Although much remains to be learned about the future of crypto, cryptocurrency has become a global phenomenon in recent years. As a result, many people are concerned about technology and its potential to disrupt traditional financial systems.
Is crypto just a passing fad, or is it here to stay? Could it even be used to replace fiat currencies? Learn more by reading our article!
Crypto Market Crash
Cryptocurrencies have taken a beating in recent months. For example, the US dollar/Bitcoin exchange rate fell from nearly $70,000 in early November 2021 to less than $20,000 in late June and, despite ups and downs, dipped to $19,733 on September 15.
By far the most popular form of cryptocurrency, Bitcoin has historically been a success story for those who purchased it: the exchange rate versus the dollar was less than $3,000 five years ago. However, many bitcoin supporters have been let down in two ways.
This cryptocurrency has failed to become a widely accepted form of payment and has proven to be a poor means of protecting purchasing power during periods of uncertainty and inflation. This is unexpected. The supply of Bitcoin is limited to 21 million units.
Because more than 19 million units, or 90%, have already been issued (“mined”), most people expected the cap to cause a constant rise in its dollar-denominated price.
Predictions for the cryptocurrency market in 2023
It’s impossible to predict what the cryptocurrency market will look like in 2023 and beyond.
Still, there are more questions than answers. However, by keeping an eye on a few overarching crypto themes, you will be able to make better investing decisions as the market evolves.
You should pay particular attention to the following details:
- Regulation in the United States and abroad.
- The widespread acceptance of cryptocurrency payments.
- Bitcoin and other digital currency exchange-traded funds
- Countries that have made Bitcoin (or other digital currencies) legal tender
The long-term future of the cryptocurrency sector will take shape as these issues develop and are resolved. The picture may begin to take shape by the end of 2022, as governments and blockchain developers work on long-term crypto plans.
Nonetheless, a series of baby steps that began with the creation of Bitcoin in 2009 are likely to continue for many years.
What is beyond 2022 for cryptocurrency?
To forecast future scenarios for cryptocurrencies, it may be helpful to look back at the past and clarify a few key points. To begin, the blockchain world is made up of cryptocurrencies and crypto derivatives. Bitcoin, for example, is a cryptocurrency, whereas the stablecoins Tether and TerraUSD are crypto derivatives.
These are “derived” from cryptocurrencies and/or pegged to a widely accepted and centralized currency, such as the US dollar. Simply put, a financial investor gives money to a company in exchange for a derivative. The company converts dollars into cryptocurrencies and lends them to international borrowers.
At the same time, the company promises the financial investments that the derivatives will be exchanged on demand for a fixed amount of a specific cryptocurrency, possibly pegged to or backed by dollars.
The result is that if you have purchased Bitcoins or other cryptocurrencies, you will profit or lose based on the cryptocurrency exchange rate in your portfolio. If you purchase a derivative, you may discover that it is not adequately backed by cryptocurrencies or that the dollar-convertibility guarantee is, to put it mildly, porous.
If this is the case, the derivative is effectively worthless. This is what happened with several crypto derivatives in recent months. Companies that issue such products are very active in the market and contribute to the volatility of the underlying assets, especially if they promise high returns, which increases demand for cryptocurrencies and crypto derivatives.
Another important point is that cryptocurrencies are currently regarded as both a speculative instrument and a store of wealth, rather than a means of payment for everyday transactions.
More than 60% of total bitcoins in circulation, for example, are held in accounts (“wallets”) with more than 100 Bitcoins each and are rarely traded on the market, other than to adjust portfolios: in late July 2022, only about 250,000 Bitcoins were traded daily, with only a small portion related to commercial transactions. Furthermore, cryptocurrency holders appear to be long-term investors.
For example, both “shrimps” and “whales” (accounts with less than one and more than 1,000 Bitcoins, respectively) have used the recent sell-off to buy the dip in large amounts.
Following are three preliminary conclusions:
- The typical cryptocurrency holder’s long-run approach suggests that the cryptocurrency project is not an easy kill and survives dramatic volatility;
- Volatility has been driven by crypto derivatives, the activity of which has been magnified by the relatively small amount of cryptocurrencies traded on the market;
- The 2022 crypto market crash has hit the world of derivatives. Some market movers have been killed, while short-term speculators have been hit and long-term crypto investors have been given opportunities.
Why cryptocurrency may not be the currency of the future
A brighter future may be pushed back in several ways:
- Policymakers may dither and fail to reach a reasonable regulatory framework in the coming years
- They could decide that currencies like Bitcoin and Litecoin only serve illegal activities and bad actors and that none of that activity should take place on US soil
- Retailers may object to the volatile value of digital currencies and instead insist on traditional cash or credit card transactions
A surge in security breaches, failing technology platforms, and other threats to the security of blockchain-based payment systems could erode public trust in digital currencies. For example, after the collapse of TerraUSD in April 2022, algorithmic stablecoins received a bad rap.
Under any of these conditions, the digital currency revolution could be delayed for several years.
