Crypto crisis will weed out the Gulf’s weak players, say analysts

Reuters/Agustin Marcarian

The region’s cryptocurrency industry has grown rapidly – and is now being hit hard by the worldwide plunge in prices, but experts and businesses are welcoming the shake-up

The value of the cryptocurrency market has slumped by more than $2 trillion since November, with bitcoin’s price dropping 70 percent and some in the sector laying off staff.

American exchange Coinbase Global revealed last week that it was cutting around 1,100 jobs, or 18 percent of its workforce. Closer to home, Middle Eastern crypto exchange BitOasis laid off nine employees – roughly 5 percent of its staff in the UAE and Jordan.

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After the crypto industry’s rapid growth in the Gulf, regional analysts are welcoming the shake-up. These tough times will weed out weaker players who jumped on the bandwagon without solid business models, they say.

Agustin Carstens, the Mexico City-based general manager of the Bank for International Settlements, an umbrella body for central banks, has suggested the crisis in the sector is overdue.

“All these weaknesses that were pointed out before have pretty much materialised,” Carstens said. “You just cannot defy gravity. At some point you really have to face the music.”

Gulf analysts expect many of the region’s operators to “face the music” in the coming months.

“There has been a substantial inflow of new crypto firms to the UAE,” said Dr Bhaskar Dasgupta, head of strategic development for MENA at global financial services provider Apex Group, who is based in Abu Dhabi.

“We have seen several crypto firms receive interim or full licences from [the Abu Dhabi Global Market], such as Binance, AirCarbon and Kraken. The scale of the rise in the number of crypto firms did come as a surprise to many.”

BitOasis, too, operates through a multilateral trading facility from the Abu Dhabi Global Market. Other crypto businesses are licensed through the Dubai Virtual Asset Regulatory Authority (VARA), set up in March.

Nikita Sachdev, founder and CEO of Luna PR, a Dubai-based marketing agency focused on blockchain, fintech and crypto, said: “Bear markets flush out weak projects and force better ones to endure. As a PR agency, we see this trend.”

She added: “We will come out of the bear market eventually; this is a normal part of the cycle and it’s happened many times before.”

Her agency has seen a drop in the number of projects offered recently, Sachdev said, but the quality of those approaches has improved.

‘An amazing opportunity’

For CoinMENA, a Shariah-compliant crypto exchange headquartered in Bahrain, “the market downturn is actually an amazing opportunity,” according to its co-founder and CEO Talal Tabbaa. “Companies that build in the bear market reap the rewards when markets pick up.”

Last week, CoinMENA announced it had obtained a provisional virtual assets licence from Dubai’s VARA (it has also been licensed by the European Union).

Another newcomer to the region is Hong Kong’s Huobi Global, a crypto exchange granted a licence to operate on Friday by the Dubai International Financial Centre.

“The market downturn will weed out weaker projects and projects that carry greater structural risks. With tightening liquidity and greater market uncertainty, we will see projects that are overvalued and lack sound business models become swept out by dwindling capital and user demand,” said Lily Zhang, chief finance officer of Huobi Global.

“When the dust clears, we can expect the market to be populated by fewer, stronger players, with more market share distributed amongst each of them. In this scenario, there may be more diamonds in the rough for investors to identify and support throughout a downturn.”

Saqr Ereiqat, co-founder of Dubai’s Crypto Oasis – a partnership between the Dubai Multi Commodities Centre and Switzerland’s Crypto Valley – said the downturn would be “an opportunity” for high-quality projects that have a strong business model.

Crypto Oasis also neatly demonstrates the speed of the sector’s growth. The “blockchain ecosystem” was launched in May 2021 with the aim of signing up 1,000 blockchain-related businesses by the end of 2022. It hit this target, which took the Swiss Crypto Valley seven years, in just 12 months. The company is now aiming for 1,500 sign-ups by the end of the year.

Ereiqat added: “We believe in the unique opportunities that this industry is creating, and the market movements are just a part of the stabilisation in the long-term evolution of this market.”

Pizza? That’ll be 0.034 bitcoins, please

In February 2014, The Pizza Guys made headlines as the first outlet in the UAE to accept bitcoin as payment – with a vegetarian pizza sold for 0.034 coins. Over the past eight years, this has become more commonplace among Dubai businesses.

Real estate developer Damac Properties announced in April that it would start accepting bitcoin and ethereum. It has already received more than $50 million through such payment methods.

Ali Sajwani, general manager of operations at Damac, said it was still happy to accept crypto payments, adding that he believed the companies that survive the crisis will “come out stronger”.

Vineet Budki, managing partner of Cypher Capital, a UAE-based private venture capital firm, described the “Crypto Winter” as a cyclical event that comes round every four years. It had “happened twice before, in 2018 and before that”.

“It helps the industry evolve,” he said. “People will start to become more efficient. Projects which were meant to capitalise on the fundraising aspect of crypto will die out, while projects with an actual use case of tokens tend to become bigger, they thrive and will stay. Tokens with real use cases will survive.”

Cypher Capital will certainly hope it has picked the survivors: in March, it launched a $100 million seed fund focused on investments in blockchain, crypto and other digital assets, and it is currently building a 10,000 sq ft hub in Dubai for crypto startups.