How a slowdown in crypto rally is weighing heavy on exchanges

During the brutal cryptocurrency sell-off last month, volumes also tumbled — a development that doesn’t bode well for exchanges that trade the digital tokens.

Total spot volume slumped to $1.8 trillion in January, a decline of more than 30 per cent from the previous month, according to a report from CryptoCompare. That was the lowest turnover since the end of 2020. Even at its intra-month peak of $91 billion on January 24, trading was down nearly 50 per cent from December.

“It’s just an exceptionally quiet, fearsome and uncertain time in crypto,” said Ed Hindi, chief investment officer and co-founder of Tyr Capital. “Smart money, as they say, doesn’t sleep, it doesn’t take holidays. But retail traders in crypto, they do take a break, especially when they get hurt,” he said, referring to an industry term for institutional and other bigger players.

The decline in trading volume will have a direct impact on revenues for Coinbase Global and Robinhood Markets, according to Julie Chariell, a Bloomberg Intelligence analyst. Roughly 90 per cent of Coin’s revenue and about 40 per cent of HOOD’s are driven by crypto trading.

“HOOD already articulated expectations for softer earnings results for first quarter, partly due to the crypto slowdown,” she said. Coin hasn’t yet held its quarterly conference call, but when it does, its first-quarter outlook “will likely be soft”.

Investors in digital currencies and other riskier assets have been shaken so far in 2022, rattled by a newly hawkish Federal Reserve that’s getting set to withdraw stimulus from the system.

Bitcoin, the largest cryptocurrency, has lost a fifth of its value this year, while some smaller coins, as well as tokens influenced by social media sentiment, have posted even larger drops. An index tracking the largest 100 cryptocurrencies is down 26 per cent year-to-date, while the Bloomberg Galaxy DeFi Index, which bundles some of the largest decentralised finance protocols and apps, has tumbled 31 per cent in the same stretch.

Demand for all things crypto had skyrocketed in 2021, with crypto-asset manager Grayscale Investments finding that a majority of investors had become involved with the asset class during the year. That means the recent slump could be painful for anyone who got in relatively recently. In fact, a recent Glassnode analysis found that almost all of the supply held by short-term investors is underwater.

“Ordinary mortals’ interest may take more time to heal,” James Malcolm, head of foreign exchange and crypto research at UBS, wrote in a note, noting, however, that that’s not necessarily the case in the venture-capital space.

It doesn’t help that memories of the last “crypto winter” — a phrase endemic to the digital-asset space that refers to a sharp slump followed by months of doldrums — are renewing fears that a repeat could be playing out currently. The last such decline happened in 2018, when Bitcoin fell roughly 80 per cent and subsequently took more than a year to reach another high.

“Even though Bitcoin has its own very significant fundamental underpinning, there is that element of just rampant speculation that plays a role,” said Jurrien Timmer, director of global macro at Fidelity Investments.