And, assuming it occurs, it may look very different from the Bitcoin-led sea change that occurred in 2021. In the long run, it appears unlikely that any government or group of nations will completely derail the cryptocurrency concept, but they can slow it down and steer the final product in various directions.
These dangers may appear fictitious, but they are very real. Finally, the cryptocurrency community must work with regulators all over the world. Failure to do so could put massive impediments in the way of the digital currency sector’s progress.
That is why you should not put all of your eggs in one basket when it comes to Bitcoin, Ethereum, or cryptocurrency in general. This market has a mysterious and unpredictable behavior, skyrocketing one year and crashing the next. Informed investors want to build a long-term diversified portfolio that can withstand dramatic setbacks in any particular sector.
Based on ‘nothing’ but valuable
Of course, cryptocurrencies are not like stocks and bonds, which are backed by promises of future income streams, which can be generated by a company’s successful market performance or by a government commitment to squeeze taxpayers.
Rather, cryptocurrencies are monetary units backed by nothing, and their value is determined by their credibility as a future means of payment for goods, services, and other goods and services.
Central bankers and policymakers in general are quick to warn the public that cryptocurrencies are a scam. Christine Lagarde, President of the European Central Bank, recently stated that cryptocurrencies are “based on nothing” (correct) and “worth nothing” (incorrect), and that regulation is required to prevent inexperienced investors from losing all of their money invested in cryptos (incorrect).
Ironically, central bankers provide digital currencies that, according to President Lagarde, are “vastly different” from cryptocurrencies. Central bank digital currencies are distinct from blockchain-based cryptocurrencies, but not for the reasons Ms. Lagarde likely believes.
The main issue is that decentralized currencies with a supply cap would do away with the concept of monetary policy entirely, transforming central bankers into an agency that regulates commercial banking and produces statistics. The prospect is understandably unappealing to the world of central banking.
To put it another way, central bankers are not opposed to cryptocurrencies because they are allegedly fraudulent. If fraud is defined as “based on nothing,” then all central bankers should be prosecuted.
Rather, their hostility stems from the fact that widespread acceptance of cryptocurrencies will eventually undermine central banking privileges, with ramifications such as the financing of public indebtedness.
Possible Scenarios for Cryptocurrency
Policymakers and central bankers face three options for cryptocurrency.
They have the ability to ignore, outlaw, or regulate cryptocurrencies. The first option is the most straightforward. What is the point of central bankers bothering? After all, the crypto world is highly competitive, and some currencies will vanish. Furthermore, they are no longer a serious financial threat.
Moving money from dollars or euros to one or more cryptocurrencies is difficult because the transaction costs are still relatively high. As long as governments accept centralized currencies such as dollars and euros as the sole means of payment, adopting cryptos would be equivalent to adopting a cumbersome double-currency regime that many people would despise. These regimes existed in the past, but only for a short time.
Outlawing cryptocurrencies makes little sense unless authorities are concerned that large crypto transactions will destabilize fiat-currency exchange rates. Furthermore, outlawing cryptocurrency must be a global move.
If some countries refused to comply, it would lose credibility. The fundamental issue with this approach is that the existence of cryptocurrencies and crypto derivatives is not illegal, and it is far from clear that those who purchase them are acting against the public interest.
Finally, regulation appears to be the most secure strategy. With no realistic short-term threat to fiat money as a means of payment or evidence of its use in money laundering, the authorities’ only true concern is taxation. This will most likely be the regulator’s primary focus.
It has little to do with the decentralized nature of cryptos, but rather with the fact that the tax collector has no way of knowing how much wealth the taxpayer has stashed away, and it would be difficult to even determine whether an individual has an account.
Future regulatory efforts will focus on requiring greater transparency in order to track and tax this type of wealth.
The European Parliament approved the Market-in-Crypto-Assets proposal in early July. If implemented globally, crypto-asset providers will be prohibited from operating without authorization.
This authorization will almost certainly come with conditions – in theory, to protect investors from fraud, in practice, to compel them to make their accounts public. Unless technology renders authorized dealers obsolete, this is only the beginning.
While regulators will shape the future of cryptocurrency, brands will also have an impact, as many are entering the market to meet the needs of the growing marketplace that governments have so far ignored. This can be accomplished by making trades more comfortable and safe for “newbies,” or by providing education and resources to curious intenders.
App for peer-to-peer payments Venmo is doing both of these things by allowing its customers to use a platform they’re already familiar with to dip their toes into crypto and by providing simple content to help educate intenders along the way. Both established finance brands and fintech disruptors can serve as a bridge to the future of crypto.
Future of Cryptocurrency Final Words
Part of that future includes anticipating what the more “mainstream” audience might demand and adapting to the changing profile of investors. Traditional payment companies that provide access and education will undoubtedly make the market more appealing to older investors, while an increasing number of businesses accepting digital currencies can make the market feel safer and more stable.
Whatever the future holds for cryptocurrency, there is a lot of work to be done to balance the risks and rewards, and there is a lot of opportunity for the brands and individuals who take on the task.