Blockchain consultancy company Celebrus Advisory’s managing partner Edmund Yong said the expectations of easing in the interest rate cycle is generally positive for cryptocurrencies. — Reuters
PETALING JAYA: The increased expectations of smaller interest rate hikes or even rate cuts in 2023 globally has fuelled the rally in cryptocurrencies since the start of the year.
With inflation data cooling in many parts of the world, including Malaysia, and hence reducing the need for sustained aggressive tightening of the monetary policy, investors’ appetite towards risk assets such as cryptocurrencies has once again improved.
Blockchain consultancy company Celebrus Advisory’s managing partner Edmund Yong said the expectations of easing in the interest rate cycle is generally positive for cryptocurrencies.
“From what we observed last year, there was a ‘flight to quality’ due to rising interest rates and US dollar strength.
“Retail investors moved away from crypto to risk-free cash deposits with relatively high yields. Crypto spot trade volumes plunged by more than half,” he told StarBiz.
The cryptocurrency market was battered last year by the sharp rise in rates, which then triggered a crash in crypto coins and exchanges.
For example, the price of one bitcoin – the world’s first and most-popular cryptocurrency – crashed from its peak of RM200,030 on March 29, 2022 to RM72,810 by end-December 2022.
However, since the start of January, the bitcoin price has surged by over 36% to breach the RM99,000 level. The coin was last trading at US$23,050 (RM98,809) yesterday.
Despite the price rally, Yong said many investors are probably stuck deep in loss positions.
“Hence, even if the overnight policy rate (OPR) remains steady, the local digital asset exchanges (DAX) will need to attract fresh funds to buoy market sentiment,” he said.
Bank Negara surprised the market recently by keeping its OPR unchanged at 2.75%, instead of raising it by 25 basis points (bps) as the market had anticipated it to do.
Nevertheless, economists anticipate Bank Negara will raise the OPR by another 25 bps or 50 bps this year.
In such an event, Singapore-based Frac Pte Ltd chief executive officer Melvin Tan said costs of funds will continue to rise significantly into the first half of 2023.
“This trend is similar worldwide. Given this predictability, cryptocurrency prices may find a strong support level and allow for market consolidation,” he told StarBiz.
Frac is a Web3 platform that does fractionalisation of high-value assets and supply chains through non-fungible tokens (NFTs).
Tan, who was previously a banker with Maybank Kim Eng, said the Malaysian cryptocurrency market is expected to be slow in 2023, given the current bleak global macroeconomic forecast.
“The crypto markets still tend to move in lockstep with traditional markets, especially the US markets. I expect this to persist until at least the third quarter of 2023,” he said.
On the bright side, Tan said Malaysia has been less affected by the cryptocurrency meltdown last year.
For example, statistics from Coingecko showed that Malaysia was not within the top-30 countries affected by cryptocurrency exchange FTX’s bankruptcy.
“This is indeed good news as people would still have capital to deploy at much lower prices as compared to last year.
“People would also be able to partake in new crypto investment trends like asset-backed NFTs, where NFTs are backed by real-world assets,” he added.
Amid the improving investor sentiment in the cryptocurrency space, Celebrus’ Yong anticipates the Malaysian DAX market to enter a maturing phase.
This will be achieved with increased institutional participation, supported by the arrival of licensed digital asset custodians.
Yong pointed out that the Malaysian cryptocurrency market at present had a very high concentration of retail investors, the vast majority being young investors.
“When you have a crypto market that is full of young retail energy, you can expect a lot of speculative activity without stabilising influences.
“They have less investable assets, allocate a disproportionate amount into high-risk alternative investments like crypto, and are driven by social sentiment rather than fundamentals. They panic quickly, they lose money, then cry scam and blame regulators for it.
“Local DAX growth has been over-indexed in retail. Crypto penetration is beginning to saturate and new user accounts are slowing down.
“Dormancy rate will remain high too unless the market turns around,” he said.
Yong noted the two licensed initial exchange offering operators in Malaysia will finally launch their much-awaited fundraising platforms.
However, he highlighted there were many unresolved questions regarding investor protection and the legality of tokens as a financial instrument.
“We are also in the midst of a prolonged funding winter for crypto, which some even have called the ‘New Ice Age’. The market may see this as a ‘nothing burger’ with no added benefits compared to equity crowd funding,” he said.
Looking ahead, Yong foresees some investors shifting funds from equities to cryptocurrency as a form of diversification.
“There is growing correlation between crypto and conventional stock markets – both tend to benefit during a ‘risk-on’ environment instead of one shifting to another. Bitcoin doesn’t really behave like gold,” he said.
Frac’s Tan also echoed a similar view, saying more people will shift some of their traditional finance (TradFi) portfolio into cryptocurrency, especially due to the advent of asset-backed NFTs.
“One such project is Frac.io, which seeks to use NFTs to represent physical, real-world high value assets.
“Such projects will no doubt pique the curiosity of TradFi investors and encourage them to invest,” he said.
Asset-backed NFTs provide a sense of comfort, realism and verity that most TradFi investors can understand, according to Tan.
