Weathering the crypto winter: Top five takeaways from Binance CEO Changpeng Zhao

At a Point Zero Forum held yesterday (June 22), Binance CEO Changpeng Zhao spoke about the current cryptocurrency landscape and speculated on recovery from the market crash.

As it stands, the sentiments around crypto have been waning among mainstream investors. Blue-chip coins — such as Bitcoin and Ethereum — are down over 70 per cent from their all-time highs, and it’d seem the bear market is here to stay.

This also brings to question the fate of other blockchain-related developments such as NFTs and the metaverse. Just as traditional brands — in industries ranging from fashion to F&B — were beginning to adapt these trends, the market crash has spurred doubt about their long-term potential.

To clear up some of the uncertainty, here are our top five takeaways from Zhao’s keynote at the forum:

1. The worst of the market crash is behind us

Although projects are still suffering from the effects of the market crash, Zhao believes that the worst of the impact has been shouldered. Based on how the market has progressed since the LUNA/UST crash, he reckons that the ‘contagion’ won’t continue to spread.

“At it’s peak, [LUNA’s market cap] was up to US$40 billion,” says Zhao. “Other firms that are failing now are in the single-digit billions. We’re seeing tertiary effects of the market crash, but each time, the cascade is smaller.”

Zhao adds that the current bear market isn’t the same as the ones witnessed in 2018 and 2020.

“There’s a lot more leverage in the system,” he justifies. “There are a lot of DeFi projects, lending funds to other firms in a circular fashion. In this situation, when one firm has a liquidity problem and crashes, the other firms slowly feel the pain. It doesn’t all happen in one day.”

The recovery of the crypto market is likely to take on a different form too. “I hope that the worst part is over — we’ve seen a pretty sharp drop. It’ll take a long time for the industry to recover though.”

Zhao predicts that it could be years before crypto prices recover to their previous all-time-highs.

2. Regulations will help, but won’t solve all the problems

Crypto’s ease of access has often proved to be a double-edged sword. During bull markets, it’s praised for facilitating financial inclusion.

However, when projects fail — especially ones as big as LUNA — it’s looked at as a glaring flaw. Regulators come into the spotlight for failing to protect retail investors from such volatile investments.

“I don’t think it’s that crypto hasn’t been regulated enough,” Zhao says. “We shouldn’t blame the regulators.”

He adds that companies and startups fail, even in regulated markets. “In an innovative new industry, there will be failures. We do want to seek more regulatory clarity, but it won’t solve the problem.”

Zhao shifts the attention to education instead. “We need more of that. It’s probably the best way to protect users in the long run.”

After all, it could take years or decades for regulations to shape out. “It’s an iterative process. Most regulations are focused on centralised exchanges, but now there’s also NFTs, DeFi, and the metaverse.”

What is the metaverse? We don’t really know yet. How do you expect regulators to make regulations about something that’s not even formed? They’re not going to design the ecosystem.

3. Only the strong will survive the bear market

For all the disarray it has caused, the bear market comes with a silver lining. Now that money isn’t flowing into every hype-driven project being launched, only the ones with real value will remain standing.

“Before, there was so much noise,” says Zhao. “Anyone who could write a Solidity contract wanted to do their own project. Now, those projects have either failed or are no longer that active. The industry is still moving forward, while the stronger players get a chance to shine.”

The crypto ecosystem is being cleaned out, and projects will need to rely on actual business models to survive.

“If you’re only getting users because you’re using financial incentives, that’s not a real model,” Zhao says. “Eventually you’ll run out of money, and you’ll crash.”

Launching a crypto coin, by itself, doesn’t constitute a business model. “You actually need use-cases where people spend that coin, either for transaction fees on the network, paying for services, or buying NFTs, for example.”

“It comes down to very fundamental business models and building products that people want to use.”

4. High returns aren’t sustainable

If it sounds too good to be true, it probably is. DeFi projects are known to offer absurd interest rates through liquidity pools and yield farms. These rates don’t last forever, and investors need to be well-versed when trying to capitalise on them.

“High APYs, high returns — I don’t think they’re sustainable in the long run,” Zhao says. “New projects can give out these incentives to attract users, but only for a short time.”

Speaking about a project listed on Binance which offers an annual return of 36 per cent, Zhao says, “Binance manages risk quite carefully. I’d assume [this return] is very short-term and with a limited scope. It would not work if all 20 million of our users [decided to invest].”

This is not to say that crypto returns are entirely illegitimate. “Longer term, DeFi projects can offer eight to 10 percent. They have a real business model, where they earn money from the trading fees which people pay.”

5. Crypto is here to stay, and governments should embrace it

The industry’s not going away. The technology’s not going away,” Zhao asserts. He believes there are more use-cases now than ever before, and the space is growing despite what the trading charts say.

I think NFTs have a lot of potential. DeFi’s going strong, fundraising through ICOs is going strong. These use-cases don’t exist in traditional finance.

For governments around the world, embracing crypto comes with a lot of benefits. “This new technology is going to give you better ways to raise money, invest, transact. It’ll introduce new business models and micropayments, and facilitate cross-border businesses.

“When these tools are available to your entrepreneurs and established businesses, your economy will become stronger. Governments don’t become strong by exerting control, they become strong by having a strong economy.”

Zhao speaks about a counter-intuitive stance — how most countries in the world want foreign direct investment (FDI) yet not all are encouraging of initial coin offerings (ICOs).

“When you have entrepreneurs raising money from people all over the world, that’s FDI. Once regulators understand that, many will want it”

Government aside, Zhao believes that banks and other traditional financial institutions need to get their foot in the door as well. If not, he likens their fate to Kodak going bankrupt because it refused to shift from film to digital cameras.

“If they don’t come here early, the crypto world will just [keep developing]. And in 10 or 20 years, there will be a big disruption.”

Featured Image Credit: Point Zero Forum