Crypto needs to overcome its perceived illegitimacy to scale

Public opinion has not completely turned against cryptocurrency, but one could be forgiven for thinking otherwise. In recent weeks, near-unprecedented bitcoin volatility has sparked a firestorm of debate as pundits and investors argue over the cryptocurrency’s value, monetary or otherwise.

This is not crypto’s finest moment. The market value of the sector has fallen from $3 trillion in November 2021 to $1 trillion. The downturn began after the Federal Reserve began reversing the stimulus policy it adopted during Covid-19 and has since weakened investor confidence in blockchain-based finance.

One of crypto’s most vocal critics, Warren Buffett, summed up his opinion at Berkshire Hathaway’s annual meeting in May, “If you … owned all the bitcoin in the world and you offered it to me for $25, I wouldn’t take it,” further outlining his view that crypto does not produce anything in the same way that farmland or apartment buildings do and thus lacks real value.

“It has a magic to it, and people have attached magic to a lot of things,” concluded Buffett, a rather dramatic dismissal of a market valued at $1 trillion from an investor who for years did not invest in technology and argued that the industry relied on building a better digital mousetrap. Berkshire Hathaway now has significant exposure to big tech like Amazon and is one of Apple’s largest shareholders.

Although cryptocurrency does not have the same tangible output as farms or apartments, its central role in facilitating the next generation of digital value transfer cannot be ignored. Blockchain-based finance is a fundamental building block for Web3, the much-talked-about read/write/own version of the web, which will allow digital citizens to not only participate in online experiences, but have a say in their governance and be compensated for their contributions.

As CK Zheng, a 30-year Wall Street veteran and co-founder of ZX Squared Capital, responded to such perspectives in a Blockworks article: “If you only think about the old ways of doing things, you miss the new things . If you think about a big return on investment, you really have to think about the long-term trend and see where that trend leads not today, not tomorrow, but 10 years down the road.”

Nothing outlines this point like an Amazon 10-year price chart, or better yet, a 20-year or 30-year price chart. Although Jeff Bezos was publicly open about Amazon’s strategy (with his data) in the early 90s, the stock price looked like a code blue flatliner until after the financial crisis when market analysts finally figured out what Bezos had created, and the stock price took off like a rocket ( when tech geeks shook their heads with a dismissive “I told you so”).

Cryptocurrency is hardly the only asset class experiencing volatility in this economic environment. It’s a perfect storm of economic chaos with supply chains still under stress from the production restrictions imposed by Covid-19, energy prices and sharply rising inflation.

In January, US interest rates rose to a 40-year high, sending many markets into a tailspin, now coping with rising rates falling at a pace. Even “safe haven” commodities like gold and silver are trending lower as rising bond yields hit the precious metals market.

Cryptocurrency does not maintain a monopoly on volatility, nor should it most volatile asset type trading today. Consider oil, in April, where the commodity’s 30-day volatility was 7.91 percent. In the same month, 30-day volatility for bitcoin fell to just 2.2 percent.

While investors don’t make investments based on comparative volatility data from a single month, the numbers illustrate why dismissing cryptocurrency on the basis of volatility can be overly preemptive, especially while championing the value of a conventional commodity. Look at a crude oil price chart over a 10 to 30 year period (or longer) and the price will range from $20 to $180.

Volatility is a characteristic of the market, and it is where many financial professionals make returns. Cryptocurrency comes under undue criticism, often due to its position as a new and complex asset class, and the often exaggerated negative policy makers and popular media narratives that focus on scams, fraud and crime.

It is also worth noting that private and professional investors do not face an either/or choice when it comes to volatile or stable investments. While average people may not want to pour their life savings into a volatile asset like oil or cryptocurrency, high-risk assets make up an important part of any diversified risk-adjusted portfolio.

Private investors account for about a quarter of total equity trading volume, a relatively volatile asset class. In the mass exodus of 2020, when the retail investors who had entered the market during meme stock mania unloaded their investments as “memed” assets plummeted from their artificial highs. According to Bloomberg, almost 50 percent of individual share positions in the Nasdaq 100 accumulated since January 2019 have been sold.

Non-professional investors tend to be more likely to make decisions based on hype and fear. In any case, during a major market correction, many asset classes are highly correlated, and investors across all segments should have portfolio strategies for these events.

Investors with high conviction will persevere through periods of uncertainty and remain committed to their investment’s financial return. Professional investors may also choose to stay the course, believing that cryptocurrencies will eventually play a role in the global financial market, although many do not HODL, and sell high and buy low and have experience moving out of advancing or declining markets . .

Crypto analyst Noelle Acheson notes in a recent post, “The mighty have spoken: over the past two days, both JPMorgan and Citi have published reports strongly suggesting that the bottom of the crypto market is in.”

Watch this space. Nevertheless, cryptocurrency advocates must face the problem at the heart of wider cryptocurrency adoption – its perceived illegitimacy.

