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We frequently see subtle changes during various phases of the financial market's history, changes whose effects don't always become clear until decades later. Decades of change may, however, occur in a relatively short period of time, as we have witnessed in recent years. The proverb "There are decades when nothing occurs, and weeks where decades happen" applies here.
How did Cryptocurrency come to be
The first mention of cryptocurrency was made in a conference presentation written by American cryptographer David Chaum in 1983 that described a preliminary version of anonymous cryptographic electronic money. Cryptocurrencies then were known as “cyber currencies”. Money that could be distributed anonymously and without the need for centralized bodies was the idea, a good example being the banks. Chaum expanded on his original concepts in 1995 and created Digicash, a prototype cryptocurrency. Before money could be transmitted to a recipient, it needed to be withdrawn from a bank using user software and unique encryption keys.
The creation of Bitcoin marked the beginning of cryptocurrencies. Since its inception, cryptocurrency's value has surged and it has been dubbed "digital gold" by its users. Its main goal was to establish a safe and private mechanism to transmit money from one person to another. Their popularity has increased over the past few years as more and more individuals make investments in them.
However, by the end of 2022, David Chaum expressed his concerns about the way the crypto industry evolved. Being a keynote speaker at Istanbul Blockchain Week, he stated that the market participants eventually turned back to the way they should have avoided – creating intermediaries, i.e. centralized entities such as exchanges, eventually trusting them with their money. It ended up badly, giving such examples as Terra, 3AC, FTX and many more, which disrupted the public trust and the trust of institutions in the industry.
Still, David is looking positive into the future, expressing will to create new technologies to establishing trustless peer-to-peer systems which could be used by general public and which might lead to greater adoption by institutional investors as well. Despite the current challenging environment, institutional and individual investors are becoming more eager to participate in the market.
Cryptocurrency institutional adoption
Financial institutions have boosted their exposure to the cryptocurrency market since the outbreak so they may offer their consumers possibilities to invest in cryptocurrencies. According to a poll on institutional investors' desire for digital assets, 43% of them already do. Some investors in the study claimed to have over 50% of their portfolios in digital assets, but the median percentage of respondents who had invested in cryptocurrencies is just approximately 3%.
The 2022 Financial Services Consumer Survey by GlobalData found that consumers worldwide are interested in the cryptocurrency market. The desire to use cryptocurrencies as an investing tool is what fuels this curiosity the most.Current cryptocurrency investors are excited by institutional participation in the market because institutions bring in new capital, almost always more than individual investors can. Only 18.5% of respondents reported using cryptocurrencies as a payment method, while 77.4% of worldwide respondents who indicated they owned cryptocurrency stated they were driven to make money from it.
Since the pandemic, the cryptocurrency market has attracted a lot of attention from investors and consumers. According to PWC's 4th Annual Global Crypto Hedge Fund Report 2022, the assets under management (AUM) of the studied crypto hedge funds totaled $4.1 billion in 2021, an increase of 8% from the year before. Although hedge funds are investing in the cryptocurrency market, they are doing so in a limited capacity because 57% of those funds have less than 1% of their total assets under management (AUM) invested in the industry.
In the European Union, the entire market value of crypto-assets is said to have grown eight times in the previous two years to over 1.5 trillion euros as of February 2022, but it is still about 1 trillion euros below its peak in November 2021. According to reports, the ownership of crypto assets has peaked at 6% of Slovakians and 8% of Dutch citizens, indicating that they are starting to achieve widespread acceptance.
A market-neutral strategy, which tries to make profit regardless of the market's direction by reducing risk via the use of derivative products, is one of the key approaches that hedge funds are using with cryptocurrencies.
In addition to the volatility, financial institutions are unable to significantly strengthen their position inside the cryptocurrency industry due to a lack of an appropriate regulatory framework.
Currently, there is uncertainty regarding whether digital assets are securities, commodities, currencies, or other types of property, which causes them to suffer from a lack of legal clarity.
The longer-term tactics that funds can utilize or the kinds of cryptocurrencies they can invest in are undetermined as a result of this lack of regulation. By curtailing speculation, which contributes to the high volatility, regulations in the industry might bring about stability. Regulations can also boost investor trust in the industry by introducing protection plans and coverage to make transactions and investments safer and bring the industry under the control of regulatory agencies.
60% of respondents who own cryptocurrencies have less than $15,000 invested in them, and 41% have less than $5,000, according to GlobalData's 2022 Financial Services Consumer Survey. This is much higher than the percentage of respondents with holdings in bonds (52%) and shares (56%) of less than $15,000 each. The way that investors are incorporating cryptocurrencies into their portfolios is by acquiring tiny market holdings. This lessens the impact of a crypto market meltdown on their investment.
Finally, financial institutions are paying attention to the cryptocurrency industry as they attempt to profit from its expansion. Despite their present modest investments, they are certain to expand, particularly as governments begin enacting regulatory frameworks.
What’s in it for the future crypto ecosystem?
The first Bitcoin exchange-traded fund (ETF) to be approved in the US might happen next year, allowing investors direct access to the cryptocurrency itself, according to several cryptocurrency investors. According to Bryan Gross, network steward of cryptocurrency platform ICHI, "expected to be the biggest growth sectors of crypto" include new advancements like decentralized finance (DeFi) and decentralized autonomous organizations (DAOs). DAOs might be seen as a new online community, whereas DeFi tries to replicate conventional financial products without middlemen. DeFi service deposits topped $200 billion in 2021, and demand is anticipated to increase in 2023.
Regulation of cryptocurrencies was anticipated to be a major concern in 2022. According to Luno's vice president of corporate growth and international expansion, Vijay Ayyar, 2023 will be a significant year for regulation. Other than Bitcoin and Ethereum, Ayyar told CNBC that he anticipates some clarity on the legal "gray area" of cryptocurrencies.
Back in 2021, Ether beat Bitcoin, increasing by 418 percent vs 66 percent for Bitcoin. Analysts predict that both will prosper going forward due to the growth in NFT sales volumes. The Ethereum blockchain continues to power the majority of these tokens.
While most individuals don't now see the benefit of purchasing with cryptocurrencies, as more merchants begin to accept them, the situation may change. Although it may take some time before buying products or services with bitcoin will be a wise financial move, more institutional acceptance may lead to new applications for regular consumers and affect the price of cryptocurrencies. Nothing is certain, but if you purchase cryptocurrencies as a long-term store of wealth, the greater the likelihood that demand and value will rise as it finds more "real world" applications.