Since the introduction of Bitcoin in 2009, Cryptocurrencies have been a controversial topic in the finance world for over a decade. Cryptocurrency which started as an experimental idea has since then evolved into this huge trillion-dollar industry. Crypto has remained under scrutiny from regulators, traders, investors, technology enthusiasts, and even the general public.
Despite the high status of Cryptocurrency in the market, many financial experts remain wary of it. Major concerns have been about regulation, market volatility, security, and the failed attempts to fully integrate cryptocurrencies into the economy.
In more recent times (especially in the last two years), the Crypto has faced some of its lowest periods. From the collapse of trading Giants like FTX to the numerous charges filed by the SEC against big companies like Binance and Coinbase, the public is left to wonder— What exactly is going on with Crypto?
Famous tech investor, Chamath Palihapitiya, claimed that “Crypto is dead in America”. Is Crypto dead? Is the death of Crypto limited to America? What signs will signify the death of Crypto? Have they happened?
This blog post will help answer all your questions about the cryptocurrency market.
Market Volatility and Challenges in the Crypto World
Around the globe, cryptocurrencies have earned a reputation for being very volatile assets. Many financial experts often refer to the volatility of crypto as its major problem.
What exactly does the volatility of an asset mean?
Market volatility is a condition where the price of an asset fluctuates very rapidly and significantly in the market. These asset prices will often witness very rapid price gains, which fall very quickly in the blink of an eye.
While the price fluctuations in traditional financial markets are usually more gradual, the cryptocurrency market is known to be highly volatile.
The high volatility in the Crypto market is caused by many factors. Some of them include:
- Investors sentiments
- Early stage and slow adoption
- News of technological advancement
- Geopolitical events
- Poor regulation
- Speculations by market players
- Market manipulation
- Liquidity issues
- Lack of fundamental value, amongst others.
The high volatility problem of cryptocurrencies has caused many market players to lose confidence in the crypto market which has in turn impacted its long-term success and viability.
However, the high volatility is not the only challenge the crypto market is facing. Other popular concerns include:
- Crypto has failed to prove that it is a “safe haven” or that it can fight inflation. Between the years 2010 and 2022, Bitcoin, the most popular Cryptocurrency, has recorded 27 episodes of drawdowns of 25% or more. This is very unpromising because a comparison with the equities and commodities markets shows that this has only been a one-time occurrence with these markets.
- Lack of clearly defined and uniform global crypto regulation.
- Bitcoin’s risk-adjusted return has been disappointing since 2020, correlating more positively with the US equities and bonds.
- Cryptocurrencies have consistently conflicted with the Environmental, Social, and Governance (ESG) goals. Bitcoin, for example, uses a validation process where a single transaction requires enough energy to power the average American home for two months.
Regulatory Risks in the Cryptocurrency Market
Cryptocurrency remains the most famous topic when discussing financial decentralization, innovation, and privacy. Perhaps these unique features of cryptocurrency are the cause of its consistent troubles with regulatory bodies. Although to be fair, there isn’t exactly a clampdown on cryptocurrency by the government. The Governments of many different countries have totally embraced cryptocurrency. However, many Governments around the world cannot figure out the best approach to ensure complete regulation of the crypto industry. To be honest, there isn’t a straightforward solution to this problem. It is an inherent risk of the crypto industry. This is why some Governments have also chosen to impose strict regulations on the operations of the cryptocurrency market, and some, outright ban.
There doesn’t seem to be a global consensus or position on the adoption of cryptocurrencies. As you travel to different countries, you will notice the range of cryptocurrency regulations.
There are several reasons why governments are insistent on a complete regulation of the crypto industry. This is because of the many risks associated with poor regulation of the crypto industry. Some of them include:
- Potential misuse of cryptocurrencies for illegal activities
- Tax evasion,
- Poor Consumer protection
- International coordination
- Data privacy, amongst others
Let’s take a look at the most recent regulatory issues in the cryptocurrency industry in the last 2-3 years, what many have termed the “crypto winter”.
