2022 was rough for cryptocurrency, to say the least. Long-story short, if your immediate retirement plan was mostly staked in Bitcoin, this was a pretty challenging year. The struggles throughout the cryptocurrency field have been well-publicized. A combination of macro-economic events like inflation, scandal-driven coin collapses like Terra and FTX, and recent regulatory actions against major cryptocurrency exchanges like Ripple, Coinbase, and Binance have collided to absolutely crush the value of cryptocurrencies across the space.
As reported by The Motley Fool, “Cryptocurrencies suffered tremendously in 2022. Scandals and bankruptcies rattled several large and popular names in the space, against a backdrop of raging inflation and painful anti-inflation policies. From market-darling growth stocks to overpriced real estate properties, anything risky took a massive price cut.”
The top tokens on the market suffered tremendous losses. Between the final day of 2021 and New Year’s Eve 2022, XRP lost 59% of its value, Ethereum lost 68% of its value and the industry standard, Bitcoin dropped some 65% in value, falling from more than $47,000 per coin to $16,604.
Ouch.
But the cryptocurrency sector has even bigger problems than plummeting token values. This past month, the Securities Exchange Commission (SEC) charged two leading cryptocurrency exchanges–Coinbase and Binance–with securities violations for trading what the Commision characterized as unregistered securities.
Do these charges sound the death knell for a short-lived and highly volatile cryptocurrency market? Or do they reflect a new stage in the evolution of digital currency?
There is a strong argument that we’ve recently witnessed the bursting of a bubble. Cryptocurrency speculation grew wildly out of control over the last several years in a space with precious little regulatory oversight or guardrails. So what does the near future hold for cryptocurrency, and particularly for cryptocurrency holders still clutching to the hope of a massive recovery?
Well, as with everything related to cryptocurrency, we are in some uncharted waters here. That makes it pretty difficult to know whether we’re heading for some form of sustainable recovery or the rapid demise of a briefly torrid growth asset.
And economists are somewhat divided on what lay immediately ahead…which only makes it harder for the rest of us to figure out. So with that in mind, we’re going to do our best to give an optimistic outlook here. While the events over the course of 2022 and the immediate regulatory outlook may paint a grim picture of the crypto landscae, we actually see this as a positive inflection point. The decisions that are made today with regard to crypto could ultimately predicate its long-term viability.
But first…
The Current Outlook for Crypto Investors
Uncertainty. That is the key phrase that crypto investors must keep in mind at the moment. In spite of 2022’s sharp declines, 2023 got off to a relatively decent start. Bitcoin prices, always the bellwether for other virtual currencies, have already recovered a meaningful portion of their prior losses.
At the time of writing in early June 2023, Bitcoin prices have reached back up beyond $26,000. Of course, this is nowhere near the all-time high set back in November 2021, when Bitcoin skied out at more than $68,000 per token.
However, according to Go Banking Rates, “Analysts will be watching the price of bitcoin, and many feel that its ability or lack thereof to hold a value of $25,000 will be a telltale sign for the cryptocurrency. The actions of the Federal Reserve will also play a critical role in investor confidence.”
Certainly, the consequences of today’s regulatory actions will have a major bearing on the future for cryptocurrency. Today, regulators are working to bring virtual currencies under the oversight of the Commission so that tokens can be treated as traditional securities from a legal and regulatory perspective.
Meanwhile, those within the industry continue to innovate around the Decentralized Finance (DeFi) space, suggesting that virtual currencies are only the beginning of the blockchain revolution. So what does all of that mean?
It means that perhaps we are in a prime position to see some major opportunities in the crypto space–and the broader DeFI space–over the next several years.
5 Reasons the Crypto Market Will Bounce Back
Here are five reasons that we’re quite optimistic about a continuing crypto currency recovery and a bright future for virtual currencies in general:
1. Now’s a Good Time to Invest Low
It’s true that cryptocurrency is notorious for being highly volatile. And the decentralized system that surrounds it also makes this sector uniquely vulnerable to its own brand of securities abuses. So if you’re risk averse, you’re probably thinking you’d be better off avoiding this whole hornet’s nest altogether.
