- Cryptocurrency, volatility and the risks in it.
- What is the long-term viability of crypto, including the impact of decentralized finance (DeFi).
- Are Central Bank Digital Currencies (CBDCs) proof that crypto is here to stay?
Since the introduction of the first cryptocurrency transactions and digital tokens in the 1990s, after their democratization in the 2010s, the current crisis in the cryptocurrency market is unprecedented.
At the end of 2020, Bitcoin took a huge plunge from which it has yet to recover. This precipitous fall is discussed with the worrying demise of some “stablecoins”, which were intended to be less unpredictable.
This is compounded by the decline of once-prominent cryptocurrencies, especially after they were accused of fraud, as in the FTX controversy. Among all the leading trading platforms, FTX ranks third for serving a population of one million at the peak of its career.
Its aftermath has had a significant impact on investors, and this, according to experts, would certainly limit the adoption of crypto assets over the next few seasons.
The clock of volatility is ticking
Tokens that can be exchanged for digital currency are one type of crypto asset (i.e. cryptocurrencies such as Bitcoin and Ethereum). Security tokens are used to invest in a company through trade support bots such as bitcoin bank, giving the holder a stake in that company, while utility tokens are exchanged for access to a finished product or service once created.
Unlike other cryptocurrencies, stablecoins are backed by something other than a digital ledger of transactions, such as the US dollar, a commodity such as gold, or an investment vehicle such as a bank deposit (for example, a stock or a bond).
The daily news is littered with articles about Bitcoin’s downturn. While this is not the first time the value has fallen, it is the biggest loss since the end of 2020, and therefore deserves special attention.
Investors fled these riskier investments as interest rates rose, contributing to the crash. Bitcoin may be on the mend, but it still has a long way to go before it reaches its former glory.
The media attention that cryptocurrencies have received in recent times has fueled many people’s fears about their long-term viability. The latter’s unregulated markets are notorious for high volatility and are often linked to speculation.
In fact, the TBEN just reported a 30% increase in bitcoin laundering in 2021. Investors lost more than $1 billion in cryptocurrency to scams in 2021, according to the US Federal Trade Commission, whose job it is to protect consumers. Those who have lost money to fraud have, unsurprisingly, seen little return on their investments.
Crypto serves as a trading lifeline for a billion users
Still, the business use of cryptocurrencies is increasing, albeit slowly. Many publicly traded companies, including Starbucks and McDonald’s, have started accepting Bitcoin as payment, according to specialists studying the implications of this trend for corporate social responsibility.
This is especially true for their locations in El Salvador, as Bitcoin has been recognized as a legal tender there.
While Japan is not actively pursuing Bitcoin adoption as a currency, certain companies, including Japanese e-commerce giant Rakuten, have decided to accept cryptocurrencies instead.
They claim to be motivated by the need to broaden the range of payment methods available to their customers.
The number of people using cryptocurrency is increasing every year. For example, the exchange platform Crypto.com predicted that more than 295 million users would have participated in the cryptocurrency market by the end of 2021. As of December 2022, the platform expected to reach one billion users.
In addition, those whose traditional banking options are unreliable or insecure can use cryptocurrencies to access a decentralized financial system. One of the justifications offered by the Governor of El Salvador for recognizing Bitcoin as legal money was to provide an alternative banking system for the country’s less affluent citizens.
Crypto to witness a sporting oscillation
The long-term viability of cryptocurrencies is influenced by a number of factors, including the rising interest in decentralized finance (DeFi) and the maturation of the metaverse. Stablecoins are often used to facilitate the operation of decentralized financial systems.
Likewise, the metaverse, a collection of interconnected 3D simulated realities, accepts cryptocurrency payments for goods and services.
Despite the recent collapse of the crypto asset market, industry experts are confident that decentralized finance, especially in the form of products backed by cryptocurrencies, will survive. This is due to the existence of the market and the competition present.
In addition, they believe that while the recent precipitous drop in cryptocurrency-related markets has eliminated some participants, it is in fact a positive development.
These participants argue that a significant fall in the value of crypto asset markets is not only inevitable, but beneficial as it will help restore market equilibrium.
The silver lining: Crypto is the dark horse
Another proof that digital currencies are here to stay is the introduction of coins by central banks in the form of blockchain and digital currencies (CBDCs). Namely, the Bank of Canada is developing plans to establish a CBDC.
CBDCs, if released by the Bank of Canada, would be “officially digital money (that) would hold their dollar amount in Canadian dollars as they are authorized by the Bank of Canada exactly like bank notes,” the institution claims.
The Sand Dollar of the Bahamas and the Naira of Nigeria are just two examples of countries that have produced similar currencies (eNaira). CBDCs are distinct from privately produced digital currencies (such as Bitcoin or Ethereum) because they are not designed for speculation or prediction, but rather for use in day-to-day trading. In terms of usability, they are comparable to cash.
In addition to making fiscal and monetary policy easier in the issuing countries, another goal of CBDCs is to increase the financial inclusion of those who cannot access the mainstream banking system.
Cryptocurrency is here to stay thanks to developments in digital currencies, both in the metaverse and with the advent of the CBDC.
Due to their resilience, the physical manifestations of crypto-assets will change over time in line with the underlying technology that enables them (mainly blockchains) and the cyclical fluctuations in end-user and/or lender demand.
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