The “crypto winter”, or months-long meltdown of digital currencies, is part of the natural cycle of a new type of asset as the coins experience their first “extremely aggressive” macroenvironment, according to analyst experts.

The Wealth Today Summit was held in Dubai the day after Bitcoin fell 10 percent in 24 hours, below $20,000 for the first time since November 2020, after months of sustained losses. However, experts have said this is part of the natural cycle of a decade-old digital asset industry and a correction that needed to happen as the market matures.

Karim AbdelMawla, a research associate at 21 Shares, cited the “debacle” of Luna, terra’s stablecoin, which lost almost 99 percent of its value, which he described as “very unfortunate.”

“There really needed to be a lot of experimentation with algorithmic stable coins,” he said. “Algorithmic stable coins are a true innovation in the crypto space. At the end of the day, you need a really decentralised monetary system that is not reliant on single points of failure. The conclusion, or the lesson we have learned, [is that] no matter how algorithmic the stable coin design might be, it needs to be backed up with collateral.”

Asked how long the “crypto winter” might last, AbdelMawla said, “It could last anywhere from a year to two years, maybe even less than that. Crypto has not experienced an extremely aggressive macro environment like we are experiencing right now. Grappling with the fear of recession and regional warfare simply did not happen since crypto’s inception.  

Crypto is now highly correlated with the stock market, he said, adding: “A lot of things have to be sorted outside of crypto to have a fleeter vision of how long this might last.”

“It [the meltdown] really needed to happen; the market was over-leveraged [and] filled with over hyped products. Ultimately speaking, in a bear market [is] when truly innovative products come into existence,” he concluded.  

Stefan Kimmel, Kraken’s chief commercial and operating officer, highlighted the interest in virtual assets from family offices in the region, and said crypto is now in its fourth cycle and that a continued upward trend would be obvious in 10 years. Kraken recently became the first virtual assets exchange to receive a full Abu Dhabi Global Market (ADGM) licence and has announced that it will hire 500 staff members globally by the end of 2022.  

“As long as crypto was [the] Wild West and decentralised finance (DeFi), it’s very hard for somebody who is responsible to preserve money to put your allocation in there. That has changed,” he said

The UAE is one of the few jurisdictions in the world where there are clear rules and guidance on what is allowed and not allowed with the trade of digital assets, he said. “We’re seeing small allocations: 0.1 percent, half a percent. Some are braver.”

(Reporting by Imogen Lillywhite; editing by Seban Scaria)