FTX, a cryptocurrency trading giant filed for bankruptcy in November 2022 despite the public focus on its “$32Bn” valuation in February 2022. Sam Bankman-Fried, the company’s founder is currently on trial for claims of defrauding customers.
Another Crypto broker Genesis also filed for bankruptcy protection after owing its creditors over $3Bn.
Earlier this year, the SEC filed 13 charges against Binance on accounts of mishandling customer funds among other crimes.
Other companies that have been affected by this so-called crypto winter include BlockFi, Three Arrows Capital, Voyager Digital, and Terra Network. Some stablecoins like Luna and Terra USD also collapsed earlier last year. Many of these companies that failed during the crypto winter only failed because their customers were steadily losing faith in them.
Market Stability and Long-term Viability
In the last few years, there has been a massive surge in the adoption of cryptocurrencies worldwide. Apart from Bitcoin, many other cryptocurrencies have been unveiled, each with its unique features. The market capitalization has also since then skyrocketed with investments from a lot of institutional players and investors.
For the most of it, the market has been relatively stable in the last few years. The main factor contributing to this stability is of course the interest in and adoption of cryptocurrency by institutional investors. Many traditional financial institutions and high-net-worth individuals have adopted the use of cryptocurrencies. This adoption has legitimized and stabilized the cryptocurrency market better than its earlier years.
The market has also matured in various aspects. The market has witnessed better structure, increased liquidity, and the development of financial instruments designed to minimize risk, such as Bitcoin futures and options. The market has also matured into adopting better security infrastructure and practices than in its earlier days. The regulatory efforts in the crypto industry have now reduced fraudulent and non-compliant practices.
So far, we have learnt how the Crypto industry started, the challenges it has faced, and what stage of development crypto currently is. However, what exactly could lead to the significant decline or death of crypto? In what scenario would it be safe to assume that crypto is dead
Mass Adoption of Central Bank Digital Currencies (CBDCs). It is no news that several Central Banks around the world are exploring the creation of their digital currencies. As of now, studies have shown that about 130 countries (roughly 98% of the global economy) are exploring digital versions of their currencies. About 11 countries, some in the Caribbean and Nigeria have already launched their CBDCs. China has already begun pilot testing while India and Brazil plan to launch their digital currencies next year.
Therefore, in a scenario when these CBDCs gain traction and become the preferred digital medium of exchange, they can overshadow existing cryptocurrencies since they have the government's legal backing. These CBDCs, owned by the government, may offer better security and regulatory compliance which can eliminate the need for decentralized cryptocurrencies.
Technological Advancements Beyond Blockchain. Cryptocurrencies are primarily built on blockchain technology. In a scenario where the world evolves beyond blockchain, the crypto industry could face a serious problem. For example, recent quantum computing is said to have the potential to crack current encryption methods. What then will happen to the Crypto industry in the event of such?
Regulatory Convergence and Stringent Oversight. In a scenario where regulators worldwide implement stringent regulations that stifle the use of cryptocurrencies nationwide, the crypto industry might lose a lot of users and consequently overall market activity and liquidity.
Rebuttals and Counter Arguments
As to the argument of whether crypto is dead or not, many crypto enthusiasts strongly believe that crypto is not dead— and with facts of course. They argue that:
- The number of active crypto wallets across various blockchains is about 20 million per month compared to just 5 million three years ago.
- The number of crypto transactions per month currently stands at almost 1 billion. This figure was 30 million 3 years ago.
- The number of active developers in the crypto space averages about 27 thousand per month, compared to 20 thousand in the year 2020.
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The future of cryptocurrency will remain a very controversial topic in years to come. In this blog post, we have examined the possibility of a potential “death” or decline in the cryptocurrency market. We have also discussed the challenges in the crypto market, scenarios that could lead to the decline of crypto, and facts proving the growth of crypto over the years.
As for the ultimate question on the death of crypto — time will tell.