Cryptocurrency Market: The 2022 cryptocurrency market meltdown has heightened fears about the future of crypto, despite persistent investor interest in digital assets. Anyone considering investing in crypto should understand its obstacles and opportunities.
Over time, digital currency prices have been inflated due to hype, bubbles, and fraud. Lack of fiduciary responsibility, regulation, and monitoring persists throughout the sector. Crypto’s energy-intensive computational demands have a significant environmental impact, scaring consumers and governments. Fans remain optimistic despite these concerns. As of May 2023, the worldwide cryptocurrency market cap exceeded $1 trillion. The blockchain technology behind cryptocurrencies has non-crypto uses in healthcare, media, and supply chain management, attracting interest.
Present Cryptocurrency Market Concerns
A 2023 Pew Research Foundation study found that most Americans don’t think that cryptocurrencies are safe and reliable. Even for crypto-fanatics, there are many things that could be keeping them up at night.
Steadiness and the Crypto Disaster
Despite claims of stability and asset backing, many crypto tokens are fickle and scammy. In May 2022, TerraUSD and LUNA stablecoins collapsed, destroying the crypto economy and costing investors $400 billion. Due to insufficient liquidity, abuse of funds, and investor withdrawals, crypto exchange FTX crashed in November, decreasing the value of its token, FTT, and other cryptocurrencies like Bitcoin and Ethereum. The broad CoinDesk Market Index tracks market-capitalization-weighted digital assets. Five years after its 2018 peak, crypto has been volatile.
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After FTX failed, BlockFi and Genesis Global Capital, Gemini’s third-party lender, blocked withdrawals. Crypto.com stopped withdrawing USDC and USDT, which are dollar-pegged. Coinbase fired 1,000 employees after the crash. Crypto crisis affected NFT market. Coins like Bore Ape Yacht Club and CryptoPunks dropped almost 50% in August 2022. High-profile frauds and market oversaturation lowered cryptocurrency valuations. Many crypto market crashes occurred in 2021, 2020, 2018, 2013, and earlier due to investor speculation and media hype. Crypto is volatile yet the technology and currencies are resilient.
Dishonesty and Crime
In 2022, top digital currency players, including Sam Bankman-Fried of FTX, Do Kwon of Terraform Labs, and Su Zhu and Kyle Davies of Three Arrows Capital, were charged with fraud. Additionally, in 2022, fraudsters created 117,000 fraudulent tokens, defrauding investors of billions. ICOs, especially those with speculative business plans, have been extensively criticized as scams. Some are also suspicious.
Transaction disputes are complicated by blockchain and Bitcoin’s pseudonymous and uncontrolled nature. In a normal centralized transaction, a defective product or service can be canceled and cash returned. There is no central organization in the cryptocurrency ecosystem to facilitate remedies against sellers.
Security and Privacy Concerns
The blockchain is hard to hack, but bitcoin exchanges aren’t. Computer hacking and theft have plagued the market for nearly a decade. The first significant exchange attack occurred in 2015, when hackers stole up to 850,000 Bitcoin from Tokyo-based Mt. Gox. Following FTX’s insolvency in November 2022, robbers stole $600 million from the exchange. In the previous month, hackers stole $570 million from Binance.Further attacks in 2021 and early 2022 resulted in over $1 billion in stolen funds.
Hackers can also hack smart contract code. The 2021 Poly Network hack was one of the “largest digital heists in history,” stealing $613 million. Decentralized finance (DeFi) technology enables P2P transactions, allowing direct token transfers across blockchains. The smart contract that automated token transfers was vulnerable to theft. The hacker returned the money after a few days, saying he wanted to “expose the vulnerability,” but the episode showed the risks these networks and their customers confront. Ransomware attacks, when hackers encrypt personal information and demand payment in crypto, are common.
Environmental Impact
Bitcoin and other proof-of-work coins need a lot of energy. Proof-of-stake coins, such as Ethereum post-2022, use less energy. Ethereum reports a 99.9% decrease in energy usage post-merge, while Cambridge University’s Centre for Alternative Finance compares it to a raspberry.
As of August 2022, the US government reports that crypto consumes 120-240 billion kilowatt-hours annually, surpassing the electricity usage of several countries. While not the major contributor, it helps cause global climate change. Additionally, crypto mining has disrupted electrical networks in Iran and Kosovo, causing substantial disruptions.
Responsibility, Regulation, and Oversight
National regulators have little power over cryptocurrency technology since it transcends politics. The Financial Stability Board and the International Monetary Fund are collaborating to establish a worldwide regulatory framework, with new rules anticipated by September 2023.
Several countries have chosen not to wait. Countries such as China, Egypt, Iraq, Morocco, Algeria, and Tunisia have banned the issuance or holding of cryptocurrency tokens due to environmental or crime concerns. Additionally, 42 countries have imposed restrictions on crypto exchanges or bank involvement with the currencies. Other nations have tried to get corporations to market these assets.
Japan, Switzerland, and the UAE altered or added laws between September 2022 and January 2023.The Swiss framework is considered one of the most developed, and the UAE has established the first authority specialized to virtual currencies, according to PwC. Canada, the UK, and Australia are still crafting laws, while the EU is close to passing them. Congress is increasingly scrutinizing cryptocurrency in the US, and occurrences like the FTX crash may lead to further investigation. Since cryptocurrencies were created to circumvent government control, regulation may fail.
