocurrencies is now closely following stock market fluctuations, in particular technology stocks, and bitcoin, which until then seemed like a safe haven, is losing its attributes of digital gold. It is not yet clear whether this situation is temporary or whether it will last for a long time.
The current macroeconomic trend is likely to be a major test for cryptocurrencies and bitcoin in particular.
It must be recognized that the current conditions do not encourage investment in so-called risky assets, much less in a sector that itself generates disasters. The collapse of the Terra Luna ecosystem in May, with attendant bankruptcies and irreparable damage that evaporated nearly $60 billion almost overnight, is still an open wound.
What are the medium-term prospects?
But another dark sky is hanging over the crypto industry like a lid: uncertainty about upcoming regulations. Finally, there is less and less uncertainty, but rather a sense of inappropriate rigor and injustice compared to the world of traditional finance, which does not encourage anyone to take risks on shaky ground that can slide into the abyss. Perhaps this may endanger not the survival of decentralized and uncensored assets like bitcoin, but the existence of the ecosystem that was built around it. European players in the sector know something about this thanks to the MiCA project and the revision of the TFR directive drafted by the EU in rough form.
The KPMG study sticks to conclusions about sometimes aggressive regulation, as in China or perhaps India, or more balanced, as in other jurisdictions. An attempt, which she defines as an attempt to protect the “consumer” without compromising the dynamism of the sector.
Finally, without getting into the cryptocurrency/MNBC (central bank digital currency) debate, KPMG believes that the issue of monetary sovereignty will become increasingly important.
Meanwhile, for an accounting firm, there will be growing interest in stablecoins in the near future as companies seek to “capitalize on the operational advantages of cryptocurrencies.” Environmental concerns are also coming to the fore, which he believes is fueling innovative partnerships between the crypto community and other sectors.
Proven Benefits of Bearish Cycles
The euphoria that gripped the industry during the bull cycle when bitcoin rose to $70,000 is long gone. Today, as he struggles to keep the $20,000 ceiling up, passions are settling down and hotheads have become persona non grata. The excitement is gone, the industry needs to reorient itself to construction. In addition, in the face of a severe test, some companies in the sector are likely to seek to “recapitalize themselves at a lower valuation.”
In fact, what should be kept in this surrounding downturn is the proven virtues of the bearish cycle. And it is Alexander Stashchenko, Director of Blockchain and Crypto Assets at KPMG France, who is responsible for this.
Of course, some cryptocurrencies will die out, especially those that do not have clear and reliable value propositions. In fact, this can be quite beneficial from an ecosystem standpoint as it removes some of the confusion created by bull market euphoria. The best companies will be the ones that survive.
Judging by the events of recent months, the market has indeed begun to sort the wheat from the chaff in many ways.
Gone are the lame ducks, in favor of “well-managed companies with sound risk management policies, a long-term vision, and robust cost and risk management.”
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