But here’s the thing. You can get into the game for pretty cheap. Yes, individual Bitcoin prices are astronomical on a relative scale. If you were hoping to make a million dollars on a few bucks, you missed the Bitcoin boat. But you can still get a small Bitcoin life raft—a fraction of a token–at whatever size you desire.
And of course, there are countless other boats in the harbor. If Bitcoin and Ethereum are yachts, Cardano and XPR are tugboats with big ship potential. So are countless other novel tokens in the cryptocurrency exchange space. Many virtual currencies come with their own innovative concepts, value offerings, and notions for how blockchain can be leveraged. Whether one innovation succeeds and another fails is a matter of speculation.
But most virtual currencies and cryptocurrency transactions are quite affordable to start–some even starting at fractions of a penny per coin. And with prices on the broader cryptocurrency market at a low relative to the highs of 18 months ago, you could create a relatively diverse digital wallet for just a few dollars.
Now, I wouldn’t necessarily base my long term investment goals on this affordable speculation. At pennies on the dollar, these crypto assets are as good as dart throws. But that doesn’t mean one of these can’t become a world-shaking virtual currency in due time. Who knows? Perhaps one of your penny tokens could challenge Bitcoin’s dominance. Naturally, if that happened, you’d make out pretty well.
So with the cost of entry to the crypto space being relatively low, there is a good case for putting down a few dollars on speculative digital currencies. This imperative alone could be enough to continue driving participants into the crypto sector, a pattern which would certainly suggest the likelihood of long term survival for the crypto industry writ large.
2. This Isn’t the First Crypto Winter
The emergence of cryptocurrency has been met with a mix of enthusiasm and skepticism. Early Bitcoin advocates helped to drive initial speculation just as early critics from within the financial establishment helped to throw cold water on the idea of virtual currency altogether.
This balance has produced periods of aggressive growth and popular proliferation as well as periods of mainstream retreat and sustained downward trends in pricing. These downward trends are sometimes referred to as “crypto winters” and may be characterized by severe price drops across the crypto sector and an ongoing decline in the overall cryptocurrency market cap.
These periods can cause extreme pain for virtual currency holders and for the numerous startups engaged in the emergency crypto market. Indeed, Forbes points out that the crypto market has endured swooning cycles more severe than the current one and has still managed to make recoveries, whether by inching upward or by skyrocketing, or by a little of both.
Money Made points out that “For example, between December 2017 and December 2018, Bitcoin’s price plunged by about 80% from its all-time high, leaving many investors disappointed. Factors like regulatory ambiguity, waning institutional interest, or market saturation often contribute to such downturns.”
Indeed, the relative novelty of the cryptocurrency market makes such starts and fits in growth somewhat inevitable.
3. Regulation of the Cryptocurrency Market May Help Improve Crypto’s Stability
The last several years have seen cryptocurrency endure its fair share of growing pains, many in the form of scandal. In 2020, the SEC raised a case against Ripple for alleged securities fraud related to the XRP token sold on their distributed ledger. The SEC alleged in their case that Ripple has raised more than $1.3 billion in capital selling unregistered securities.
According to the SEC, “Ripple; Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO, raised capital to finance the company’s business. The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide.”
This case is under consideration at the time of writing and its outcome would have major implications for the broader relationship between the cryptocurrency space and financial regulators. Indeed, with the recent charges raised against Binance and Coinbase, we are very much at a crossroads for cryptocurrency. Whether regulators in the United States will gain the authority to bring oversight to the crypto space may well depend on the outcome of the Ripple case.
