When you bring up cryptocurrency in polite conversation, one thing is almost certain: everyone and their dog has an opinion about the top two crypto currencies, Bitcoin and Ethereum.
Some are on the bull side, while others are on the bear side, with a variety of reasons for holding their position.
What is unassailable is that the price of both – and basically all cryptos – depends on buy and sell orders. In general, there are people who operate as market-makers, but, as in the traditional financial world, they don’t buy and hold onto their stock – they only make a profit when they sell. So it is with digital money, aka crypto.
How is that all going after a summer where – at least by crypto’s standards – not a huge amount has happened? Most recently, the perceived wisdom has been there is a wall of money due to land any minute, particularly on Bitcoin. Ethereum is more at risk, even if the current narrative is that things are getting better – and so they may well be, but not in a rush.
Conversely, there are warning signs indicating Ethereum could suffer a potential collapse, as its ascending support line is at risk. Some commentators have noted: “it will take a lot of money to shift prices north, and if it does not appear now, the year-long bullish pattern in progress could lose its confirmation”.
The basic problem is that Ethereum has a liquidity discrepancy. There are many more Ethereum sellers than buyers at the moment and no amount of bullish tokenomic factors can change that. Staking and deflationary mechanisms may influence prices, but ultimately the essential question in any market revolves around the number of buyers versus sellers.
Regulation is famously another big influence on pricing. Many will recall spikes and collapses at the mere hint of more liberal attitudes or legislative clampdowns in China or the USA during the pandemic years.
On that front, we have some recent developments too. Elizabeth Warren has introduced the Digital Asset Anti-Money Laundering Act to the Senate to help stop ‘crypto’s use in money laundering, drug trafficking, and sanctions evasion’.
Surprisingly, the regulation has plenty of bipartisan support. The updated version of the bill covers a wide variety of illicit activity, including a crackdown on noncustodial wallets, bank secrecy, money laundering, and a host of other illegal activities through the use of digital money.
None of that is bad, per say. But, as ever, it’s the collateral damage that may swing things in an adverse direction. Binance’s de-pairing of tokens is a symptom of what regulation is doing, as regulators target tokens which display certain less-than-clean characteristics and a lack of transparency.
Binance is also having to stop staking in the UK, as regulators here enforce the laws in relation to e-money and both Know Your Customer (KYC) and Anti Money Laundering (AML) checks. But this is just the start of what is to come and legislation, like Elizabeth Warren’s bill, will give it teeth.
Where we are otherwise is a place of extreme volatility. That’s why stablecoins are both useful and necessary, but because they behave like fiat currencies and are – as it says on the tin – stable, the regulators are even more exercised about them than run-of-the-mill cryptos.
There are massive security concerns about exchanges and wallets being hacked. In reality, the amount stolen each year is entirely dwarfed by the fraud and theft in the fiat world.
There are huge regulatory uncertainties as each government tries to bend crypto to its will. There will need to be clarity going forward and, as I have argued before, some body akin to the Bank of International Settlement will need to be conjured into existence to regularise the disparate offerings.
Scalability and the present fact of network congestion – leading to soaring transaction costs – are subjects that need to be addressed for the most active cryptos, while social, environmental and ethical concerns have also pushed themselves to the forefront.
Nevertheless, decentralised finance (DeFi) represents a revolutionary shift in the traditional financial sector. These platforms offer a wide array of financial services, including lending, borrowing, and trading, without relying on traditional intermediaries like banks.
With no third parties like these in the system, users bear full responsibility for their investments and holdings, thus potentially exposing themselves directly to scams and hacks. Such a set-up obviously comes with its own issues, which will need ironing out in the form of security and protection for consumers.
As this non-exhaustive list demonstrates, there are many problems still to be faced by crypto. But, it’s worth remembering that the industry is still not even in kindergarten yet.
Prices go up and then they go back down again. Whatever direction they head in today or tomorrow, the potential to transform finance, empower individuals, and challenge traditional fiat systems is still absolutely massive, and will change all our lives in the future.
Long live crypto!
Temple Melville is the CEO of The Scotcoin Project Community Interest Company (CIC)