Last year was a very good year for cryptocurrencies, but in comparison 2022 has experienced a relatively poor start. Bitcoin, the ‘OG’ of cryptocurrencies, is down in price about 30% from its November 2021 highs, with the crypto industry as a whole growing to a total market cap of more than $2 trillion. The crypto market decline for many smaller cryptocurrencies is even worse, leading many to believe that cryptocurrency prices will remain depressed for quite some time. BigONE believes the cryptocurrency industry will additionally face some significant threats this year which may have an even more of an impact than the current market downturn. It’s worth considering these risks on the 2022 ‘event horizon’ when figuring out how to best manage your portfolio in the months ahead.
Consider the wider economy
The principle of decentralization is the cornerstone of the crypto industry. As a practitioner of decentralization, cryptocurrencies based on blockchain technology do not require centralized institutions like governments or banks to operate. But because of this, some in the crypto community fall into the trap of over-confidence, believing that they can stay out of everything in the world. The flaw in this false logic is that, as cryptocurrencies become more mainstream, cryptocurrencies will gradually become part of a new economy with widespread use, and such a role will play a vital role in the global economy.
The US Federal Reserve’s decision to withdraw stimulus measures related to the COVID-19 pandemic is a key reason for the economic downturn. Moreover, the Fed’s move to combat inflation by raising interest rates has led investors to pull out of riskier assets such as crypto. In addition, the current war in Ukraine and economic sanctions against Russia has added to uncertainty in the global economy. French Finance Minister Bruno Le Maire on Tuesday said that the aim of the sanctions was to “cause the collapse of the Russian economy.” As a result, many investment experts believe that the needless war will further exacerbate economic instability on a global scale.
Strengthened regulatory policies
The looming threat of increased crypto regulatory policy has been hanging over cryptocurrencies for some time now. Countries worldwide are struggling to find ways to tighten regulation without weakening the crypto industry’s innovative potential. For example, U.S. agencies have said they will not follow China’s approach in banning cryptocurrencies, but they want to introduce stricter controls to safeguard consumers. But the downside of doing this is that it has the tendency of creating new problems. Currently, some crypto projects offer bank-like services but don’t have to follow the same strict rules as banks. In addition, some cryptocurrency projects have a lot in common with stock investing but don’t have the same reporting and transparency requirements to prevent issues like insider trading and market manipulation. But its these problems that will need to be faced after strengthening regulation in the future.
Potential threats from stablecoins
A stablecoin is a cryptocurrency that anchors its value to gold or fiat currency. The most well-known stablecoin is Tether (USDT), which is pegged 1:1 with the US dollar, which means the value of each USDT should be $1. Tether is a fiat-backed stablecoin, so it needs stable reserves to back every token it issues.
This is an essential element for stablecoins. For example, suppose you gave $100 to a friend for safekeeping. The friend may lend the money to others to earn interest or invest the funds in cryptocurrency to earn income. If a friend uses your money to profit from it, he will keep those profits. But if the friend doesn’t make a profit and loses your money, then you’re the one who suffers. Simply put, Tether (USDT) is currently facing a potential threat. Its lack of transparency is troubling many in both the crypto community and in regulatory circles. Indeed, the US Government, Federal Reserve, and the Financial Stability Board (FSB) recently raised concerns about stablecoins, suggesting they could be a major risk to the global economy. The FSB specifically focused on stablecoins in its February 16 report on the dangers of crypto assets.
Fraud
Crypto scammers stole $14 billion in cryptocurrencies last year, again setting a record, according to Crypto Analytics. And in a North American Securities Administrators Association survey, investments related to cryptocurrencies and digital assets topped the list of threats to investors. Cryptocurrency theft increased 516% from 2020, to $3.2 billion in cryptocurrency. Of this total, 72% of stolen funds were taken from DeFi platforms. “DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike,” but it’s “unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft,” Chainalysis argued in its 2022 Crypto Crime report. However, the report also found that relatively speaking crime is “becoming a smaller and smaller part of the cryptocurrency ecosystem.”
Criminal activities destroy investor confidence and market stability and lead to ordinary people losing money. In addition, the frequent occurrence of scams and frauds has hindered the adoption of cryptocurrencies. It has made both institutions and individual investors more cautious when dealing with cryptocurrency investments. It has also made merchants and shoppers less willing to pay with cryptocurrencies. The recent annual survey of North American securities regulators urged investors to take care before purchasing cryptocurrency and digital assets.
Cryptocurrencies have come a long way in recent years, but there is still a way to go before reaching their full potential as an alternative financial system. On the one hand, we have benefited from cryptocurrencies that have changed the way we use money and how the internet works. But on the other hand, we have lost billions of dollars to scams and cryptocurrency crime, slowing down mass adoption.
Investors in the crypto market appear to be more accustomed to thinking about risk from volatility and personal investment perspectives. This approach is correct, but it is essential to have a long-term investment plan that takes account of the wider context. If the four threats mentioned above are not effectively addressed, the promise of crypto to change the world for the better could be squandered.