And there is precedent in other nations for a more restrictive regulatory structure. Indeed, some nations have been far more restrictive around the virtual currency space than the United States. Those nations with considerable influence over global trade therefore also have the capacity to influence evolution in cryptocurrency transactions. A prominent example is the Indian cryptocurrency market, which has ostensibly been curtailed by the nation’s extremely hardline stance on virtual currencies.
According to Forbes, “India’s stance on cryptocurrencies continues to be tough with the government bringing all crypto-related transactions under the ambit of the Money Laundering Act. In a specific gazette notification, the Union Finance Ministry of India stated that all the transactions related to virtual currencies or digital assets would fall under the purview of Prevention of Money Laundering Act (PMLA).”
Forbes points out that while this action may appear to hamper the development of cryptocurrency markets in India, it may also offer a way forward for regulators throughout the global economy. Indeed, many in the finance industry have praised this move primarily because it addresses the need for enforcement in an area which is otherwise absent from meaningful central regulations.
In other words, other nations may view enforcement actions as the best way to bring cryptocurrency into harmony with existing regulatory concerns. Recent events such as the FTX scandal–which we’ll discuss here below–suggest that those concerns are valid. And the recent actions taken by the SEC demonstrate that the regulators in the U.S. are now also ready to take on the cryptocurrency market through enforcement.
The hope is not that the SEC stifles the ability of cryptocurrency exchanges like Coinbase and Binance to operate but that it brings them under the purview of regulatory oversight. Creating a regulatory framework around an otherwise decentralized system would seem a necessary step at this juncture, and one that can only improve the future viability of cryptocurrency exchanges and enhance the security of crypto transactions for all participants.
The imperative behind regulatory oversight in the U.S. would be to treat virtual currencies as the Commission currently treats traditional securities. This would include greater transparency in the space, greater public availability of crypto market data, and more legal protections for those who own cryptocurrency. While some advocates for the inherently decentralized structure of the crypto market fear regulation could have a chilling effect on future growth, there are others who view regulation as a necessary step in achieving some measure of stability in cryptocurrency.
After all, the recent bear market in crypto–while driven in part by inflation concerns–was also magnified by a scandal involving FTX, one of the world’s largest cryptocurrency exchanges. In November of 2022, a series of events transpired over ten days which resulted in the collapse of the crypto exchange, the arrest of CEO Sam Bankman-Fried, and countless splashy headlines involving numerous A-List celebrities.
Investopedia reports that “On Nov. 16, a class-action lawsuit was filed in a Florida federal court, alleging that Bankman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors from across the U.S. Others named in the lawsuit include celebrities and professional athletes Steph Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O’Leary, who allegedly helped Bankman-Fried facilitate the plan.”
In many cases, celebrities helped to promote the exchange’s fraudulent FTT tokens without conducting due diligence. The result was a spate of compelling mainstream headlines and an enormous flood of negative publicity for cryptocurrency in general. Skeptics and those in the public who questioned the legitimacy of these invisible virtual financial assets were given justification to doubt the concept.
In a cryptocurrency space already in a decline over a series of events including war in the Ukraine, ongoing inflation, and the May 2022 collapse of the Terra stablecoin, the events at FTX pushed prices into an absolute freefall. The overall cryptocurrency market cap was inching toward $3 trillion in fall of 2021. One year later, in the shadow of the scandal, the market cap had fallen to under $900 billion. In other words, trillions in value were lost to virtual wallets over the space of just one year.
But this, in and of itself, underscores the value of creating a meaningful regulatory framework around cryptocurrency. The FTX case proves the need for some level of visibility into the actions of newcomers in the space and a way to provide a clearinghouse that might confirm the legitimacy of emergent tokens. This could protect retail investors who may have been frightened away from the crypto space by negative headlines attached to big-name celebrities. Regulation may well be necessary to create a much-needed level of trust and security within the general public.
4. Bear Markets Have Historically Been Followed by Bull Markets
That said, even in the absence of stability, there is a strong historical precedent–both in traditional securities markets and in the crypto market–for a sustained period of growth on the close horizon. There is past evidence to suggest that each extended period of decline in cryptocurrency prices is followed by a period of aggressive growth.
