Fri. Dec 4th, 2020

Crypto winter may be over, but what do these continued price increases mean for the future of the cryptocurrency sector?The steady rise of cryptocurrency prices during the second half of 2020 has continued, and some would say have accelerated, in the face of continued political and economic uncertainty the world over. While this is certainly good news for crypto investors and those that continue to believe in the long term bullish case for crypto, it is also worth noting that these price increases may have unintended consequences.

Prior to diving into what some of these longer term implications might be, it is important to acknowledge how dramatically the cryptocurrency landscape has changed since 2017. Following the bursting of the bitcoin price bubble at the end of 2017, the blockchain and cryptoasset sector organically developed several alternatives to the truly decentralized and distributed nature of bitcoin. Stablecoins, decentralized finance, the rise of autonomous organizations, and central bank digital currencies (CBDCs) are just few of the blockchain applications that have emerged during the so-called crypto winter.Crypto winter may indeed be coming to an end (or may in fact already be over), but what do these continuing price increases mean for the cryptoasset space in the medium and longer term? Let’s take a look.

The crypto price paradox, revisited. First things first, it is important to acknowledge the reality that as crypto prices continues to increase, the interest of non-expert individuals and institutions to use crypto as a fiat alternative may face a headwind. Put simply, as the non-experts look at the cryptocurrency marketplace. and continue to see price increases and volatility, confidence in accepting these financial instruments as a medium of exchange may waver. Stablecoins were developed to address these price volatility issues, and these price swings illustrate the need for such stabilized cryptoassets.Bitcoin might not be as volatile as other financial instruments, but this association still exists in the mind of many consumers and potential users.

Stablecoins will take over. Speaking of stablecoins, the rise to prominence and market valuation of the stablecoin space is not something to be taken lightly, or brushed aside as not “real” cryptocurrency. Stablecoins have a critically important role to play in bridging the still significant gap between crypto enthusiasts and the much larger non-expert population. Reduced price volatility, the ability to exchange or redeem these cryptoassets for the underlying asset, and recent OCC clarification on the regulatory treatment of these assets highlight the practicality of these instruments.

Crypto by use case. Cryptocurrencies, at the end of the day, are instruments and tools that have been developed in response to market forces. Framed in that context, it is reasonable to conclude that the cryptocurrency sector will evolve similarly to other financial instruments. Taken in the context of stablecoins and CBDCs, it is obvious that this change is already underway. Put simply, the future of cryptocurrencies may be less of a winner-takes-all marketplace, and more of a differentiated market dependent on use case.

Mass adoption will come, with a catch. As the conversation around blockchain and cryptoassets continue to be had at virtually every level in the private and public sector, broader adoption is all but assured. While it might be true that tokenized fiat currencies are rapidly approaching, the case can – and is – being made that these are not “true” cryptocurrencies since they are still issued and governed by a central government or central bank. Crypto enthusiasts may see the widespread adoption that has been so desired for years, but it might not take the form of decentralized and distributed options such as bitcoin.Much like any other business or agreement, compromise and adoption will be required, and there will always be an important role for decentralized and distributed crypto options.

Crypto insurance will come to the forefront. Ultimately the future of the finance and payments will be heavily influenced by blockchain and cryptoasset developments, and the regulatory infrastructure will need to keep pace. Specifically, and even as stablecoins and other cryptocurrency options become more widely accepted, the need for providing insurance tools and other backstops to safeguard against theft and other unethical activities will be of paramount importance. The September 2020 statements by the OCC and SEC are positive steps in this direction, but further clarification and policy development will be necessary to address continued gaps in coverage.

Bitcoin is still the cryptocurrency that drives headlines and makes waves in the marketplace, and that continues to drive individual and institution interest into the cryptoasset sector. That said, in order to fully develop and mature, it is important for all interested parties to recognize the impact of continued price volatility will have on the space.

Price volatility and cryptocurrency have, to date, continued to generate headlines and conversation, but may have wider ranging impacts far beyond short term trading ranges. Taking stock of the state of crypto in the face of these price swings is something every interested party, or crypto investor, should be doing as the sector continues to accelerate and mature.

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