By Susan Doktor
Call me cynical or call me cautious. But if anyone tells you they know for certain where cryptocurrency markets are headed, don’t believe it. Prognostications from investment analysts, economists, and even crypto owners themselves abound. The press offers new predictions every day. But if you look back in time, a great percentage of those predictions proved false. Crypto observers can’t seem to agree about much. The only thing we really know about crypto is that it’s volatile. Market conditions swing widely—and they can swing in an instant.
So what’s a would-be crypto investor to do? And if you already own cryptocurrencies, how should you respond to the current crypto winter? Perhaps the best approach is to mine crypto’s history for clues and consider the big picture: economic and social factors that may have the greatest impact on where the crypto market is headed. Investors would also be wise to regularly consult objective resources for their take on crypto’s future. There’s a lot of hype out there. Companies that stand to benefit from crypto trading often paint the rosiest possible picture of the crypto market.
Top Trends Affecting Crypto Markets
Let’s take a look at the developments that are most likely to influence crypto markets in the coming years. We’ve selected our top five: supply and demand, the cost of production, new government regulation, increased consumer awareness and understanding of crypto, and the growing ability of crypto owners to use crypto for everyday purchases. Some of these factors bode well for crypto while others may be considered red flags for investors. We’ll read the scary part of the story first, knowing that there’s still plenty of potential for a happy ending.
The Basic Rules Apply
Have you noticed how the price of Brussels sprouts goes down in the winter? That’s because they’re a cold-weather crop and more plentiful when there’s snow on the ground. That’s also why asparagus is such a steal in Spring. Cryptocurrency markets are subject to the rule of supply and demand, too.
Once upon a time, there were just a handful of cryptocurrencies. Today, there are more than 19,000 cryptocurrencies for sale on more than a thousand blockchains and crypto exchanges. Competition in the market is heating up. Let’s look at just one currency and you’ll see why supply is up: New Bitcoins are mined every ten minutes for a total of about 900 every day.
Couple that with the number of investors who were spooked by this summer’s Crypto Crash and proceeded to dump their crypto. Demand for crypto is down as investors reposition their assets and move toward safer bets. Conventional economic wisdom suggests that increased supply and decreased demand will lead to lower crypto prices. Indeed, the total value of the crypto market plunged by $2 trillion during the early part of the summer.
The Feds Are Getting in On the Action
Early crypto investors lived in a secret paradise. The sector was small. It didn’t attract a lot of attention and the federal government wasn’t too concerned with the niche-y, nerdy, techno product. There were few regulations in the early days of crypto. The anonymity of blockchain transactions shrouded crypto transactions. And anonymity was one of the things investors loved most about crypto.
Not surprisingly, it was also one of the characteristics that scammers, thieves, and other bad actors loved about crypto. Investors lost over $1 billion due to crypto crime in 2021 alone. Crypto is increasingly the darling of money launderers, too. A report by the data company Chainalysis found that crypto money laundering increased by 30% between 2020 and 2021.
Coupled with the crypto crash, these statistics have made the federal government sit up and take notice. The government now requires crypto exchanges to comply with some of the same rules banks and traditional brokerages have had to follow for years, including Know Your Customer (KYC) regulations. KYC sets out requirements for financial institutions to confirm customers’ identities and carry out background checks before doing business with them.
The government is also instituting new regulations to protect investors against the shocking losses seen when the bottom falls out of the crypto market. This summer’s crash wasn’t the first in crypto’s short history. But it was certainly the most widely publicized now that crypto has largely gone mainstream. A new bi-partisan bill, dubbed the Responsible Financial Innovation Act, was introduced by US senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) Among its provisions is one that stablecoins—digital assets that are redeemable on a one-to-one basis with the dollar or other legal tender—must be backed by no less than 100% of their face value in non-crypto assets. The new rules seek to stem the tide of failed crypto exchanges that leave investors holding a very heavy bag. The bill would also include new requirements that crypto businesses make a series of disclosures to ensure that crypto purchasers know what they’re getting into and understand the risks of crypto trading.
It’s tough to know how government scrutiny and regulation will affect the price of individual coins. Compliance costs money. You might think that the burden of regulations might drive crypto prices up. But most crypto analysts believe that, ultimately, regulation is a good thing. They expect it will stabilize the industry long-term and rescue it from what appears to some to be an inevitable free fall.
Cryptocurrency is an Energy Hog
How voraciously hungry are cryptocurrencies for electricity? Consider this: Bitcoin—a single currency, mind you—consumes more energy in one year than the entire country of Norway uses. With energy prices soaring, the production costs associated with crypto mining and trading have inclined sharply. While experts say rising energy costs have little influence on the trading price of cryptocurrencies day to day, they’ve made creating new crypto less profitable for crypto miners. Arguably, that will reduce the supply of crypto and raise market prices. If you’re already invested in crypto, that sounds like pretty good news. If you’re looking to get into the market, not so much.
