Cryptocurrency seems to repeatedly come close to gaining acceptance and then throwing away its newfound cachet. It gains ground with mainstream investors, then sacrifices those gains to volatility with investors retreating to the sidelines yet again.
Institutions, likewise, talk the game yet seem to talk more than to act. There are some notable exceptions; some organizations have made significant investments or commitments into cryptocurrency or related activities. These organizations are outliers. Many are looking at crypto; fewer are taking significant action.
Despite crypto’s wild ride and propensity to appear to resist becoming “acceptable,” many institutions and investors feel that cryptocurrency and decentralized finance (DeFi) are going to be a significant power in the future. Which begs the question of what to watch for in cryptocurrency. What might be the signs that crypto will soon be emerging from its teenage angst and ready to play a meaningful role in society?
Regulation of cryptocurrency is inevitable. It’s still a bit of the Wild West out there in crypto land. Investors work with little or no protections, and crypto is sometimes promoted and sold in ways that might make the snake oil salesmen of the 19th century proud.
Cryptocurrency investments are generally highly speculative. People can and do lose money. Sometimes they lose lots of money; sometimes they lose more than they can afford to lose.
Our government probably knows they cannot eliminate that; they can’t protect people from losing money. But they also know they can put controls in place. They can require fair and adequate disclosure. They can limit levels of investment and restrict debt or margin purchases of crypto to those who can afford such risk.
I believe that most players in the crypto space are trying to do the right thing. They want to allow people to partake (at whatever level they’re comfortable doing so) in the opportunity provided by crypto.
Most, however, is not all.
The lack of clear regulatory landscape harms both crypto businesses and crypto investors. Both businesses and investors deserve to have sufficient protections to prevent abuse and level the competitive playing field. Over-regulation is never a good thing, but under regulation can be equally harmful.
The United States is working in the direction of comprehensive cryptocurrency regulation. Expect this to occur in parallel and tandem with other nations. Cryptocurrency will be regulated, and that will remove ambiguity and provide a degree of investor protection. Lack of regulation holds cryptocurrency back from achieving mainstream acceptance.
My perception is that crypto scares some big financial institutions. They are concerned about the potential for crypto and DeFi and have a bad case of FOMO. Any financial institution of significance is seriously exploring the cryptocurrency realm and how it might and should best fit in. Some are taking action; others are making plans.
No one is expecting to remain on the sidelines.
I should qualify that bold statement slightly: It’s difficult to imagine any financial institution planning to remain on the sidelines of what may be one of the greatest shifts to ever occur in the realm of finance.
This is a big one to watch. The early adopters are in; they’re working out how to be in place and how to garner market share ahead of the next wave. They’re investing into the space, but it’s not yet a profitable space.
The next wave is significant. Adoption will move quickly from low level to mainstream. When you have many institutional players in the cryptocurrency space, you’ll have a lot more support for the market. They’ll be there to make money and they’ll be there for the long haul. A major increase in additional institutional adoption of crypto will be a major sign of crypto growing up.
It’s kind of like being accepted by your significant other’s parents; it doesn’t need to happen but it may be an indication of a level of maturity in the relationship. And if they’re giving you two a down payment for a house, they’re expecting you’re going to stick around. It’s like that.
This one’s longer term. Speculative investments are volatile. Two factors here may help reduce volatility. As there get to be more institutional investors and more long-term investors, there will be a positive influence, which will have some stabilizing effect, reducing volatility.
Buy and hold investors do not contribute to volatility.
Speculators do contribute to volatility. The eventual shift to a higher percentage of long-term investors relative to speculators will reduce volatility in the crypto markets.
This is also going to take some time to become a big change. Crypto may always be volatile, but it may be less volatile than it is now. Lower volatility will open the door for additional investors who won’t come into the market at current levels of risk. Lower volatility will lead to greater acceptance in the market.
Blockchain, NFTs, and Other Factors
The cryptocurrency world is not just coins. The foundation of cryptocurrency is blockchain, which has many potential business applications. Blockchain may drive crypto’s future.
Non-fungible tokens (NFTs) were the rage, but have seen a significant fall off in both value and activity. Part of the NFT craze is fun and games, but there are also many potential business use cases for NFTs and smart contracts.
DeFi may also have a lot of potential.
When you have peer-to-peer transactions without the middleman taking a cut, the transactions happen faster and can be lower cost. There’s also a big issue of risk and controls, with risk being high and controls low or nonexistent.
New uses for blockchain, NFTs, and smart contracts, and new applications of DeFi can be harbingers of crypto’s coming of age. Remember that cryptocurrency is a whole technology set, not just an alternative to fiat currencies. There’s a lot beneath the surface that has phenomenal potential to change the way we work with financial matters going forward. Pay attention to the whole cryptocurrency business sphere.
The Bottom Line
Many people believe cryptocurrency and DeFi will play a major role in the future of finance. I am one of them.
I also know that you can lose a lot more money than you would want to lose in cryptocurrency and that it can happen faster than you might think. When we speak of investments, we speak of risk, generally along some relative scale. Speculative investments are slightly off the scale on the risky end, and that’s where crypto is today. It’s in its unruly and unpredictable teenage years but has many people behind it who want to help it and see it succeed. It needs some guide rails, but it is in good shape to eventually surprise us all.
I left one thing that bears mention off the list. That’s the potential for central bank digital currencies (CBDCs). I expect that governments will use CBDCs to try to get some of the digital currency action. I don’t consider them cryptos because they are not decentralized and will be controlled by a central bank.
They may be an indication of more mainstream acceptance of digital finance, and they’re probably inevitable in the evolution of things. They may help or hurt slightly in the long term. Cryptocurrency will sink or thrive based on its long-term business case. CBDCs will sink or survive based on their structure and backing. Different animals.
The introduction of and success of CBDCs should lend additional credence to the crypto market. I see CBDCs as inevitable, but not a make-or-break factor for cryptocurrency.
In the end, it will be the crypto business case that needs to win for crypto to be part of our future. That business case is still unfolding. That will be — my opinion — the turning point for cryptocurrency to move from a speculative gamble rooted in FOMO to a viable investment for every long-term investor. The signs will be there, I know I’ll be watching.