Crypto is becoming more popular, more than ever before. Even with recent crashes, the public appetite for cryptocurrencies has never been as high as it is today. And yet even with this almost exponential growth, the technology is still in its infancy, it is still evolving and there is a lot of uncertainty regarding its’ future.
Starting in 2008 with the invention of Bitcoin as the first crypto-coin, the number of digital currencies has ballooned over the last few years. Today there are over 18,500 currencies in existence. Cryptocurrencies are no longer just a trendy tech trend but becoming more entrenched in our global financial system.
Moreover, the market for cryptocurrencies also continues to grow. It is estimated to triple by 2030 hitting a high of more than $5 billion. For investors, businesses and brands who may not have believed in the crypto hype, it can no longer be ignored; crypto is a rising force.
And yet, detractors still remain steadfast in their criticisms. Despite the continuing rise of cryptocurrencies, there are some who still see it as a fad or rather a bubble.
The question is; are they right?
A Dangerous Fad
Financial trends are not just fads that come and go like trends on social media. They have consequences, and some can be disastrous and ultimately dangerous to the global economy. The dot.com bubble of the 90s and the housing crisis of the late 2000s are good examples of the effects bad financial trends can have a global scale.
The rising popularity of cryptocurrencies therefore can be dangerous, if not fatal to the global economy. And with crypto crashes becoming ever more frequent perhaps it is time to take criticisms levelled against cryptocurrencies more seriously.
So far, the major debate surrounding cryptos has been levelled around their inherent value as assets. Prolific investor Warren Buffet has for instance likened cryptocurrencies to the tulip mania that took hold of the Netherlands in the 1600s. At the time tulips were especially difficult to grow with a few strains becoming especially valuable. Soon, speculation grew out of control that it was said that one could by a house with just one tulip – until the bubble burst and confidence fell.
“When you buy non-productive assets, all you’re counting on is whether the next person is going to pay you more because they’re even more excited about another next person coming along,” he said on CNBC TV. “But the asset itself is creating nothing.”
On the other hand, Mark Cuban has said that he doesn’t believe Bitcoin is a hedge against inflation, even going as far as noting that ‘it would be easier to trade bananas than Bitcoin.’
Indeed, with crashes like Luna losing more than 30% of its value in a few weeks and quite a few Bitcoins crashes, the volatility of cryptocurrencies has had investors worried about the future of their crypto portfolios.
Moreover, aside from debates about their value and volatility cryptocurrencies also have a negative impact on the environment. Due to the energy-intensive nature of Bitcoin mining, for example, many environmentally conscious companies and government institutions are starting to shy away from cryptocurrencies as a whole.
And yet despite crashes, warnings and even environmental damage the appetite for digital coins is still rising. Cryptos are no longer a preserve of internet renegades intending to ‘turn the global financial system on its head.’ It is today a fully-fledged asset just like any other on the stock market, albeit riskier.
What’s more, the profile of investors has evolved. No longer are cryptos a niche hobby, rather everyday consumers are getting in on the frenzy. Older consumers especially have begun to back crypto at much faster rates. In the US for instance, consumers over 35 years old make up almost half of those expected to make an investment into cryptocurrency in the next few months.
Even in less crypto-friendly regions like China and more recently India, investors and miners are finding ways of circumventing these laws or just moving to another country altogether.
A Power Paradox
More recently, even traditional financial institutions have begun to see the upside of cryptocurrencies and want their piece of the pie. For example, US. Banks created a bitcoin custody service that allows hedge funds to take a stake into digital currency.
With more money for investment, traditional finance has the capacity to gain more control of the crypto ecosystem and also threaten digital currencies’ ability to operate outside of traditional finance.
Herein lies the paradox.
Cryptocurrencies were created to usurp power from traditional finance and democratize it to the average consumer. Now, however traditional money is using that same technology to change the power structure of the crypto market.
Every day, more power is ceded to a few entities. The mining network for instance is no longer available to a wide range of crypto enthusiasts from all over the world. It has today been ring-fenced by a few companies who have the computing power and energy to mine at scale leaving average consumers to mine the scraps.
Moreover, after acquiring huge amounts of crypto coins they are able to affect their price. Tesla for instance caused a surge in Bitcoin price by 20% in a single day by investing massively after which it dumped it and caused another drop.
More or Less Regulation?
More recently crypto mining and trading have caught the attention of governments like never before. The aforementioned laissez-faire attitude toward decentralized finance is waning. The question for many governments and investors today is whether they want more or less regulation.
For now, calls for more regulation have been gaining more support in recent months. Due to the high volatility of these currencies, a lot of investors need regulators to provide some form of protection in case of huge crashes as we have seen sometimes with Bitcoin and more recently with Libra.
More regulation will also improve security and also boost these currencies’ standing so that they can be accepted by more businesses and individuals as a sound means of payment.
On the other hand, cryptocurrencies thrive on volatility and anonymity. In fact, a lot of investors are squeamish about calls for more regulation as this might be an impediment to the peer-to-peer nature of crypto transactions.
A middle ground has to be found.
For this reason, support for regulation is directed not toward governments, but toward payment companies and exchanges themselves. These are the institutions with direct control over crypto transactions. Most investors want some slight oversight over these institutions with the government taking a backseat.
To their credit, most governments have indeed taken a backseat with regard to cryptocurrencies. Most have let miners and traders continue with their activities, albeit with a lot of warnings about the apparent ‘dangers of crypto trading.’
More recently, however, signs are that governments are growing increasingly tired of taking the backseat with these matters. Cryptocurrencies threaten to disrupt national and international financial systems if adopted widely.
There have been varied reactions to this ensuing threat. Countries like China have moved to outrightly ban the trading and mining of cryptocurrencies within the country while others like El Salvador have fully adopted Bitcoin as legal tender.
Both of these approaches have their advantages and disadvantages. On the one hand, banning trading and mining of cryptocurrencies infringes on their citizens’ freedom while on the other hand approving Bitcoin as legal tender exposes your country to the volatility that is the nature of cryptocurrencies.
Clearly, a middle ground is the right approach. Allow traders and miners to carry on with their activities while also protecting them from large price fluctuations.