Anand: The Future of Crypto
Despite recent downturns, the crypto space has enormous potential.
by Arjun Anand | 20/10/22 04:05
In recent years, the cryptocurrency market has maintained a polarizing yet prominent presence in the eyes of governments, businesses and the public. However, after the massive crash of 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 – offer undeniable benefits, such as greater financial inclusion and increased security. Public regulation and wider public acceptance will allow cryptocurrencies to cement their rightful place in the future of the economy.
The world’s first decentralized cryptocurrency, Bitcoin, was unveiled in 2009. Bitcoin spearheaded the creation of a new market that leveraged cutting-edge innovations in digital technology and blockchain, promising a new era of finance and currency. In 2019, it seemed that the crypto market was only going up. True, there were ebbs and flows, but the overall forecast for the crypto market seemed overwhelmingly positive. Throughout 2020 and 2021, the crypto market experienced an exponential rise in popularity as it hit a number of milestones: the total market capitalization of all cryptocurrencies peaked at a staggering $3 trillion, El Salvador became the first nation to adopt Bitcoin as legal tender and new creations such as metaverse – an immersive environment of virtual reality – and decentralized finance – the use of new decentralized technologies to bypass central financial intermediaries – were developed on the basis of the crypto market.
This year, however, saw a sharp decline in crypto’s outlook. From January, there was a huge drop in the valuation of the top cryptocurrencies. Bitcoin fell from a dizzying high with 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 fall, falling from over $4,700 in November to just over $1,000 today. Of course, one cannot rule out the collapse of TerraUSD, a widely used algorithmic stablecoin that was pegged to the dollar. Investors worldwide suffered huge losses; El Salvador lost more than $60 million on its Bitcoin gamble, exacerbating already declining economic growth and a widening deficit. This dramatic crash begged the question: Is crypto really the future?
The crash reminded us all that cryptocurrencies, as innovative and futuristic as they may be, are still very volatile. It is indisputable that crypto is more widely accepted: universities and large companies accepting crypto as a form of payment and central banks discussing the merits of central bank digital currencies are just two examples. Nevertheless, cryptocurrencies still seem unable to shake off the perception of being volatile investments. When the price of Luna – the stabilizing counterpart to TerraUSD that reached a market cap of over $40 billion earlier this year – dropped to essentially zero due to algorithmic error, it reinforced this perception.
Nevertheless, cryptocurrencies must still be the future, as they offer just too many benefits to write off. By 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 an ID or good credit scores. Due to the decentralized nature of the blockchain, crypto offers enhanced security and privacy. Lower transaction costs are another advantage. Although you may be required to pay a large sum for wire transfers facilitated by banks, you can transfer money worldwide 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? First, governments should regulate the crypto space. Not only will regulation help limit massive failures like Terra’s fall, but they also demonstrate government recognition of cryptocurrencies and their potential role in our world. While regulation may stifle innovation in an extremely fast-moving field like crypto, it will also protect investors and build confidence. Through regulation, crypto will gain implicit government support, which is desperately needed to change crypto’s reputation for unpredictability.
The issuance of central bank digital currencies by the world’s central banks is a key move that will also be crucial to preserving the future of crypto. 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 provide many of the same benefits, including strengthening financial inclusion, lowering transaction costs and digitizing the economy . Despite growing interest in CBDC, the Federal Reserve remains reluctant to embrace digital currency due to the risk of financial instability and weaker effectiveness of monetary policy. While their concerns are well-founded, the country’s policymakers need to understand that issuing CBDCs will not only modernize and optimize the nation’s economy, but also act as a springboard for wider public acceptance of the crypto space.
Despite the hiccups that the market has experienced this year, cryptocurrencies are the future. What is needed more than ever, however, is government regulation. The government stamp of approval on cryptocurrencies will institutionalize the crypto world. Acceptance and use of the crypto space by authorities in the form of digital currencies will cement this process. As people begin to see cryptocurrencies permeate the formal economy, the crypto space will emerge from the shadows, shedding a blanket of volatility and risk.
