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Can local crypto exchanges win out in Southeast Asia?

A Roller Coaster Ride

Crypto investors would agree that last year was nothing short of a roller-coaster ride. 

Cryptocurrencies witnessed extraordinary swings, reacting to rapid changes in crypto regulations and the larger macro environment. Last year, notable shocks were caused as a result of China’s crypto ban and El Salvador’s adoption of Bitcoin as legal tender.

Considering these wild swings, rise and fall of crypto startups, many experts are drawing analogies between Crypto and the dot-com era. Leading Crypto supporters like Mark Cuban, Brian Armstrong expect that the next set of world’s most valuable companies would get incorporated during this decade, similar to Google and Amazon in the Dot-com era. 

Looking at some of the mind boggling growth numbers of the crypto ecosystem, these statements may well hold true.

The total crypto market capitalization at the end of CY21 was USD $2.3 trillion – up nearly three-fold from USD $800 billion at the end of 2020 – and hit a peak of $3.1 trillion in November 2021.

Bitcoin and Ethereum prices reached new highs that were 247% and 457% higher, respectively, than prior peaks seen in 2017, with Bitcoin itself nearly reaching $1.3 trillion in market capitalization in Q4.

This past year also saw strong growth in the utilization of crypto. 

Prominent use cases included non-fungible tokens (NFTs), decentralized finance (DeFi) adoption, decentralized applications, play-to-earn gaming, and metaverse-related opportunities.

For example, NFT sales reached nearly US $20 billion in 2021 compared with less than just US $100 million in 2020. Additionally, the value locked in DeFi applications increased 13x throughout 2021 to approximately US $250 billion at year end, demonstrating that peer-to-peer financial services are growing.

All this growth could not have been possible without ease of access to users, where crypto exchanges worldwide have played a phenomenal role in developing the entire ecosystem.

Across the world,  the total active user base on crypto currency exchanges has soared from 100 Mn. in Q320 to more than 220Mn in June-21.

Trading volumes at exchanges have also increased exponentially, leading to an exponential growth in commission revenue for exchanges. 

To put this in context, global trading revenue generated by cryptocurrency exchanges hit $24.3 billion in 2021 to surpass total revenue generated by traditional stock exchanges like the New York Stock Exchange and the Nasdaq for the first time ever, according to a report published by financial-services consultancy Opimas.

As it seems like a super attractive business, today, no less than 600 crypto exchanges are operating in the world, primarily because of low entry barriers, with many of them operating as white label technology firms. 

However, there are clear winners who have scaled quickly to take up a significant portion of this pie.

The global powerhouses

The biggest winner of the explosive growth in crypto trading revenues is Binance., which increased its share of spot-market crypto trading volumes from 49% in 2020 to 69% as it raked in an estimated US $14.6 Bn. in trading fees last year.

Second in line is Coinbase, the only major crypto exchange to be publicly traded, with a total revenue of US $7.8 Bn in 2021, up from US $1.3 Bn. in 2020.

Along with revenue, profitability of these exchanges have also zoomed to unprecedented levels.

Given their rapid success, cash-rich exchanges are setting up venture capital and incubation arms to fuel the growth of the ecosystem across the world. Notable amongst them include Binance Labs, Coinbase ventures and blockchain.com ventures.

It’s no wonder then, that this has led to the founders in Southeast Asia also setting up these exchanges.

Localization in SEA

In the last two years, with increased digital adoption, there has been a concurrent surge in retail digital investors in SEA, with trading volume nearly doubling compared to pre-pandemic days in several countries. 

This growth in retail investors has been led by the young working population, with 18-30-year-olds accounting for nearly 40% of all traded volume.

Online investor activism has peaked in the last two years, with a deluge of resources shared across social media, from basic education to active trading forums that mirror the likes of the infamous r/wallstreetbets.

A surge in retail investor activity has percolated to cryptocurrencies as well, with people’s desire to diversify their asset classes during the pandemic.

However, what started as a diversification asset has slowly become mainstream across SEA. In some countries, the number of crypto investors has significantly overtaken the number of public equity investors.

Figures released by the Indonesian Ministry of Trade showed that there were 6.5 million crypto investors in Indonesia, or about triple the 2.2 million equity investors. 

The 2021 Global Crypto Adoption Index by Chainanalysis surveyed 154 countries and ranked Vietnam as the leading adopter, with over 880% growth over a one year period. 

In Singapore, which saw early adoption amongst countries in SEA, growth rates are tapering as the market reaches saturation point. 

A survey by Gemini showed that nearly 67% of Singaporeans already hold cryptocurrency as part of their investment portfolio.

From a regulatory standpoint, attitudes towards cryptocurrency in the SEA region have been friendly to neutral, with most countries trying to maintain a careful balancing act to minimize money laundering and speculative actions while maintaining a fair trading environment. 

China’s crackdown on cryptocurrencies has seen a mass exodus of crypto preneurs to friendly havens such as Singapore and Hongkong.

With this favorable environment, it does not come as a surprise that local crypto exchanges in Southeast Asia have seen considerable funding and usage.

For example, Pintu, an Indonesian crypto assets platform, raised a $35 million ‘Series A+’, just two months after it closed a 6 million series A. However, what was particularly interesting was that the round saw participation from Coinbase (through its venture arm). 

A large question was always around whether localization matters when it comes to these crypto exchanges. A key argument against this notion was that brand and trust are ultimately required for centralized crypto exchanges, along with obvious factors such as coverage and fees.

By ranking on purely those parameters, one could argue Coinbase, Crypto.com and Binance would win out. However, that has not been the case.

Local exchanges like Pintu in Indonesia, Zipmex and Bitkub in Thailand, along with several emerging ones popping up in Vietnam and Philippines now command several million users combined. 

On digging deeper, it is easy to see why that is the case. As mentioned earlier, regulatory clearance is so important in this space, and these players have done most of the heavy lifting in their respective local markets to get to this point. 

Moreover, localization does matter when you are catering to a retail investor base. For example, Pintu’s low minimums to start trading (less than a dollar) are far lower than global incumbents, making it easier for the average Indonesian to begin their crypto journey.

Thus, for now, it seems like global players prefer to invest in these local players rather than doing it themselves. 

A bumpy ride ahead

However, not all is well – signs of an impending slow down after a burst of initial enthusiasm have already started to show up. 

Market value of popular coins have fallen by 35% from their highs in Dec ‘21, as investors are looking to move cash out of risky holdings to safer assets. Similarly, after an initial gold rush, interest in NFTs and DeFi platforms has also slowed down in the recent past. 

According to NonFungible, both primary and secondary market transactions in NFTs have dropped below 1 million, from a high of 7.5 million per week last year. As the bullish optimism tapers, retail investors are likely to be more cautious when trading in crypto assets. 

This has certainly been true for a generally risk averse retail base in Southeast Asia, with many now turning away from this asset class. 

However, many of the long term tailwinds remain, and with these local exchanges only seeing wider coverage, it definitely seems like they are poised to weather the storm. 

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