Outlook points out that “Every time the crypto market experienced a bear market, it was always followed by a bull run market, and there is no reason why this wouldn’t happen again. Even though investors are currently in fear, those who manage to stick through or even invest now will be rewarded when the market eventually explodes again.”
Once again, Bitcoin prices tend to offer the best window into this pattern. Its history of ebbs and flows proves that while virtual currency may be volatile, it does bounce back and it does carry the market with it. Motley Fool offers an example that should make early skeptics of cryptocurrency grumble with regret.
In the latter half of 2012, Bitcoin was fresh off of a recent halving. As Motley Fool explains, a halving is “a preordained 50% cut in the rewards earned for mining a new Bitcoin block, scheduled to occur roughly every four years. The inflation-killing event inspired more people to try their hand at Bitcoin mining and the token soon soared.”
Before its halving, Bitcoin reached above $100 per token. Then, with the scheduled event, the price dropped to $13 per token. The price drop was met with a massive influx of new investors. By December, Bitcoin prices were trading about $1100 per token. And then a leading cryptocurrency exchange was penetrated by hackers. Those who questioned the legitimacy of virtual currency were vindicated as rattled investors bailed on Bitcoin.
Prices once again plummeted, reaching $180 per token. The evidence was in–cryptocurrency had been–as Motley Fool puts it–“a mirage.” Well, those who stocked up on the mirage currency enjoyed a steady and sustained pattern of growth over the next four years, capped off by a dramatic spike in 2017 that saw Bitcoin prices jump from $2000 to nearly $20,000 per coin.
As the peaks and valleys of the last several years demonstrate, this pattern has been pretty reliable. Sustained declines have been followed by some degree of enthusiasm for those motivated by buy-low opportunities.
To this point, some experts argue that the recent downward trend in pricing represents a tremendous opportunity for new cryptocurrency holders. It is that very prospect that typically lends itself to the type of bull run that we’ve seen in the past, and that some economists forecast we may well see again soon.
5. Innovations Like Web3 May Help Cryptocurrency Grow
Perhaps the strongest argument in favor of optimism is the sheer scale of innovation driving cryptocurrency forward. While it remains to be seen how the regulatory confrontations taking place today will ultimately play out, the conceptual and technological innovations taking place in the actual cryptocurrency space continue unabated.
According to Outlook, “While most of the predictions rely on the previous performance of the market, some innovative things like Web3 and decentralization of the crypto market may even project a bigger bull run than many experts predicted. This will allow users to trade much faster and without intermediaries like banks or governments, which will greatly affect the crypto market.”
Web3 is, in short, a catch all for the variety of innovations surrounding blockchain technology. To this end, cryptocurrency tokens are really just the tip of the iceberg. There is a rapidly growing space around those who are driven to learn new ways of sharing, storing and owning data through blockchain. This entire Web3 space includes concepts like smart contracts, NFTs and other innovations falling under the DeFi umbrella.
As is often the case, the pace of innovation is far faster than the pace of regulation. However, at our current stage, it is reasonable to expect that greater innovation will match with the objectives of regulators in ultimately finding ways to reduce instances of fraud and abuse.
More generally, the desire for innovation in the field suggests that, in addition to the efforts of regulators, those working within the space itself will find ways to improve the accountability and trustworthiness of virtual currencies.
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Ultimately, the success of virtual currencies will depend on continued mainstream adoption. Greater mainstream adoption will depend on the actual ability of people to use and spend virtual currency both through online payments and through the growing number of brick-and-mortar retail spaces that accept Bitcoin and other popular cryptocurrency tokens.
But for now, it does represent a good opportunity for newcomers. After all, it doesn’t cost much to get started. Not sure how to do it? Check out our 10 Reasons to Invest in Cryptocurrency and learn more!