Crypto Price Pain Will Lead To Better Projects Going Forward


The recent crash on Terra, the subsequent questioning and doubting of the decentralized finance (DeFi) space in general, and the dramatic drop in crypto asset prices has led some to refer to this era as the coming “crypto winter.” On the surface, such a description is correct, with hundreds of billions in value having been wiped out of the crypto asset market in the recent sell-off. That said, and despite the superficial similarities to the crypto winter that existed during 2018-2019, there are several traits that differentiate the current market volatility from an existential crisis of confidence.

From a higher tier perspective, the recent price declines and volatility the crypto asset sector is experiencing should not come as a dramatic surprise to market participants. Alongside riskier assets such as tech stocks and emerging market debt instruments, crypto assets have seen a dramatic rise in value since mid-2020. Even as global uncertainty and geopolitical conflict continued to rise in All across the board, crypto assets of all kinds thrived. Entirely new applications, including decentralized finance and non-fungible tokens, have broken into mainstream conversation and attracted billions in investment.

Countries have adopted bitcoin as legal tender and more than 100 nations have researched, developed or launched a central bank digital currency (CBDC). All the trend and market commentators seemed to indicate that cryptocurrencies were destined to dominate and replace fiat currencies in virtually all markets. However, as has been shown time and time again, there is no such thing as a sure thing; current price volatility and declines have reinforced this reality. With the uncertainty, however, there is also room for improvement.

Let’s take a look at some of the reasons why, while price drops cause short-term pain, they can also pave the way for future improvements.

Crypto dips lead to operational improvement. After the previous crashes (and the predicted end of cryptocurrencies), there have been steady marked improvements in the way the crypto-asset ecosystem operates. Several examples come to mind, including the improvements made to centralized exchanges after the Mt. Gox crash (among others), and increased reporting rules after the 2018-2019 drops in bitcoin prices. and other cryptocurrencies. Additionally, the rise of decentralized autonomous organizations (DAOs), whose reputation was damaged following the 2016 DAO hack, has also led to better regulatory frameworks for how blockchain-based organizations can integrate into the broader business landscape.

Following the collapse of the Terra stablecoin, there is more talk about the need to improve reporting, transparency and reporting requirements; these are issues that need to be addressed for stablecoins to continue to develop. As painful as the findings are and the damage certain specific projects will suffer as a result, increased transparency and standardization will be a positive development for stablecoins.

Crypto is a fast-moving sector, and continued operational developments are critical for further growth.

Crypto is more than price. Headlines about price volatility and speculation in the cryptocurrency sector generate interesting discussions and debates in both face-to-face and virtual forums, but that continually overshadows the most important points. Blockchain and cryptoassets are, at the core of the ideas, platforms and technologies that enable a decentralized and distributed way of sharing and storing information. While certain innovations, such as NFTs, are certainly exciting and generate quite a bit of buzz, they can lead to interest and investment dollars being allocated to projects that will not lead to long-term progress.

Price volatility and declines are definitely not good news or a positive development for either the individual projects affected or the sentiment surrounding the space in general. That said, such volatility should come as no surprise to anyone with first-hand investment experience or even an understanding of market trends and history. Asset classes can be volatile, and the more attention an asset class attracts, the greater the likelihood that questionable projects will be overfunded. Price changes are a feature of any asset class under development, but should not be the sole objective of any project or team of developers.

Volatility drives oversight. In addition to the increased conversations, hearings, opinions, and regulatory debates that have been making headlines around the blockchain space and crypto assets, accounting standard setters are starting to get into the conversation. The Internal Revenue Service (IRS) has certainly been very prominent in the areas of tax enforcement, tax collection, and tax pronouncements, but other accounting standard setters have not been as forthcoming. The recent announcement by the Financial Accounting Standards Board (FASB) that certain types of crypto assets will be part of the next research agenda is an important step towards greater clarity.

Oversight and regulation may not be the topics that generate the most excitement and happiness among blockchain and cryptocurrency advocates, but they are absolutely essential in paving the way for broader adoption. As accounting standards improve and become more consistent, this will, in turn, encourage more institutions to readily adopt these technologies, ultimately leading to a more mature, stable, and developed crypto asset market.

Volatility is a difficult topic to tackle for any asset class, especially as market participants are usually only fans of one-way volatility; upwards. During times of heightened market uncertainty and volatility, dovish calls can reach a fever pitch, but that is not a reliable indicator of the future of the sector as a whole. As the market has shown time and time again, crypto assets have the ability to constantly bounce back from price drops and come back stronger. This time it will be no different.

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