This is particularly the case among many governments, policymakers, central banks and regulators who have fined major market players for practices that have violated existing jurisdictional laws and regulations. Crypto regulation has also been slow in coming, and this has created a large degree of regulatory uncertainty for the crypto industry, which in itself can drive volatility, and undermine investor confidence in cryptocurrency.

To achieve more widespread adoption, the crypto industry and policy makers need to work together better to address uncertainty and volatility, and focus on delivering a sustainable (global) framework for crypto assets that helps better achieve investor confidence in the market.

Unpacking Crypto: How Knowledge Limits Adoption

Blockchain-based finance can be notoriously complicated for the uninitiated. Achieving a basic understanding of it may require a college lecture’s worth of research. To skeptical investors, a high-level pitch may sound too nebulous and risky to tolerate. In moments of disaster, it’s easy to scoff at people who have bought into what appears to be baseless hype—and then pat yourself on the back for not following their example.

“If a traditional investor analyzed DeFi as a country’s financial sector, some fundamental questions would be very difficult to answer; for example, what is the base level for interest rates and the country’s risk premium?” pointed out a writer for CryptoDaily last fall. “Simply put, six percent on your USD savings account in the US is huge, but how sufficient is it for your stablecoin deposit?”

Investors can often be limited by a lack of informed foresight. Sailors don’t sail across the ocean without navigation skills and maps, or satnav these days. The sector is taking steps to acquire such analytical resources. In November 2021, Polygon announced that it had partnered with Overnight, the protocol that powers the interest-bearing stablecoin USD+, to develop an interest rate benchmark for decentralized finance.

As explained in an article announcing the venture, “PoLybor is inspired by the widely accepted Libor Overnight rate. Just as Libor is the rate at which most reliable banks can finance each other, PoLybor Overnight is the average rate at which one can distribute (1) a basket of common stablecoins for (2) several trusted protocols.”

This tool is expected to give investors a greater ability to assess stablecoin liquidity, better perspective on return frame performance and greater insight into arbitrage opportunities. It, and other initiatives like it, offer a means to empower investors to do proper due diligence, make informed decisions and gain an accurate understanding of their investment prospects. It also looks like Overnight’s USD+ is proving to be an alternative to UST after the recent crash.

Of course, context can only help so much when potential investors are so worried about volatility that they won’t even entertain the idea of ​​crypto investing.

Volatility presents a significant but solvable problem

Cryptocurrency has a reputation for being volatile. Skeptics paint all cryptocurrencies with the same mocking brush. In the coming months and years, advocates will need to rescue low-risk assets and investment approaches from bitcoin’s shadow if they want to encourage widespread adoption, or the latter’s reputation may continue to undermine the cryptocurrency’s validity.

Some industry players have already begun this work. Earlier this year, Credit Suisse veteran CK Zheng teamed up with two well-known DeFi architects, Felix Xu and Yemu Xu, to launch a risk-aware crypto hedge fund, ZX Squared Capital. The fund utilizes quantitative strategies with options and futures to reduce risk and has a current volatility of less than 40 percent, a dramatic improvement over bitcoin’s 80+ percent volatility.

As described by Block, “ZX Squared Capital is designed for TradFi and crypto-native investors who want exposure to crypto but don’t want to deal with the volatility of the asset class.”

The offer is innovative in its own way. Proponents often present crypto as the ultimate do-it-yourself asset, which is not surprising given the dogma at the heart of decentralized finance focusing on disintermediated financial empowerment of the individual.

This focus on individuality has also heightened the challenge for investors who do not have the skills, knowledge or confidence to enter crypto – mediation is alive and well in the cryptocurrency market in the forum of education, advice and active management.

By providing a clear path to entry and investment paved by partners who understand the industry and how to navigate it, ZX Squared normalizes the idea that low-risk crypto investing is not something investors need to take on alone. The hedge fund is not the only entity to do this.

Zignaly, a cryptocurrency social trading platform, has championed such collaboration since its debut in 2019. Today, both professional and retail investors can look to the platform’s extensive talent marketplace for experienced traders to provide investment guidance. Having such support for inexperienced investors who want to gain experience with crypto without inadvertently taking on excessive risk can be reassuring.

More hands-off, independent-thinking solutions have also come to the fore. Kryll.io, for example, facilitates similar investment support via an AI-powered, flow-based trading platform. With Kryll, crypto investors can build their trading strategies via a simple drag-and-drop tool, adding buy targets and stop-losses. Here the support comes in the form of a safety net as investors can maintain their independence while reducing the chances of sudden loss.

Of course, none of these offers complete without risk – what is investment? However, they go some way to begin addressing investor concerns and reduce some of the volatility that investors take on when investing in crypto. These types of investor solutions are better positioned to respond to the crypto-skeptics and rhetoric with analytically supported rational and risk-adjusted strategies and look to take some of the magic out of crypto, thereby achieving something far greater: legitimacy.