As global markets stamp their descent, so does the crypto sector. If recent losses have got you spooked, or if you are seeking answers to why cryptocurrencies are down and what the future may hold, then this article may provide solace.
The crypto market is the youngest industry in the financial sector. The promise of the technology itself, being a permissionless and decentralised technology clashes with a human propensity for centralised control. The industry is currently witnessing the largest leverage reset in the industry’s history. Whereby hedge funds, venture capital firms, and crypto enterprises holding large amounts of leveraged crypto are facing insolvency due to under-collateralized positions. This has resulted in massive selling pressure on the crypto sector as a whole. Though at face value, plummeting prices are horrifying, a reset in distribution is cogently a healthy occurrence for the sector.
Why you shouldn't be worried
- The number of addresses holding at least one Bitcoin has reached an all-time high of 851,921 with active addresses continuing on an upwards trend. Distribution is improving and the network continues to propagate.
This is not the first time crypto has crashed. In January of 2018, the sector entered its fourth bear market following a global rally. Numerous international media outlets used the falling prices to assert “Bitcoin is dead” and “the end of crypto”. However, this was not the case. In the economic cycle that followed, a great deal of tech talent entered the industry and started building a sophisticated decentralised finance (DeFi) ecosystem. This underpinned the second rally witnessed from December 2020 to November 2021. Advocates have likened the volatile behaviour of the DeFi sector to the early years of the internet’s 2000 dot-com bubble – a period of time for which a new market started developing around the capabilities of the internet. With new technology, comes new hype, capital and leverage. Shakeout periods are essential to sustainable long-run growth and the crypto industry remains comparatively adolescent to other industries.
Blockchain technology matters. At a fundamental level, the greatest benefit emergent from blockchain technology is that it does not rely on centralized databases or centralised authorities to facilitate transactions. Though it may not seem like much at first glance, the ramifications of decentralised crypto systems are far-reaching and long-lasting. Through the Bitcoin blockchain, society effectively governs the network. Transactions are validated by millions of participants across the globe and deeply encrypted. No single party has absolute power over the system. As a blockchain continues to foster widespread adoption, the stronger the encryption becomes.
“Scalability isn’t important, until it suddenly is. Decentralization isn’t important, until it suddenly is. Privacy isn’t important, until it suddenly is”. – Naval Ravikant.
The quote extends to the ability of decentralised systems to withstand outlier events. For example, the outbreak of global war can cause governments and banks to collapse. They are the centralised nodes currently upholding the integrity of financial systems. They only operate at specific hours of the week and have absolute power over their constituents. Should tyrannical powers infiltrate centralised systems, the integrity of the system is abolished. Proponents of crypto argue Bitcoin is a superior model for long-run globalisation because it cannot be infiltrated. This may not matter now, but one day it may.
Other benefits of blockchain technology include:
- True traceability of transactions, and thus enhanced transparency;
- Enhanced security through cryptography;
- Improved transaction speed and network efficiency (more so for layer 2 projects); and
- Reduced transaction costs.
- Global regulation is trending toward accommodative policy. Cryptocurrency regulation is becoming increasingly recognized by international governments. Though a minority of countries have mandated prohibitive policy, the majority of regulation is accommodative. In the long run, this has the potential to foster further adoption and stability in the market, investor protection, promote confidence and allow for a safer crypto ecosystem. An encouraging scene of forward-looking crypto policy is particularly prevalent in the country of El Salvador, where Bitcoin is recognized as legal tender. The president of El Salvador recently expressed his faith in crypto stating, “I see some people are worried or anxious about the Bitcoin market price. My advice: stop looking at the graph and enjoy your life. If you invested in #BTC your investment is safe and its value will immensely grow after the bear market.”
Whether cryptocurrencies will do to banks what email did to the postal industry remains to be seen. Cryptocurrencies, and the ideas behind them, continue to disrupt traditional notions of money and challenge conventional mechanisms of finance. If you believe in the power of blockchain technology, and the necessity for portfolio diversification, consider spreading your risk using the EC10 cryptocurrency bundle. The EC10 offers a single instrument containing the top 10 cryptocurrencies weighted by market capitalisation. It passively tracks the crypto asset sector granting it a survivorship bias. If you prefer to actively invest in specific cryptocurrencies, the EasyCrypto platform offers that too.