It is common knowledge that Hong Kong and Singapore are looking to become crypto hubs of the future. We have seen adjustments in regulations, detailed plans released by governments and investors were/are buying into the idea. However, amid the ongoing volatility in the cryptocurrency market, should we expect contagion to other financial sectors in 2023?


Crypto market


It is essential to put the rise and fall of cryptocurrencies into perspective, perhaps best reflected by using the Bitcoin price. Having risen from effectively being worthless in 2015, the crypto coin peaked at more than $60,000 towards the end of 2021. Currently standing at circa $25,000 per Bitcoin, havingrecently fallen below $16,000, we are experiencing a partial recovery. However, this recovery is not being seen across the market, with many talking of a "flight to quality".


The recent collapse of the FTX Exchange highlights the volatile nature of crypto and the lack of regulations. While this will be addressed in the short to medium term, it does prompt the question, could broader contagion be a problem in 2023?


Previous warnings


Many central banks have gone on record over the last few years, suggesting that a collapse in cryptocurrencies could have a significant knock-on effect on more traditional financial markets. At the time, many saw this as a move towards greater regulation, which is coming, and perhaps a degree of scaremongering. However, when you bear in mind the overall cryptocurrency market is valued at more than $1 trillion (subject to volatile daily swings), we are talking about vast amounts of money!


So, from the outside looking in, it seems sensible to assume that a collapse in the crypto market would have an impact on the wider financial sector. Thankfully, at this moment in time, there has been no crossover, and contagion has not, so far, spread beyond the crypto market.


Collective responsibility


While we may be speaking too early by suggesting that contagion will not be a problem for the broader financial market in 2023, so far, so good. The substantial investment losses experienced by traders and long-term investors have so far failed to trigger that much-expected wider financial crisis. Considering that this comes on top of the pandemic-induced financial crisis, an ongoing global economic weakness, it is a surprise.


Many governments are now looking towards introducing regulations in the short term, potentially in 2023. This has given investors outside of the crypto market a degree of confidence that contagion will not be a problem. However, it would appear that a breakout of growing collective responsibility is isolating the crypto market to a natural experience, survival of the fittest.


Looking to the future


While it looks like the cryptocurrency market is here to stay, in its various guises, the sector will likely look very different as we advance. The collapse of FTX has increased demands for regulation with talk of potential criminal charges in the offing. If we need to look anywhere for even a slither of confidence, let's look at interest rates. If central banks and governments were expecting contagion to jump from the crypto sector to the broader financial market, would they have increased interest rates?


It would be dangerous to let down our guard over the potential for contagion to spread further beyond the crypto market. However, at this moment in time, the long-term positioning of Hong Kong and Singapore in the crypto asset sector could be well-timed.

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