But don’t be so quick to dismiss cryptocurrency as a wise investment. Other, more positive forces are at work.
Crypto Isn’t So Mysterious Anymore
Consumers can’t escape crypto news, whether it’s delivered by radio announcers, respected financial publications like the Wall Street Journal, the thousands of bloggers who write about the subject, or social media platforms like Twitter and Facebook.
As a result, crypto is better understood than ever before—though many people invest in crypto without having a firm grasp of how it works. A study by Cardify found that about a third of crypto owners don’t understand what they’ve bought. Many investors, who held no crypto but saw its value skyrocket over the past decade, were motivated to add crypto to their portfolios out of fear they were missing out. How many people flocked to this “next big thing”? Plenty. Today, according to recent data, about one in five Americans have owned or traded cryptocurrencies. Millennials and members of Gen Z lead the way and represent about 94% of crypto owners. They grew up in the digital age and are simply more comfortable in the virtual world than older Americans. As more and more digitally savvy people reach the age when they’ll start investing, it’s reasonable to expect that the number of crypto-initiated investors will continue to grow.
Crypto marketers were quick to adopt a tried-and-true tactic of many consumer brands. Currencies like DogeCoin and Shiba Inu built their platform on memes—the equivalent of a brand mascot. Think Tony the Tiger of Kellogg’s Frosted Flakes fame, or the Keebler Elves. Memes make products seem friendlier. They inspire attachment. It makes you wonder, how many DogeCoin investors are dog lovers?
There Are More Ways to Spend Crypto
Crypto owners may not fully understand crypto. But increasingly, it’s looking a lot more like cash to them. They have more opportunities to spend it than ever before. Mega-shopping site Overstock.com became the first retailer to accept Bitcoin for payment. That news didn’t make headlines at the time. But nowadays, consumers are happily reaching into their crypto wallets to pay for a Whopper and fries at Burger King or take care of their AT&T cell phone bills. They’re buying organic oatmeal at Whole Foods with crypto, now that its parent company (and the largest retailer in the world) Amazon has begun accepting crypto payments through third-party crypto payment processors.
Not surprisingly, Crypto payment processors are more plentiful now. Coinbase, one of the largest crypto exchanges, now serves as a gateway for companies that want to accept crypto payments. Shopify, the platform that launched umpteen mom-and-pop-and-sister-and-brother businesses, is also in the game now through its several affiliate processors.
You can’t pay for your morning latte straight from your 401K or the Apple shares you hold in your Stash account. That’s one thing that now distinguishes crypto from other investments you might make. Time and again, history has demonstrated that consumers embrace products that make life simpler and more convenient. You might not think to describe crypto as simple. But as spending it becomes even easier than spending cash—no trip to the ATM required!—you can count on the world lining up behind it.
Remember Supply and Demand?
It turns out that the principle cuts both ways when it comes to some forms of crypto. Some crypto coins—Bitcoin among them—are hard-capped. There is, for example, a finite number of Bitcoins that can ever be mined: 21 million to be exact. About 19 million of them are already “in circulation.” It’s predicted that the last bitcoin will be mined in the year 2140, which seems like eons away. But the pace of crypto mining has slowed, with miners receiving smaller rewards for their efforts as time goes on. As Bitcoin and other capped currencies become rarer, their market value can be expected to increase. Crypto may well turn into the stuff that “old money” is made of—a legacy asset to be handed down and enjoyed by more than a handful of generations. If you’re concerned with your financial legacy, buying hard-capped coins may be well worth considering.
Crypto On Balance
It’s no wonder there are as many crypto enthusiasts as there are nay-sayers. Strong arguments can be made on both sides of the question of whether crypto is a sound long-term investment or a recipe for financial disaster. I told you as much in the first paragraph of this article: no one knows for sure.
But for the moment, crypto is huge. It appears not to be going anywhere. So if you’re already invested in crypto, I’m not going to tell you to dump your assets. If you’re interested in trading crypto for the first time, I’m not going to tell you you’re crazy. But I am going to tell you that it takes a lot of time and knowledge to be a successful crypto investor. Crypto trading is a 24/7 pursuit and markets can change in an instant. New opportunities and pitfalls are always just around the corner. So whether you’re an old hand or a novice, be sure you rely on objective advice to inform your trading decisions.
Here are a few resources that can help you better understand what you’re investing in and the forces that are likely to influence crypto markets. What should you expect in the days to come? That’s something you’ll have to decide for yourself. But if history can teach us anything about cryptocurrency, it’s to expect the unexpected.
Susan Doktor is a journalist, veteran business strategist, and overall cautious person. She writes on a wide range of personal finance topics, including financial technology, investing, and credit markets. Her contribution comes to us courtesy of Money.com.
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Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the cryptocurrency they discuss. The information and content are subject to change without notice. Visionary Financial and its affiliates do not provide investment, tax, legal, or accounting advice.