Is the Future of Cryptocurrency Bleak?

January 19, 2023 World Blockchain

It will probably endure, but only when more businesses and currencies fail. This is why.

The industry that offered a competitive alternative to the established global financial paradigm is now facing existential issues as a result of the collapse of numerous large crypto enterprises in recent months. The TerraUSD and Luna coins crashed in May of last year, shedding nearly all of their value over night and wiping out $45 billion from the cryptocurrency market in a single day. Three Arrows Capital, a Singapore-based cryptocurrency hedge fund, abruptly closed. Voyager Digital and Celsius Network, two cryptocurrency lenders who had given loans to Three Arrows Capital, immediately declared bankruptcy.

And in November, FTX, the well-known cryptocurrency trading platform featured in the Super Bowl commercial, collapsed.

Sam Bankman-Fried, the company’s founder, was detained in the Bahamas in December and has since been charged with fraud. The most popular cryptocurrency in the world, Bitcoin, is now worth a third of what it did in October 2021 when it peaked.

“Don’t be like Larry ” is the motto of the final FTX commercial featuring David, and many of the 420 million people who are thought to have invested in cryptocurrencies today may be wishing they had been more like Larry.

Is crypto on the verge of extinction then?
The short answer, according to experts who spoke with Al Jazeera, is that cryptocurrencies as a concept will probably endure. But the industry will probably have to deal with more regulation and a longer period of uncertainty. Both businesses and currencies will fail. Gaining back client trust will be the biggest task businesses confront if they want to survive.

Bitcoin “ice age”
The promise of quick returns on investment has usually attracted users to cryptocurrency trading platforms. The deal is to deposit money in so-called crypto wallets, which are designed to work like savings accounts and pay out high interest rates that can reach double digits. The possibility to conduct transactions without being concerned about a regulator acting as a middleman is an extra attraction for individuals who are skeptical of conventional finance.

However, since the US Federal Reserve and other significant central banks hiked interest rates considerably through 2022, making more conventional investment options more lucrative than previously, this appeal began to fade. For example, the US rate increased dramatically throughout the course of 2022, rising by more than 4 percentage points.

After TerraUSD and Luna entered free fall, a combination of safer alternatives and diminished confidence in cryptocurrencies resulted in a crisis that, in the opinion of experts, is still very much ongoing.

According to Tim Leung, director of the computational finance and risk management department at the University of Washington in Seattle, “I think we’ll see a lot more bad news before things start looking better for the sector.”

Leung predicted that cryptocurrency platforms would have low trading volumes for some time since many potential clients are now skeptical. Although the cryptocurrency industry likes to tout its independence, it nevertheless need funding from conventional markets.

Leung opined that it is unclear how much of the financing will remain in the current environment. He cautioned that many smaller enterprises would fail due to decreased trading and finance.

Leung claimed that cryptocurrency mining businesses, which produce digital currency, or coins, using power-hungry supercomputers, will also be impacted. Low trading volumes and high energy prices will reduce the demand for coins, putting pressure on the profitability of their business model. I think this phase will endure till 2023,” he stated. “A crypto winter is less likely to occur than a crypto ice age.”

The slump is not unexpected, according to analysts. David Yermack, a finance professor at the Stern School of Business at New York University, described the business as being in its infancy and boasting hundreds of companies and a lot of innovation. According to him, the near future for cryptocurrencies will be chaotic, but “ultimately best practices will emerge through competition,” he told Al Jazeera.

Worldwide governments have made plans to intervene to protect consumers from the instability. Regulators and analysts, however, don’t seem to agree on the appropriate course of action.