Why Do Investors Choose Cryptocurrency?
Despite its inherent risks, Bitcoin appeals to certain investors for several reasons. Investors are drawn to the speculative nature of crypto pricing, hoping to profit from market value fluctuations.
Other investors choose cryptocurrencies because they offer decentralization, security, and anonymity that traditional currencies lack. While these benefits are theoretical, crypto aficionados anticipate faster, cheaper transactions, enhanced security and privacy, and increased financial inclusion, leading to mainstream acceptance.
Protection Against Political Crises
Many invest in cryptocurrencies as a geopolitical hedge. During times of political uncertainty, the prices of these currencies tend to increase. As political and economic uncertainty in Brazil grew in 2015, for example, Bitcoin exchange trade increased by 322% while wallet adoption expanded by 461%. Bitcoin prices have also increased in response to destabilizing political events such as Brexit.
Pseudonymity (Near Anonymity)
A common misconception is that cryptocurrencies guarantee entirely anonymous transactions. They don’t. Instead, they offer pseudonymity, a near-anonymous state allowing consumers to complete purchases without providing personal information to merchants. However, these transactions may still be subject to anti-money laundering (AML) regulations and the trading platform may require customers to provide proof of identity such as a legal form of ID (referred to as “know your customer” or KYC). AML and KYC information could be used by law enforcement to trace transactions back to a person or entity.
Programmable “Smart” Capabilities
Smart capabilities allow blockchain or cryptocurrency protocols to be programmed or have advanced functionality. Cryptocurrencies may offer benefits such as limited ownership and voting rights (“stockholder”) in their software code.
Locking a transaction or account until a certain time or condition is met is also possible. Cryptocurrencies may use advanced privacy features like as stealth addresses, ring signatures, or zero-knowledge proofs. These hide sender, receiver, and amount, allowing private transactions.
Consider supply chain management. Let’s imagine a garment company signs a smart contract with its cotton supplier that specifies quality, quantity, delivery date, and pricing. Once the provider meets these conditions, the smart contract automatically pays them without manual intervention or third-party verification. When the cotton arrives at the factory, the smart contract registers it. The smart contract records dyeing, weaving, and cutting as manufacturing begins. This gives a precise, tamper-proof record of the production process for traceability and quality control.
Peer-to-Peer Purchasing
The ability to conduct P2P transactions is a major advantage of cryptocurrency. Because they do not keep users’ cryptocurrencies in the exchange’s proprietary wallet or record user and transaction information, peer-to-peer (P2P) transactions lessen the likelihood of hacking or regulatory shutdowns that affect trades on centralized exchanges. When compared to traditional transactions that are channeled through centralized authority, P2P transactions provide more privacy, fewer fees, and more payment alternatives, provided that users maintain the security of their information.
What to Know Before Investing in Cryptocurrency
Because it’s more than just digital money, cryptocurrency might be confusing to those new to the concept. As many NFT owners discovered in 2021 to their dismay, they had very little say over the final product of their investment in works of art. This can expose investors to a variety of hazards. In order to avoid any costly shocks later on, it is crucial to have a complete understanding of what you are purchasing.
What Is Cryptocurrency?
Cryptocurrencies are digital assets that use encryption to ensure security. Some cryptocurrencies are smart, but most are used to buy and trade goods and services. Most cryptocurrencies are not legal cash and are not backed by gold. Private organizations usually issue them.
This is not always the case. Recent years have seen stablecoins and digital currencies issued by central banks in Nigeria and the Bahamas, which are tied to assets like the dollar, gold, or other cryptocurrencies. ICOs can fund blockchain and cryptocurrency technology development. Digital tokens replace ownership shares. Early access to the coin and smart capabilities benefits investors. ICOs have raised billions of dollars for blockchain startups.
Types of Cryptocurrencies
Bitcoin is a coin-only currency used to buy goods and services. Ethereum is a token. Tokens support NFTs and smart contracts.
Bitcoin
Bitcoin, released in 2009 by Satoshi Nakamoto, is the most popular cryptocurrency, accounting for approximately 45% of the market. Buyer and seller use mobile wallets to send and receive payments. In recent years, more retailers take Bitcoin, but others, like Microsoft and Twitch, have temporarily halted owing to volatility. Bitcoin has flaws. For instance, it processes only seven transactions per second, while Visa handles thousands. Currency functionality is also limited: Smart contracts and decentralized applications are not supported because it was designed as a tradeable coin. Bitcoin’s price has changed significantly, including a 2018 drop due to China and India’s stricter regulation, the SEC’s crackdown on crypto exchanges, and the claimed Binance hack. Bitcoin experienced a rebound in 2021 as institutional investors refocused on it, but experienced another slump in 2022 due to the FX fraud case.
Eth and Ether
Ethereum is a blockchain that simplifies smart contract creation, while Ether is a token used for Ethereum transactions. Ether and other Ethereum-based currencies are growing in popularity. In May 2023, Ethereum’s market cap was approximately $218 billion. Despite volatility in recent years due to technology concerns, the currency’s market share of 19% is up a few points from two years ago. Bitcoin and Ethereum dominate the market, but new digital coins and tokens like Litecoin, Zcash, Dash, and Dogecoin have emerged and grown rapidly in the past decade. There are about 23,000 cryptocurrencies available now.
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