6 Trends Shaping the Fate of the Crypto Market for the Foreseeable Future
The innovation that is unfolding in the cryptocurrency space is unrivaled and happening at a fast and furious pace. Market participants watch with bated breath to see what the bitcoin price will do while pontificators take a stab at predicting the direction of the broader cryptocurrency market. The questions on everyone’s lips are: What even is Bitcoin mining? Will Ethereum flip bitcoin? What about Dogecoin — will it reach the moon thanks to Elon Musk’s influence?
Cryptocurrency adoption, however, has become a double-edged sword, one in which the global financial system is ripe for yet at the same time evokes fear given the risks that the industry has not yet been able to shake off. Striking a balance between profit potential and risk mitigation is key, but it is a fine line that has yet to be perfected. Below are half-a-dozen trends that could determine the fate of the crypto market for the remainder of 2021 and beyond.
One issue in the cryptocurrency market that has yet to be resolved or at least understood is tax regulation. Now that the size of the cryptocurrency market cap has touched on USD 2 trillion, Uncle Sam and the taxman in other jurisdictions are not about to let any revenue through their hands. While many in the cryptocurrency market continue to fight the tide, crypto tax frameworks are emerging in countries, especially as the market matures and policymakers come to terms with the fact that it is not going anywhere.
Crypto investors can’t stick their heads in the proverbial sand about crypto taxes either. The rise of know your customer (KYC) standards, transaction tracking protocols and crypto laws (albeit at a snail’s pace) are all signs that the cryptocurrency industry is entering a new phase, one that market participants can miss if they blink. All of these signs taken together suggest that the emergence of the first bitcoin tax evasion lawsuit is only a matter of time and very likely to happen this year.
‘Offshore Crypto Havens’
As crypto tax frameworks begin to take shape, there will be a ripple effect in the market that is akin to patterns in the traditional financial markets — tax havens. The more that big brother is watching, the more attractive that jurisdictions with crypto-friendly laws in place will become to users looking to hoard as much of their stash as possible. This trend is likely to take the form of offshore crypto havens in Asia, including Singapore, South Korea and Japan, as well as Europe — mainly Switzerland. With the adoption of bitcoin as its legal tender, Central America’s El Salvador could also be in play.
Crisis of Confidence
As the cryptocurrency and blockchain industry matures around the world, it will also test the limits of the market that could have a contagion effect on the global industry. Bitcoin’s rally to USD 34K at year-end 2020 is a good example, as it was fueled not only by increasing demand for the flagship cryptocurrency but also supply/demand dynamics in U.S. dollar-linked stablecoin Tether, which is widely traded on crypto exchanges.
Tether has the ability to turn on the printing press, like central banks, and market participants and others question whether its reserves are sufficiently backed by fiat. This could be a crypto crisis in the making. If push comes to shove and Tether or other USD-backed digital currencies can’t deliver USD 1 for each token, the fear is that stablecoins could wreak havoc in the cryptocurrency market.
Risk Assessment Modeling
Now that bitcoin’s value has increased dramatically in a short period of time, the market has been reminded about the need for top-notch risk assessment models. The more bitcoin’s price rises, the harder it will be for market participants to gauge the risks associated with gaining exposure to cryptocurrencies without responding to FOMO. Those providers that can provide a real solution and not just attempt to read the tea leaves will be those that emerge as the winners among novice and sophisticated traders alike.
Crypto transaction costs are a minefield. On one hand, the industry is moving toward cheaper fees for Ether transactions as the Ethereum network inches closer to transitioning to a proof-of-stake (POS) network. On the other hand, bitcoin transactions could continue to escalate.
The cost for transactions will not only affect the cryptocurrency community but also e-commerce businesses that integrate support for crypto transactions. Crypto has the upper hand in the short-term considering transactions are cheaper than that of their fiat counterparts. Whether this dynamic can be maintained for the long term hinges on how crypto’s use case as a payment method unfolds and whether it will make sense for e-commerce to stick around.
The rise of 5G in the telecommunications industry will transform data transmission and therefore will spill over into crypto industry phenomena, such as developments surrounding mining and decentralized finance (DeFi), for example. 5G will change the game for traders currently scrambling to set up shop near crypto exchanges to execute faster transactions. The fifth generation tech standard will create a fairer playing field and remove any unfair advantage from the equation.
Anyway you look at it, the cryptocurrency industry has already disrupted the traditional financial markets. What happens from here largely depends on how these trends and others play out for regulators and market participants alike. Given the pace of adoption and price activity in the first half of the year, the second half is sure to provide some questions to the industry’s outstanding questions.
(Image source: https://www.pexels.com/photo/calculator-and-pen-on-table-209224/)
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