Beyond the evolution of the price and the speculative aspect of cryptocurrencies, the ecosystem faces many challenges which could lead to the disappearance of many players, but could also allow leaders in the sector to emerge. During the last bear market, many projects emerged, such as FTX, which should also be one of the big winners from the current consolidation of the sector.
Many players are facing liquidity problems, forcing them, for some, to prohibit withdrawals from their platform. This could spread to other players and create the collapse of the house of cards, weakened by the decline of Bitcoin and the fall of some stablecoins and other projects.
On the other hand, the difficulties of some reinforce the solidity of others. Indeed, FTX, one of the largest cryptocurrency trading platforms in the world, is offering lines of credit to platforms in difficulty and buying companies in the sector, but also in finance. traditional. This could allow him to take great advantage of the situation.
This difference is also felt in hiring. While some companies are laying off part of their employees, others are continuing to develop their teams. This shows that, despite the difficulties of some companies, others remain solid and continue to grow. This reflects a booming sector, which should continue to grow in the coming years.
In addition, the fall in the price of Bitcoin is also putting pressure on El Salvador, which is losing tens of millions of dollars on these purchases and the loss of confidence in its Bitcoin-backed bond project, could put the country in default of payment on 800 million dollars of government bonds maturing in January 2023. No longer having the support of the IMF, it could encounter difficulties in financing itself on the markets and force it to declare the country in default.
Finally, mining activity is closely monitored. Not necessarily concerning the profitability of miners, because it depends on many factors, such as the characteristics of the machines, the price of electricity or even additional costs.
The point is more about the fact that a drop that would go on too long could lead to the disconnection of more machines and this could affect network security. The risk of such a configuration is far from being reached in view of the mining data, but we must not forget the consequences that would ensue.
Mining activity allows decentralization and ensures network security, but proof-of-work (PoW) validation is highly criticized within state and regulatory institutions. The ecological footprint is the first argument.
A significant portion of miners use renewable energy to power their machines, but given that the main cost in this activity is the price of electricity, some set up in countries where there is little obligations in the face of global warming and where the use of fossil fuels is predominant.
Falling cryptocurrency prices could drive more miners into exile to low-cost countries and lead to a higher proportion of non-renewable energy use.
It is difficult to accurately estimate the energy consumption of cryptocurrencies, but some estimates show the impressive amount of electricity required for mining activity. Many comparisons of Bitcoin or Ethereum consumption to that of certain countries are regularly used by market critics.
An estimate of the consumption of a transaction carried out by Visa and the Bitcoin blockchain highlights the overconsumption of the latter. This same type of comparison is made between gold mining and bitcoin mining, and the same conclusion emerges.
However, Bitcoin could fulfill both missions and therefore it is not supposed to combine the two. In addition, the advantage of the blockchain is to eliminate the intermediaries and it would therefore be necessary to take into account all the consumption of the latter to make a relevant comparison.
Regulation is a delicate subject, especially since the collapse of certain projects and the blocking of funds from certain clients, which has only accelerated and hardened this desire of institutions at the global level.
In the United States as in the European Union, consultations and bills continue to flow, although the first seems to want to do this without rushing, on the other side of the Atlantic, time is running out.
From the regulation of stable coins, to the regulation of players and trading platforms, many consultations are underway. On the other hand, the implementation of the various measures, which we hope will be dedicated to protecting investors and not to breaking the market and the sector, will probably not see the light of day before at least 2023.
Vincent Boy | Market Analyst | GI France
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