Cryptocurrency, volatility and the risks therein.
What’s crypto’s long-term viability, including the impact of decentralised finance (DeFi).
Are Central Bank Digital Currencies (CBDCs) evidence that crypto is here to stay?
Since the introduction of the first cryptocurrency transactions and digital tokens in the 1990s following their democratisation in the 2010s, the current crisis in the cryptocurrency market is unprecedented.
In late 2020, Bitcoin took a massive dive from which it has yet to recoup. This precipitous fall is being discussed with the concerning demise of some “stablecoins,” which were meant to be less unpredictable.
This is exacerbated by the decline of once-prominent cryptocurrencies, especially after being accused of fraud, as in the FTX controversy. Among all the leading trading platforms, FTX has been ranked third as it served 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 restrict the rate of adoption of crypto assets over the next few seasons.
The clock of volatility is ticking
Tokens that may 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 assistance bots like bitcoin bank, giving the holder a stake in that company, whereas utility tokens are exchanged for access to a finished good or service once they have been created.
Unlike other cryptocurrencies, stablecoins are backed by something other than a digital ledger of transactions, such as the U.S. dollar, a commodity like gold, or an investment vehicle like a bank deposit (e.g. a stock or a bond).
The daily news is littered with articles about the decline of Bitcoin. While this isn’t the first time its value has dropped, it is the largest loss since late 2020, therefore it deserves special attention.
Investors fled these riskier investments when interest rates rose, which contributed to the crash. Bitcoin may be on the mend, but it has a long way to go before it reaches its former glory.
The media attention that cryptocurrencies have received recently has fanned many people’s fears about their long-term viability. The unregulated markets of the latter are notorious for their high levels of volatility and are often linked to speculation.
In fact, the BBC just reported a 30% increase in bitcoin laundering in 2021. Investors lost over $1 billion worth of cryptocurrency to scam schemes in 2021, according to the U.S. Federal Trade Commission, whose job is to protect consumers. Those who lost money due to fraud have, unsurprisingly, seen very little return on their investments.
Crypto serving as the trading lifeline for a billion users
Still, the business use of cryptocurrencies is rising, albeit slowly. Many publicly traded corporations, including Starbucks and McDonald’s, have begun accepting Bitcoin as payment, according to specialists studying the implications of this trend for corporate social responsibility.
This is especially true in their El Salvador locations since Bitcoin has been recognised as a legal tender there.
Even though Japan is not actively pursuing the adoption of Bitcoin as a currency, certain companies, including the Japanese e-commerce behemoth 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 clientele.
The number of people using cryptocurrency increases each year. Exchange platform Crypto.com, for instance, predicted that by the end of 2021, over 295 million users would have participated in the cryptocurrency market. As of December 2022, the platform anticipated having one billion users.
In addition, those whose traditional banking options are unreliable or insecure can use cryptocurrencies to gain access to a decentralised financial system. Among the justifications, the Governor of El Salvador offered for recognising Bitcoin as legal cash was to provide an alternative banking system for the country’s less well-off citizens.
Crypto to witness a sporty oscillation
Cryptocurrencies’ long-term viability is impacted by a number of factors, including rising interest in decentralised finance (DeFi) and the maturation of the metaverse. Stablecoins are frequently used to facilitate the running of decentralised financial systems.
Similarly, the metaverse, a collection of interconnected 3D simulated realities, accepts cryptocurrency payments for goods and services.
Despite the recent meltdown in the crypto asset market, industry experts are certain that decentralised finance, especially in the form of products backed by cryptocurrencies, will survive. This is due to the market existence and competition present.
In addition, they believe that although the recent precipitous drop in cryptocurrency-related markets has eliminated some participants, this is in fact a positive development.
These participants argue that a significant decline in the value of crypto asset marketplaces is not only inevitable but also beneficial because it will help to restore market equilibrium.
The silver lining: Crypto is the dark horse
Another piece of evidence that digital currencies are here to stay is the introduction of coins by central banks in the form of blockchain and digital currencies (CBDCs). The Bank of Canada is, in fact, developing plans to establish a CBDC.
CBDCs, if released by the Bank of Canada, would be “official digital money (that) would keep their dollar amount in Canadian dollars since 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 only two examples of countries that have produced similar currencies (eNaira). CBDCs are distinct from privately produced digital currencies (like Bitcoin or Ethereum) since they are not designed for speculation or prediction but rather for use in everyday commerce. In terms of utility, they are on par with cash.
Aside from making fiscal and monetary policies easier to implement in the issuing countries, another goal of CBDCs is to increase financial inclusion among those who lack access to the regular banking system.
Cryptocurrency will be here to stay thanks to developments in the realm of digital currencies both in the metaverse and with the advent of the CBDC.
Because of their resilience, crypto asset’s physical manifestations will change over time in step with the underlying technology that enables them (principally blockchains) and the cyclical fluctuations in demand from end-users and/or financial backers.
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