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Cheat Sheet: Will cryptocurrencies ever achieve mainstream adoption?

  • The crypto market crashed a few weeks ago, and has not shown any real signs of recovery yet.
  • What does this mean for the future of the industry, and what are the challenges toward mainstream adoption?
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Cheat Sheet: Will cryptocurrencies ever achieve mainstream adoption?

The third week of May 2021 brought grim news for cryptocurrency investors and enthusiasts. The crypto market shrunk by 27% within a few days. Following a major sell-off, Bitcoin fell by 30%, dropping to around $30,000 at one point – its lowest value since late January. The currency fell more than 50% since mid-April, when it hit a record high of nearly $65,000.

Bitcoin was not the only cryptocurrency that suffered. Ether also fell sharply, dropping below $2,000 at one point, an over 40% decline in less than a day. Binance’s BNB token similarly fell by nearly 40%. Dogecoin, the notorious digital currency modeled after an old viral dog meme, fell 27% to around 35 cents. Collectively, the crash wiped out around $1 trillion in the market value of cryptocurrencies within a matter of days.

Three weeks on, Bitcoin is trading at under $37,000, and has not shown any clear signs of recovery from the initial plunge.

Bitcoin’s price slump over the past month (source: CoinDesk)

But what does all this mean, anyway? What’s really behind the numbers? We asked experts in the crypto, payments and fintech space to help us make sense of these recent developments, and to decipher what they mean for the future of finance in general, and cryptocurrencies in particular.

Q. What explains the recent plunge in the value of Bitcoin and other cryptocurrencies?

Marie Tatibouet, CMO at crypto exchange platform Gate.io, attributes the recent crash to “a weird combination of price correction and external factors.” She says cryptocurrencies were overbought and in need of some price correction, which combined with a number of external factors that collectively shook investor faith.

“Tesla ousted Bitcoin due to environmental concerns, China barred financial institutions from dealing with crypto companies, and China and Iran then imposed heavy restrictions on Bitcoin mining for different reasons,” said Tatibouet. “All these factors played a major role in the drop in valuation.”

Like any tradable asset, the crypto market is closely tied to investor psychology, according to Dani Fava, a wealth management professional and the head of strategic development at Envestnet. “The psychological aspect is perhaps even stronger in crypto than the U.S. equity market, because less institutions and more individuals are trading. This means that when there are rumors about regulatory changes, or when influencers like Elon Musk make bold statements, people will likely react and cause volatility.”

Elon Musk’s influence on Bitcoin with a single tweet (source: CoinSmart)

Ran Goldi, CEO of payments platform First Digital, has a similar outlook. “The initial decline can be attributed to the psychology of the market’s investors, caused by factors such as Coinbase’s share dropping instead of exploding upwards as expected, and Elon Musk’s tweets,” said Goldi. However, he believes the main cause for the drastic drop was an over-leveraged market. “With almost every exchange offering up to 25x leverage, many market participants were excessively trading their position, and once liquidations started, it erased billions within hours.”

Not surprisingly, the ESG issues associated with cryptocurrencies were another contributing factor. “The growing concern around Bitcoin's environmental impact initiated a sell-off. The resulting decline in price triggered liquidations of ~$8 billion in leveraged positions due to margin calls. Firms and individuals who had borrowed money to buy bitcoin were forced to sell so that lenders could limit losses, intensifying the sell-off even further,” explained Annette Faynburd, the lead product manager at Bond, who has previously held various roles at J.P. Morgan and Wells Fargo.

“Most cryptocurrencies are still highly correlated, so the market moved together. The sensitivity of the asset class to social media and political news shows that the category is still nascent despite growing adoption,” she added.

Q. How will the recent crash affect the crypto and payments industries? Will investors, companies and governments be discouraged by the volatility of cryptocurrencies?

