The cryptocurrency market has taken some heavy hits in 2022, whether it was the collapse of Terra (LUNA 2.93%), a highly touted cryptocurrency that at one point was one of the most valuable cryptos by market cap, or the bankruptcies of crypto firms like Three Arrows Capital and Voyager Digital (VYGV.F +0.00%) over the summer.
The bankruptcy of FTX was perhaps the biggest blow of all, with the fall of the high-profile, seemingly reputable, exchange dealing the crypto industry's credibility a black eye. However, it's important to remember that these are individual entities, not cryptocurrency itself. Crypto is down, but it's not out -- here are three reasons for long-term hope in the midst of the crypto bear market.
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1. Cryptocurrency eliminates the need for intermediaries or central authorities
Michael Byrne: It could be a worker sending funds to their family back home in a different country using Bitcoin (BTC 0.90%) or an artist selling a work of art as a non-fungible token (NFT) on the Ethereum (ETH 2.21%) blockchain. In both cases, cryptocurrency is making a difference for these individuals because it is powering peer to peer payments and eliminating the need for costly intermediaries. The worker is able to transfer more of their money to their family because they can now bypass traditional remittance services, which often charge sizable fees, and the artist doesn't have to pay a commission to a gallery or broker, enabling them to keep more of the proceeds from their own work. The decentralized, peer-to-peer nature of cryptocurrency makes it a unique, egalitarian financial system for people all over the world.
While the FTX debacle and the implosions of other centralized finance services are understandably being used as examples of why cryptocurrency isn't a trustworthy asset class, it should be noted that FTX itself was simply an intermediary within the cryptocurrency industry. In fact, cryptocurrency, and decentralized finance in particular, enables users to buy, sell, send, or receive crypto without the need to ever use a centralized exchange like FTX. Cryptocurrencies like Bitcoin are designed to be trustless, as they are operated by a decentralized network of miners worldwide, removing the need to trust a central authority behind it when using it. A crypto investor can use a decentralized exchange like Uniswap (UNI 0.10%), which is governed by automated smart contracts (as opposed to a person or company in charge) to buy and sell cryptocurrency. Crypto users can also hold their investments in a self-custody wallet or even keep their holdings offline altogether in a hardware wallet.
The crypto world certainly has some issues to work through, but cryptocurrency's unique role as a trustless, peer-to-peer financial system that eliminates the need for intermediaries or central authorities gives it a unique appeal to users all over the world.
2. Regulatory clarity
Neil Patel: Although the cryptocurrency market is still dealing with the negative effects of the collapse of FTX, and most recently, lender BlockFi filing for bankruptcy protection, there is still some hope for long-term believers. The quick rise and even faster fall of some of the industry's most important players could speed up the introduction of a single clear regulatory framework for cryptocurrencies, as opposed to disparate governing bodies handling things like they're trying to now. And this would be a huge positive.
Over the past few years, cryptocurrencies have operated in a regulatory gray area, skirting strict laws and rules that apply fully to other businesses. What's more, the fact that major crypto firms have decided to settle in more favorable locations, like the Bahamas or Singapore, doesn't help when it comes to increasing trust in the industry.
Just look at Coinbase Global (COIN 2.67%), the leading crypto brokerage and exchange in the U.S. It stands out because all its financial statements are audited and open to the public to see. If more businesses had to play by these rules, the entire industry would be in a much better place because risks wouldn't be able to hide behind complexity.
I'm optimistic that the U.S. will create proper regulations that will attract cryptocurrency projects that want to exude legitimacy and gain the trust of the public. And this will be a net benefit for the country, as the U.S. should lead the world when it comes to new developments in the crypto and blockchain space.
3. Investment continues to flow in to the space
RJ Fulton: In just a span of five years, the value of all cryptocurrencies, referred to as the total market cap, has more than doubled. In December 2017, crypto's total market cap was just shy of $315 billion. Despite the tumultuous year that has been 2022, during which the market shed 70% of its value, the total market cap of crypto still sits at roughly $865 billion today. That represents an increase of 174% in five years.
Although the market has contracted by 70%, new research shows that the burgeoning asset class is still attracting investors and has outpaced other competitive sectors such as fintech and biotech by a long shot. In the latest Emerging Tech Indicator from PitchBook, a company that specializes in data research in financial markets, crypto led the pack and it wasn't even close.
In the last 12 months, investors have poured a whopping $6.5 billion into the sector. The next closest was the fintech sector with a measly $2.7 billion.
PitchBook found that most of the money flowing into crypto is being used to fund new projects related to DeFi and Web3. DeFi utilizes blockchains and cryptocurrencies to disrupt the status quo in the traditional finance sector which has been dominated by centralized entities such as banks. Web3 looks to bring decentralization to the internet and promote a secure, permissionless, and interoperable environment that isn't controlled by privacy-invading tech giants.
Based on the trajectory of the cryptocurrency asset class market cap and large amounts of capital still flowing in to develop new blockchain-based applications, the long-term potential that cryptocurrency possesses is increasingly difficult to ignore. The technology could very well revolutionize the way banks conduct their day-to-day operations or how users interact on the internet. This past year might have been brutal, but crypto's best days likely remain ahead.
