Retail investors shifting battlefields, trading volume drying up: the "quiet adjustment period" of the cryptocurrency industry

The recent drop in cryptocurrencies seems different from the past at first glance. There are no earth-shattering scandals, no exchange bankruptcies, and no regulatory crackdowns. However, for the largest trading platforms in the industry, losses are starting to show an unsettling sense of familiarity. Since plummeting from historic highs in October last year, Bitcoin has fallen by over 35%. However, for exchanges like Coinbase Global Inc. (COIN.US), Gemini Space Station Inc. (GEMI.US), and Bullish (BLSH.US), the impact has been much more severe. With trading volumes being the core DRIVE of their business, the sharp decline in activity has led to a 40% to 55% drop in their stock prices over the past three months, forcing analysts to significantly lower their expectations. As of now, Coinbase, Gemini, and Bullish have not responded to requests for comment. The pressure point is simple. The main source of revenue for most cryptocurrency exchanges is trading fees. When trading activity slows down, their income decreases accordingly. Analyst Irwin Lau estimates that Coinbase's trading volume in the fourth quarter may fall by 40% year-on-year, to $264 billion. Activity trends in January were even weaker, indicating that at the current pace, the operating rate for this quarter may be less than half of last year's level. For investors who view cryptocurrency stocks as an alternative to digital asset growth, there is a distressing piece of news: even a mild price decline could have a disproportionately heavy impact on revenues once traders completely exit the market. Last weekend, Bitcoin dropped below the $80,000 mark, seemingly increasing the likelihood of a broader investor exit from the market, and the exit process is likely to be more painful. Peter Christiansen, head of digital asset stock research at Citi Group, stated that when prices rise, more people flock to the market to trade because they fear missing out on a profitable opportunity. However, he also pointed out, "Once the market encounters adverse factors, it is difficult to gather momentum again." Recently, cryptocurrency stocks have also been affected by investors withdrawing risk assets from the broader stock market. This move by investors is mainly due to concerns about rising costs in the artificial intelligence field, increased political uncertainty at GEO Group Inc, and overall capital rotation from the tech sector. In January, the price of Bitcoin fell by nearly 11%, marking its fourth consecutive month of decline, setting a new record for the longest downturn since 2018. The recent downturn in Bitcoin comes amidst overall market turmoil. The gold market is a case in point, experiencing its largest drop in over a decade last Friday, with gold prices continuing to plummet on Monday. Analysts point out that due to the continued slump in the cryptocurrency market, Gemini's profitability timeline may be delayed. Needham & Co. analyst John Todaro stated that Gemini had planned to approach breakeven in 2027, but this target might now be pushed back to around 2028. Clear Street analysts pointed out that the crypto trading platform Bullish, which focuses on serving institutional clients, saw a decrease in trading volume of around 28% in January compared to the same period last year. Lawrence Froleson, an analyst at Kaiko, said, "From the current stage of the cycle, we may have only completed about 25%. It has been about three months since the market reached its peak, and based on this, I estimate it may take another six to nine months for the market to see a significant recovery." The uniqueness of this cycle is not reflected in the severity of the massive drop in trading volume after all, historical experience shows that crypto winters often significantly suppress market activity but in the absence of significant triggering factors apart from the sudden cooling of market enthusiasm. Looking back, the market crash from 2018 to 2019 was a direct consequence of the collapse of the initial coin offering frenzy under regulatory pressure; the downturn from 2022 to 2023 was characterized by a series of failures within the industry, from Terra-Luna's collapse to Three Arrows Capital's bankruptcy, to FTX's collapse. However, this time, there have been no major impactful events, even though many traders are still struggling to heal and recover from the trauma caused by the record-breaking mass liquidations triggered by the crash in October last year. However, the participation of retail investors in the market remains low. Legislation to advance the structure of the cryptocurrency market in the United States, which has long been promised, is currently stalled, putting exchanges and institutional investors in regulatory limbo. Until this uncertainty is resolved, many traders seem more willing to hold and wait a market trend that has led some analysts to define the current stage as a bear market rather than a comprehensive crypto winter. However, data is gradually blurring this boundary. Although spot Bitcoin exchange-traded funds have proliferated and related infrastructure development has been ongoing for many years, current trading activity is shrinking at a rate similar to previous downturns (such as the period from late 2021 to 2022), as reported by Kaiko. The significant difference this time lies in the behavior of market participants: traders are not panic-selling and exiting, but rather choosing to leave the market with concerns about when the next impact will occur. While some investors are turning to decentralized cryptocurrency exchanges for leveraged trading profits and faster transaction speeds, the attention of a broader retail group has shifted to more trendy areas, covering topics from artificial intelligence tokens, prediction markets, to gold, sports betting, and small tech stocks. For some large exchanges, the impact they suffer can be somewhat cushioned because they have expanded their business to include digital asset custody, prediction markets, stock trading, and other areas. However, this cushioning effect is limited. Unlike past crypto winters triggered by internal industry collapses, this industry slowdown may not end with bright new cryptocurrency trends but rather with U.S. legislation. Cryptocurrency industry representatives and banking representatives gathered at the White House on Monday night to negotiate a compromise on a market structure bill proposed by the Senate. Prior to this, cryptocurrency exchanges are realizing that even without a crisis, the market may gradually stagnate and the fee model for trading fees is often the first to feel the pain.