The events of the last few weeks have suddenly alerted investors to the fact that cryptocurrencies are still unpredictable and highly volatile. “Everyone had enjoyed the positive side of this volatility since fall 2020. Then suddenly, they realized there’s a catch to it: you can’t have multiple upsides without an equal possibility of large downsides,” said Asi De Silva, managing partner at investment advisory firm RockDen Advisors.

However, despite the recent downturn, De Silva is optimistic about long-term growth prospects. “As long as the largest digital assets continue to make longer-term value gains, adoption by individuals and larger institutions should continue at a very quick rate.”

Doug Schwenk, chairman of crypto research platform Digital Asset Research, believes that although the volatility will make headlines and cause general concern, seasoned crypto investors will recognize that this moment is not critically different from other Bitcoin drawdowns, and that money is to be made in buying at the right moment before the next upswing.

“The big theme that most people are missing here is that Bitcoin is still up dramatically year-over-year, and institutional players continue to extend their support”, said Schwenk. “Overemphasizing the drawdown versus the backdrop of steady work in facilitating adoption by key players is like the old story of the Tortoise and the Hare – we often misjudge the importance of short-term setbacks against long-term progress.”

Bond’s Faynburd similarly argues that the recent drop is actually favorable for the overall growth of the market, as it presents a more attractive buying opportunity for new entrants. “While volatility may be a constant in the near future, investors, companies, and governments will continue to be drawn to crypto as a whole because of the technology's potential to advance the global financial system, offer an alternative treasury investment, and offer a hedge against inflation,” she said. 

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The recent volatility isn’t necessarily a bad thing, according to Justin Hartzman, CEO of Toronto-based crypto exchange CoinSmart. “While predictability is advantageous in some instances, volatility offers trading opportunities for those who seek them. The idea that we are seeing swings in both directions is very lucrative for those who are disciplined traders.”

Hartzman also sees the proliferation of stablecoins like USDC as a positive development. “This shows that there’s still demand for digital currencies – and that’s a trend that will likely continue,” he said. “Let’s not forget that this market has seen a few cycles, and the latest one looks a lot like the ones from the past. Crypto is still maturing, and growing pains are inevitable.”

Q. What challenges could prevent cryptocurrencies from gaining mainstream adoption?

The biggest challenge facing cryptocurrencies globally is that of regulatory uncertainty, according to Tatibouet from Gate.io. “Without governments taking a firm stance on cryptocurrencies, many individuals and corporations will refrain from investing,” she said.

High transaction costs are another factor that can discourage investors, according to Tatibouet. The recent surge in gas fees on Ethereum's network affected many coins and tokens.

“There’s also a sense of centralization at this point, with certain individuals being able to affect the market with a single tweet,” said Tatibouet. “One of the main benefits of the crypto market is its decentralization, so having a select few with the power to move markets remains concerning.”

Eric Christensen, chief payments officer at e-commerce platform Digital River, says the current crypto market situation is somewhat like the chicken and egg scenario, but with added complexity. “In order for consumers to start using cryptocurrencies to make payments, they have to be comfortable with them from a security and user experience perspective, which can only happen once they start seeing them used at merchant locations,” he said. “And in order for merchants to start accepting crypto payments, they first need assurance that consumers will really adopt them.”

This complication, combined with the current volatility in the crypto market, makes mass adoption quite a challenge, according to Christensen. “In my opinion, we won’t have the ability to solve the chicken and egg scenario until the volatility is calmed, and until owners of cryptocurrencies start looking at them as more than an investment vehicle.” 

Growing environmental concerns pose another serious challenge. “The narrative around Bitcoin is that it’s energy-intensive – and while it does consume energy, a growing percentage of that energy is renewable, and Bitcoin’s core disinflationary quality could very well make society less energy-intensive in the long run,” explained De Silva from RockDen Advisors. “Bitcoin needs to better articulate its value proposition, but unfortunately as a decentralized blockchain, there’s no one in charge!”

