Crypto Doubts — How to Address Them

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

This is an excerpt from our June Newsletter.

The crypto space has grown exponentially over the past couple of years. From a market cap of around $192 billion at the beginning of 2020 to a market cap that’s consistently above $1 trillion even during extreme dips, we’ve seen the crypto markets grow at an unimaginable pace. With this exponential growth comes an often more-than-healthy dose of skepticism from both supporters and naysayers.

With that being said, the space still has yet to enter a phase of mass adoption. There are a variety of factors that could be influencing the hesitancy of individuals and companies to get involved in the cryptocurrency space. This month, we’ll be taking a bit of a look at some of the factors that could be contributing to this sense of hesitancy.

Individuals and companies often cite both similar and different reasons as to why they feel now may not be the time to get involved in crypto. Something that you’ll hear many people say is that they’re weary of the lack of regulatory clarity. Others cite the volatility of the markets and the lack of stability. Security concerns are also often raised by both veterans and newbies to the crypto industry.

Oftentimes, many of these concerns can be addressed with a bit of education, however, some of them are legitimate and if we want to see mass adoption, we’ll have to address these concerns and more. 

Regulatory clarity is something that a variety of people have been asking for in regard to the crypto space. This is a concern that’s been plaguing the cryptocurrency industry since its inception. The good thing is that it seems that we could be closer than ever before to receiving regulatory clarity with the White House encouraging regulators to develop some type of guidance for investors and institutions alike.

For companies and institutions, this could provide them with the much-needed guidance for getting involved in the crypto space without incurring some sort of liability due to the lack of regulatory guides. Without regulations, many companies are hesitant to invest resources into crypto and blockchain-oriented projects due to fears of regulatory changes that could greatly affect the fate of those projects. This could also provide businesses with protections against malicious actors that take advantage of newer players in the space such as scammers, fraudsters, etc.

For individuals, this would open the door to potential protection against fraud and scams as well. It could also help steer them clear of situations where they could incur dangerous amounts of risk without having the knowledge to make a responsible decision.

As the Federal Reserve Governor said, “The main issue in crypto-asset regulation isn't how to protect sophisticated crypto-investors; it's how to protect the rest of us.”

In order to achieve regulatory clarity, regulators and crypto leaders alike are going to have to sit down and discuss how investors can be protected without stifling the growth of the space as well.

The volatility and lack of stability are other issues that you’ll hear people decry in the crypto space. Unfortunately, this issue isn’t something that will likely be solved as “quickly” as regulation. This issue will likely only be solved with time. To understand why this would take time to fix, you have to understand the different factors that contribute to the volatility of cryptocurrencies.

When you’re comparing cryptocurrencies to traditional fiat markets, you have to understand that the size of the cryptocurrency market is a fraction of the broader financial market. This means that it takes much smaller amounts of money to move the cryptocurrency market than it does with the stock market.

Also, until recently the crypto market was mainly populated with less experienced, more risk-friendly retail investors. These investors often did not employ experienced trading strategies and at earlier points, in the cryptocurrency space, you could truly see this reflected in the price action. This aspect of things has definitely improved as institutions with five-year investment plans get involved, and companies and countries start looking to gain exposure to crypto. You can even see this in price action throughout the crypto industry as the crypto markets start to correlate more closely with fiat markets.

Another reason that these swings are exacerbated in the cryptocurrency market is the presence of trading bots. Trading bots can exacerbate the movement during volatile periods, especially when coupled with massive amounts of leverage from many traders who are over-leveraged. It’s likely that we won’t see volatility start to settle until the space grows a bit more. While trading bots will likely continue to be present in crypto trading, the presence of over-leveraged traders could decrease over time as traders become more educated about the risks, and regulators and exchanges attempt to place more safeguards for traders.

While cryptocurrency and blockchain can provide a unique form of security that’s different than their centralized counterparts, there’s no denying that the space is not without its security concerns. We’ve seen an uptick in hacks in the space, however, this isn’t too surprising since we’ve seen incredible growth as well.

This is why we’ve seen recent discussions of protocols going to market too fast and the benefits of taking time to develop. Charles Hoskinson, the founder of Cardano, spoke about this as Cardano had been criticized for taking its time. There definitely seems to be an understandable rush to get to market by a variety of crypto companies and protocols. However, in order to ensure the quality of the product that you’re creating, there could be a benefit to taking time to work through the issues before they arise. It will be interesting to see if this changes how development teams go about operationally.

There could be other factors that influence how secure a protocol is such as the consensus mechanism that is used, the programming language, and/or the skill of their development team (or access to resources). 

While these concerns about the space are valid, it should be noted that most of them are already being worked on in the industry and beyond. While the crypto space is still in its infancy, it’s going to be interesting to see how crypto leaders continue to address these concerns.