After cryptocurrency prices soared in 2021, with the broader market approaching a $3 trillion valuation last November, a series of high-profile blowouts highlighted the real risk to the cryptocurrency industry, causing the market to lose more than two-thirds of its value this year.
Should investors ditch their investments in digital assets? Only you can answer this question based on your personal risk tolerance, time horizon and understanding of the cryptocurrency industry. But you can be sure that the new year will probably be full of important developments.
Bitcoin will lead the bull market
The Federal Reserve has signaled that it may slow the pace of future rate hikes, which could be a bullish sign for all risky assets. So if cryptocurrencies recover sometime next year, I think bitcoin will lead the way.
As the oldest and most valuable cryptocurrency, with a market capitalization of approximately $330 billion, bitcoin is likely the leading exposure to the asset class for individual and institutional investors. The capital that left the market this year is waiting for the situation to improve, and new investors without any position in a cryptocurrency can flock to bitcoin in a recovering market. This type of activity is stimulated by the fact that today it is incredibly easy to buy bitcoins.
Again, it all depends on the actions of the central bank, the macroeconomic situation and the general sentiment towards digital assets. But I firmly believe that when the markets bottom out and prices start to rise, bitcoin will be among the first to take off.
Another delay for Ethereum?
This has been a monumental year for Ethereum, as the completion of the merger has allowed the network to move from proof of work to proof of stake, requiring 99.95% less energy and setting the stage for better scaling in the future. While the upgrade was hailed by the crypto community, it was long overdue. In fact, most developers have been waiting for this event since the launch of Ethereum in 2015.
The next phase of Ethereum’s development cycle is the introduction of sharding, a feature that will spread the network load across the blockchain, resulting in dramatically faster transaction throughput. Given the newness of blockchain technology and the uncharted territory Ethereum is in, I think sharding will be delayed. It was supposed to be released in 2023, but the official Ethereum website now says “2023 to 2024”.
Vitalik Buterin, co-founder of Ethereum, also added another stage in the network development pipeline, called The Scourge. Including The Merge, there are now six different stages that Ethereum must go through to be fully completed. I see the likelihood of additional delays and perhaps even additional development steps being added to the mix, given the insane complexity of this new technology.
Stricter regulations on the horizon
As I mentioned in the introduction to this article, a number of high-profile accidents in the industry, including the failures of Celsius, Voyager, Terra Luna and FTX, demonstrate the urgent need for clear and comprehensive regulations. These adverse events highlighted the complexity, entanglement and opacity of many of the major companies in the industry. Legislators’ goals should be to increase trust and transparency and to protect investors.
Therefore, a tougher regulatory position from the United States may prove to be a positive development for Coinbase in particular, which is based in the country and has been a listed company since April 2021. This means that instead of circumventing American laws by moving to a foreign domicile, which cryptocurrency exchange FTX did, Coinbase already issues within existing securities regulatory guidelines. And that should strengthen its position as a trusted broker and exchange.
However, a patchwork of regulations from various agencies will not be sufficient. If the US wants to be at the forefront of cryptocurrencies on the world stage, it needs to put in place a uniform regulatory framework. This will provide the necessary basis for the industry to grow in the future.
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