The Mind-Bending Fluctuations of Cryptocurrencies

The war on cryptocurrencies began with the collapse of Mt. Gox, an early Bitcoin exchange. Mt. Gox was once the world’s largest Bitcoin exchange, but it filed for bankruptcy in February 2014 after 850,000 bitcoins went missing. The missing coins caused the value of Bitcoin to plummet and raised questions about the security of Bitcoin and other cryptocurrencies. Since then, numerous other setbacks have tested the resolve of cryptocurrencies, the most recent being the collapse of Terra Luna and FTX. The collapse of FTX alone saw some $180 billion dollars wiped from the crypto market this month alone. These accumulated losses have caused many investors to lose faith in the security and promise of cryptocurrencies and led to louder calls for stricter industry regulation. Whilst regulation is certainly required, it must be designed and implemented with close industry consultation. Tighter regulation alone could result in declining innovation that may impinge on the ability of market participants to bring new business solutions, concepts, and models to life effortlessly.

While many believe that we are now well and truly heading into crypto winter. Others still say that this is just a temporary setback and that cryptocurrencies will rebound and continue to grow in popularity. Only time will tell which side is right. However, there are other forces at play that require considerable contemplation. A deeper delve into the FTX debacle unravels blatant fraud and potentially sinister activity that ultimately plays into the hands of the US Security and Exchange Commission (SEC). The SEC (and many governments) view cryptocurrencies as an erosion of fiat currencies. Consequently, they have long sought to regulate cryptocurrencies with an iron fist (especially stablecoins) so as not to lose control of financial instruments.

The position of policymakers on cryptos and how best to regulate the industry will continue to be a pressing question. Decentralised activity sits on the outside of centralised governmental control levers, which can cause friction with the long arm of the law. Moreover, the fall of FTX indicates that Sam Bankman-Fried (SBF) could be seen as part of a plan to help the SEC discredit cryptos. Especially given the deep synergies between SBF and the US Government (SBF being a significant donor to the Biden campaign). Even more worryingly, some have reported that FTX participants were part of the hack on Terra Luna and other cryptos to remove competition while lobbying government authorities to tighten the reigns on crypto. SBF’s close ties with the government afforded him a more lenient position with less scrutiny.

Cryptocurrencies are still in their early developmental stages, and as such, the market remains volatile and speculative. The total cryptocurrency market cap is now under USD 800 billion, according to data from CoinMarketCap.com. A significant drop from the all-time high of over $2.5 trillion a year ago but still small when compared to the broader world of finance. In reflection, the massive decline to this new low signifies that much work will be needed to revive crypto and substantiate its presence for the future evolution of money. However, fundamental changes must occur to settle investor confidence and build further usability into crypto to validate its future.

Many cryptocurrencies are still trying to solve critical market issues, such as providing a more efficient way to transfer money or providing more security, scalability, and privacy for users. Nevertheless, until these critical issues are resolved, the market will remain volatile and speculative. Every adverse action that occurs spreads throughout the entire ecosystem creating shocks that scare investors and lower overall credibility. To establish a more robust baseline for trusted digital assets, it is crucial to have solid structural frameworks in place. The underlying technology and protocols for cryptocurrencies must be sound and reliable. In addition, governance structures must be in place to ensure investors have faith in the system. Only when these things are in place can the market for cryptocurrencies be more stable and trustworthy.

Regulatory opacity has further attributed negative friction to the desired outcomes of crypto. Without a clear and concise set of regulations, investors are wary of placing their money into these digital assets. This lack of trust has caused the market to decline in value, and it will be necessary for governments to provide more clarity for the market to rebound.

However, the governments impending introduction of central bank digital currencies (CBDCs) is also at odds with cryptocurrencies. CBDCs are seen as more trusted and stable options for digital payments, which could negatively impact the demand for cryptocurrencies. In addition, CBDCs could eventually replace cryptocurrencies as the preferred payment method in the digital world. These implications further erode the value of cryptocurrencies and could cause the market to decline exponentially. Further declines could see cryptocurrencies reach a point of no return. Such an inflexion point would be detrimental to the entire cryptocurrency ecosystem.

The friction between cryptocurrencies and CBDCs will further divide the world of digital money. On one side of the equation, we have centralised control with governments issuing their own digital currencies. On the other side, we have decentralised networks with cryptocurrencies that are not beholden to any one authority. This division will only amplify the struggles between these two systems and ultimately lead to one winning out over the other. Regulatory enforcement currently prohibits accepting and expanding cryptocurrencies in many countries as crypto competes with fiat currencies, removing governments’ control over the monetary system.

Individuals and businesses alike are conflicted as they desire the security and reliable infrastructure of the long-existing financial system. On the other hand, they hate the inflationary aspects of money printing and the tight controls afforded to banks and intermediaries as the custodians of your money. One way to overcome the conflict between cryptocurrencies and the current financial system is for businesses to start accepting cryptocurrencies as payment. However, some governments have declared that cryptocurrencies are securities that cannot be used as payment for goods and services. Accepting crypto as payment would provide a more efficient way for businesses to transfer money and increase the adoption of cryptocurrencies. Additionally, it would help build investor confidence in cryptocurrencies and show they are viable payment options. Regardless, the fluctuations of crypto pose further challenges when attempting to transact.

The world is an imperfect place from top to bottom, and the financial and economic turns we are all experiencing are part of the improvements process to help redesign alternative structures that supersede the present. Blockchain provides the underlying value upon which the next iteration of the web resides. However, there are still further challenges ahead and improvements that can only be made by finding faults and fixing them.

Regulators and innovators must work together to strike a balance between centralisation and decentralisation. The focus must be maintained on the core factors that will improve business. There must also be better and more fluid capital access points that are inclusive and unbiased, offering a fairer playing field for all. These actions will inevitably increase business activity and narrow the gaps between the haves and have-nots while fostering healthy competition.

Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.