Despite recent downturns, the crypto space has huge potential.
by Arjun Anand
| 10/20/22 4:05 am
For the past several years, the cryptocurrency market has maintained a polarizing yet prominent presence in the eyes of governments, businesses, and the public. However, following its massive crash in May 2022, the crypto market has largely disappeared from the public eye. Despite the recent trend in market valuation and public sentiment, cryptocurrencies, while flawed in their current state, provide undeniable benefits such as increased financial inclusion and increased security. Government regulation and broader public acceptance will allow cryptocurrencies to cement their rightful place in the future of our economy.
The world’s first decentralized cryptocurrency, Bitcoin, was introduced in 2009. Bitcoin spearheaded the creation of a new market that used cutting-edge innovations in digital technology and blockchain, promising a new era for finance and currency. In 2019, the cryptocurrency market seemed to be going nowhere but up. Of course, there were ebbs and flows, but the overall crypto market forecast seemed overwhelmingly positive. Throughout 2020 and 2021, the crypto market saw an exponential rise in popularity as it passed a series of milestones: the total market capitalization of all cryptocurrencies peaked at $3 trillion, El Salvador became the first nation in adopting Bitcoin as legal tender and new creations such as the metaverse, an immersive virtual reality environment, and decentralized finance, the use of new decentralized technologies to bypass central financial intermediaries, were built on the foundations of the crypto market.
This year, however, saw a sharp drop in the outlook for cryptocurrencies. Starting in January, there was a tremendous drop in the valuation of major cryptocurrencies. Bitcoin fell from a dizzying peak of a market price of over $67,000 in November 2021 to around $20,000 in recent months. Ether, the flagship cryptocurrency of popular decentralized blockchain technology Ethereum, mirrored Bitcoin’s decline, falling from over $4,700 in November to just over $1,000 today. Of course, the collapse of TerraUSD, a widely used algorithmic stablecoin that was pegged to the dollar, cannot be excluded. Investors around the world suffered gigantic losses; El Salvador lost more than $60 million on its Bitcoin bet, worsening already declining economic growth and a growing deficit. This dramatic accident raised the question: is cryptocurrency really the future?
The accident reminded us all that cryptocurrencies, as innovative and futuristic as they are, are still highly volatile. It is indisputable that crypto is more widely accepted: universities and large companies accepting crypto as payment and central banks discussing the merits of central bank digital currencies are just two examples. However, cryptocurrencies still seem unable to shake the perception that they are volatile investments. When the price of Luna, the stabilizing counterparty to TerraUSD that reached a market cap of over $40 billion earlier this year, fell to virtually zero due to an algorithmic glitch, it reinforced this perception.
However, cryptocurrencies must still be the future as they offer too many benefits to write off. Bypassing banks and other centralized financial authorities, cryptocurrencies offer greater financial inclusion and accessibility: anyone with a device can create a cryptocurrency wallet in seconds, without the need for identification or a good credit score. Due to the decentralized nature of the blockchain, cryptocurrencies offer enhanced security and privacy. Lower transaction costs are another benefit. While you may have to shell out a hefty sum for bank-facilitated wire transfers, you can transfer money around the world in seconds for a fraction of the cost using crypto.
What is needed more than ever is for cryptocurrencies to be recognized as formal means of exchange among everyday consumers. How should this be done? For one thing, governments should regulate the crypto space. The regulation will not only help limit massive failures like the Terra crash, but also show the government’s recognition of cryptocurrencies and their potential role in our world. While regulation may stifle innovation in an extremely fast-moving space like crypto, it will also protect investors and build trust. Through regulation, cryptocurrencies would gain implicit backing from the government, something that is desperately needed to alter cryptocurrencies’ reputation for unpredictability.
The issuance of central bank digital currencies by the world’s central banks is a key move that will also be essential to preserving the future of cryptocurrencies. CBDCs are digital equivalents of a nation’s currency. Although CBDCs are not the same as cryptocurrencies (cryptocurrencies tend to be decentralized, while CBDCs are centrally managed), they offer many of the same benefits, including bolstering financial inclusion, lowering the costs of transaction and the digitization of the economy. Despite growing interest in CBDCs, the Federal Reserve remains reluctant to adopt the digital currency due to risks of financial instability and less effective monetary policy. Although their concerns are well-founded, the nation’s lawmakers need to understand that the issuance of CBDCs will not only modernize and streamline the nation’s economy, but also act as a springboard for broader public acceptance of the crypto space.
Despite the setbacks that the market has experienced this year, cryptocurrencies are the future. However, what is needed more than ever is government regulation. The government stamp of approval on cryptocurrencies will institutionalize the world of cryptocurrencies. The acceptance and use of the crypto space by governments in the form of digital currencies will cement this process. As people begin to see crypto permeate the formal economy, the crypto space will emerge from the shadows, shedding a cloak of volatility and risk.