Cryptocurrency is not a new concept to most of us as a lot of people putting cryptocurrencies into their investment portfolios.
According to a recent survey on cryptocurrencies in Australia, around 9% of the respondents said that they had invested in Bitcoin. The second most popular cryptocurrency among the survey respondents was Ethereum, with 8% of the people investing in it. Global-wide, based on recent stats, there are more than 106 million people now using cryptocurrency. And the total market cap of cryptos used to be 3 trillion at it all times high and has retaken the $1 trillion level, a few days ago.
We’ve seen the recent crypto market crash, the so-called ‘crypto winter’. In November 2021, Bitcoin (BTC) reached an all-time high of more than $68,000 USD, and the current price is around $23,000, a steep drop. The crypto market overall is experiencing significant volatility, and crypto prices have plunged 70% from their all-time highs.
There are many reasons associated with the market crash this time, in particular
- There are many extremely over-valuated cryptocurrency projects on the market. Which is to say their prices shouldn’t be that high in the first place.
- We’ve also seen the correlation between the stock market and crypto market. There were massive sell-off by investors due to inflation fears and investors tend to stay away from risky assets, which is reflected in both stock markets and crypto market.
- Obviously, the Russia-Ukraine conflict and the COVID-19 pandemic increased the fear of the market which also impacted the crypto prices.
A classic example would be the crash of the stable coin Luna. With a $40 billion USD market cap has gone. Stable coins offer a way to bridge the gap between fiat currencies like the U.S. dollar and cryptocurrencies. There are four primary stable coin types, based on their underlying structure, they are; fiat-backed stable coins, crypto-backed stable coins, commodity-backed stable coins, and algorithmic stable coins.
Luna is algorithmic stable coin. The price is managed using specialised algorithms and smart contracts that manage the supply of tokens in circulation. An algorithmic stable coin system will reduce the number of tokens in circulation when the market price falls below the price of the fiat currency it tracks. Alternatively, if the price of the token exceeds the price of the fiat currency it tracks, new tokens will enter circulation to adjust the stable coin value. Therefore, when it has massive selloffs, the price would be volatile.
Obviously, this is not the first time the market has crashed. In 2018 Bitcoin’s price dropped by more than 80%. Back then, it wasn’t clear whether crypto would be banned. What tanked the market was “the China ban” on crypto. The general consensus was that other countries like the US would do the same. And we’ve seen a lot of ICOs (Initial Coin Offerings) on the market which allowed anybody to create a coin, promise the world, and take investors’ money. That has led to wild speculation.
Another reason attributed to price volatility is that the market is very vulnerable to the so-called “big fish traders”, – the owners of large amounts of crypto. “Since large volumes of crypto are owned by few large investors, their trade decisions can make the crypto market very vulnerable.
Having said that, over the years, we also witnessed the development of the underlying technology blockchain. In the decentralized world, if crypto is the surface. The underlying technology is blockchain. We see blockchain technology has been used in different industries, such as gaming, real estate, insurance, security, art, and so on. And because of its decentralised nature, we are also seeing an innovative structure of the organisation that is emerging on the market, which is called DAO referring to Decentralized Autonomous Organisation. It is a type of organisation represented by rules encoded as a computer program, controlled by its members, and not influenced by any central parties. The members of DAO can be all around the world, without even knowing each other.
So that brings new challenges for the regulators as this is not a traditional company structure. Because the members of the DAO are all remote, they could be in different countries, they get paid in digital tokens, and there might be no business registration in any specific countries, therefore, in terms of how to regulate DAO and how to charge tax on their activities, these will need to be considered.
In summary, Cryptocurrencies and Blockchain are young and emerging markets, with many projects still in the early stage. Therefore, it has very high price volatility that wouldn’t be expected to see in other asset types. Getting involved with the cryptocurrency markets can expose us to a lot of uncertainties. For now, the best thing we can do is to educate ourselves, practice good digital hygiene, and try to manage our risks.
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