Q. Can the crypto industry overcome these challenges? If so, how?

While legislative and regulatory hurdles currently act as major challenges, governments and lawmakers should eventually be able to tackle them, according to SeungPyo Hong, head of research at the CBDC Blockchain Research Institute.

“These challenges can be overcome by the government yielding its regulatory power and the legislature making laws that are crypto-friendly, as the trading volume in the crypto market becomes ‘too big to fail’ and gains mainstream acceptance,” said Hong. “We’re already seeing a general trend where traditional financial institutions and regulators are moving into blockchain and/or cryptocurrencies because of their promising market prospects.”

Smart and fair regulation is needed in order to overcome current uncertainties, according to CoinSmart CEO Justin Hartzman. “This regulation has to happen at the regional level, as there’s no single answer applicable to all places. It’s about working together to build something that provides structure, without stifling innovation,” said Hartzman.

Regulators in places like Ecuador, El Salvador, and Texas have embraced cryptocurrencies, and will act as a litmus test for other countries and regions. “If they see decent benefits from embracing crypto, favourable regulations are sure to follow across the globe, perhaps even setting off a 'crypto race' of sorts, where nations race to become the most welcoming to crypto companies”, said Tatibouet from Gate.io.

Bitcoin's Lightning Network and Ethereum's Layer 2 will also help drastically bring down transaction costs in the coming months, according to her.

“As for the individuals wielding power over the markets, it's almost certain that as their utterances continue to affect the market poorly, many will stop taking every word they say to heart,” said Tatibouet. “Additionally, communities in the crypto space are likely to start fighting back and hold them accountable. Accountability is key.”

Q. Is it unrealistic to think that cryptocurrencies will soon gain mainstream acceptance as a form of payment, and as a general store of value?

“I think we are looking at a longer horizon than the headlines would lead us to believe,” said Digital River’s Christensen, who views cryptocurrencies primarily as investment vehicles at this point.

“With the price fluctuation, it’s hard to imagine someone wanting to use Bitcoin to purchase an item if the value of Bitcoin is rising. We first need to solve the volatility issues with crypto, and then we need to solve the chicken and egg issue,” he said. “Merchants would need to take a massive leap of faith and build support so consumers will be comfortable using crypto payments, or consumers will need to change their mentality of crypto as an investment and demand that merchants accept it.”

First Digital’s Ran Goldi similarly argues that currencies such as Bitcoin and Ether are not likely to be widely used as means of payment anytime soon. “While Bitcoin laid the groundwork for many blockchains, it has since become more of a store of value than a currency we could use for payment,” he said.

However, he believes that stablecoins and central bank digital currencies (CBDC) are an inevitable part of our future. “Soon, more and more large corporates would issue stablecoins in an attempt to win users, and these users will manage their funds running on stablecoins with the apps created by those companies.”

Digital Asset Research’s Schwenk points out that while it’s not clear whether current industry leaders such as Bitcoin and Ethereum will be long-term winners, that doesn’t mean the technology behind them won’t gain mainstream acceptance. “We’ve seen it over and over in tech and fintech, where the frontrunner often proves the category, and follow-on competitors refine the business model and approach to gain mainstream adoption.”

Meanwhile, Hartzman from CoinSmart argues that crypto awareness is at an all-time high, and cryptocurrencies have already entered the mainstream. “It’s by no means full acceptance – in fact, much of the mainstream media’s obsession with crypto results in a fairly negative perception of the space,” he said. “Instead of trying to really understand what’s going on, it’s often, ‘See, we said this was a scam.’ It’s a knee-jerk reaction that doesn’t always match reality.”

Hartzman says the industry has tremendous potential, and its value will be unlocked steadily over the next decade. “Even though COVID accelerated the timeline of innovation, there’s still a long road ahead. The key is to take a long-term view. Things don’t change overnight,” he said.

“Remember that we’re building Web 3.0 here. It’s just as transformative as the internet was for Web 1.0, and mobile and e-commerce for Web 2.0. We must be patient and let innovations take root.” 

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