With the market seeing a steady decline across most digital assets as of late, it’s easy to assume that the future of cryptocurrency is bleak. However, this doesn’t tell the whole story; there are plenty of reasons to be optimistic about crypto adoption moving forward, especially if you take into account the impending launch of stablecoins, which have potential to change the way we think about and use cryptocurrencies on a day-to-day basis.
There are many different factors in play right now, but when all is said and done, it seems clear that crypto adoption is on track to achieve widespread recognition in the very near future. Let’s take a closer look at some of these reasons why – and what they mean for you and your investment portfolio going forward.
Sometimes it’s harder to fall when you’re bigger.
Many amateur investors became millionaires during the pandemic, at least on paper, thanks to bitcoin and other cryptocurrencies. During the month of November, bitcoin reached an all-time high of almost $68,000.
In recent weeks, it has more than halved in price as part of an intense sell-off.
The situation has been even worse for an area of cryptocurrencies known as stablecoins, in particular one called TerraUSD, which has plummeted.
Here’s a look at what’s happening.
SO WHY ARE CRYPTOCURRENCIES DOWN SO MUCH?
Simply put, cryptocurrencies got caught in the maelstrom affecting broader markets.
A fear that the Federal Reserve will have to raise interest rates aggressively to fight inflation has caused stock market, bond, and other assets to tumble in recent weeks.
Bitcoin has fallen over 20% in the past two weeks due to the falls in broader markets.
In some cases, the selloff has been worse for the newer cryptocurrencies, such as Dogecoin, which was created as a joke but took off thanks to billionaire Elon Musk’s support.
Several months ago, actors such as Matt Damon and Larry David were pitching cryptocurrency companies in Super Bowl commercials.
WASN’T BITCOIN SUPPOSED TO BE A HEDGE AGAINST INFLATION?
The answer is yes, but so far it has not been the case.
Among all cryptocurrency, bitcoin is the most popular.
Initially, Bitcoin’s proponents touted the digital currency as an inflation hedge, largely due to its finite supply.
But both Bitcoin and stocks have fallen hard since then.
Inflation is at its highest in decades, so Bitcoin should rally if it were viewed as a hedge against inflation.
Randy Frederick, a managing director at Charles Schwab who covers cryptocurrencies, says that many thought it would be an inflation hedge, but there is little evidence to support this idea. The market has been moving down recently, so it has not moved up. It may have risen if it had been an inflation hedge.
A riskier asset such as stocks is reacting just as Bitcoin is.
Experts say that Bitcoin as an inflation hedge isn’t entirely dead either.
Despite being the oldest of the cryptocurrencies, Bitcoin has only existed for over a decade.
Because of this, there aren’t many historical data points. As a result, Frederick says, we’ll learn a lot more about how Bitcoin behaves through more market cycles.
WHY DO WE NEED STABLECOINS?
Cryptocurrencies have spawned numerous offshoots that have developed into much more sophisticated – or dangerous – assets, according to some regulators.
USD Coin and tether are stablecoins that are gaining popularity.
The majority of stablecoins rely on real assets for backing. For every stablecoin worth a dollar, the exchange or the seller must set aside an equivalent amount in a real fiat currency, such as the dollar, or a security that is easy to trade, such as government bonds.
This is what makes stablecoins more reliable. In the event that someone bought a stablecoin and wanted to cash out, they should be able to do that easily because the exchange should have the funds on hand, similarly to the way bank customers expect to be able to withdraw their funds at any time.
Exchanges have long been questioned whether they actually keep hard assets separate in accounts. A stablecoin’s offshoots have also been created.
TerraUSD, one of them, has encountered major problems recently. This means that TerraUSD is an algorithmic stablecoin since its peg to backup assets is maintained by financial engineering.
It is pegged even to a different cryptocurrency called Luna.
By Friday, the price of the stablecoin had fallen to 14 cents, a far cry from the $1 it should theoretically fetch.
TerraUSD’s troubles could be a part of a potential weeding of cryptocurrencies, says Pat Tschosik, a senior portfolio strategist with Ned Davis Research.
In terms of crypto, he says, “it’s still really young.” “You know, this is still a developing area. There is going to be speculation. There is going to be booms and busts along the way, and this is all still new.”
SO WHERE DO WE GO FROM HERE?
More broadly, the outlook for cryptocurrencies will likely continue to be tied to broader market sentiment.
But the falls in cryptocurrencies and the collapsing value of TerraUSD stand to alarm policymakers such as Treasury Secretary Janet Yellen and Securities and Exchange Commission Chair Gary Gensler.
That may lead to more regulation of cryptocurrencies in general.
Sustained falls in cryptocurrencies could also raise doubts about the future of the virtual money more broadly, just when there had been signs that it was trying to mature, with more and more professional investors starting to trade them.
Fidelity, the leading retirement plan provider, announced last month that employers would be able to offer Bitcoin in 401(k) plans. However, the Department of Labor cautioned employers against offering Bitcoin in 401(k) plans.
Despite this, cryptocurrencies also have a large following of fanatics who are used to steep declines and reversals, and they are convinced that this is a temporary decline.
The economist Tschosik from Ned Davis Research, for example, is bullish on Bitcoin in the long run. “We see its acceptance expanding over time.”
He cites millennials as an example of investors who see cryptocurrency as a “legitimate option.”
Not everybody agrees, however, leaving the future of cryptocurrencies uncertain.
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