MMillions of crypto investors, speculators, and enthusiasts have bought and sold cryptocurrency over the past decade, hoping that crypto would be both a powerful investment and a currency of the future. As a result, the cryptocurrency market is booming.
Bitcoin, the most recognizable crypto name, has risen from a low of around $5,000 in March 2020 to a price of over $51,000 at the time of writing. Rival currencies including Ethereum and Litecoin have become realistic contenders – and even similar currencies like Dogecoin are still floating around.
On top of that, an increasing number of merchants are accepting cryptocurrency as a form of payment. Nearly a third of all small businesses in the US currently accept crypto as payment – and that number keeps growing. Crypto optimists suggest this is natural momentum and it is only a matter of time before crypto really becomes mainstream.
There is a lot of momentum pushing the crypto movement forward. So what, if anything, could stop this momentum?
First of all, what do we mean by “momentum” and what could really stop it?
Most investors will tell you that price is the most crucial variable, and they’re certainly right. The price of an asset is usually a good signal of both trading volume and consumer confidence; the more people have confidence in a given asset, the more its price will rise.
The prices of Bitcoin and other major coins have risen steadily over the past few years; if prices stabilize or start falling (without a quick recovery), this could indicate that confidence in the crypto is wavering.
We can also look at more sophisticated signals, such as detecting when an asset is overbought or oversold. Price fluctuations are not always directly correlated with market attitudes towards an asset or the value of that asset.
If we notice that the price of Bitcoin is rising explosively, but is “overbought”, we can expect its true momentum to be slower than its perceived momentum – and the price will soon come back down to a reasonable level. .
If we notice that it is “oversold”, on the other hand, a sudden drop in price may not be an accurate reflection of stalled or lost momentum; it could just be a temporary setback in the middle of a long stream of growth.
In any case, it is not easy to concretely define the upper and lower bounds of the crypto’s growth trajectory or momentum. Even considering this, some clearly disruptive events and developments could test the optimism of even the most loyal investors.
New regulations or laws
New regulations or laws could have a pronounced effect on public trust in crypto. Most of the world’s developed countries are crypto agnostic, and some have even created their own cryptocurrencies (more on that later). But some countries have outright banned crypto trading for their citizens.
Suppose highly developed countries start bringing down the hammer on crypto trading. In this case, it could start with something of a domino effect, ultimately threatening the future of crypto’s usefulness as a decentralized currency.
A major security issue
So far, crypto has been hailed as inherently safer than conventional forms of exchanging money. And anyone familiar with the decentralized ledger at the heart of blockchain technology knows that security vulnerabilities are few and far between.
That said, a legitimate security threat (like a large 51% attack or something similar) could shake consumer confidence in crypto as a secure asset.
The attack or security threat need not be particularly threatening or damaging; it is enough to force investors to reconsider their perceptions.
Keystones in decline
The crypto world currently revolves around Bitcoin and, to a lesser extent, Ethereum, Litecoin, and a handful of other major players. They are the headliners of the crypto community, although dozens of promising young candidates have emerged.
If any of these “keystone” currencies dip significantly, it could have a ripple effect on the entire crypto market. This would slow the growth momentum that the market has been experiencing for several years.
Competition and overcrowding in the crypto market could also be an issue. Thousands of new currencies claim market share. This ultimately makes it harder for individual currencies to stand out, confusing newcomers.
- ICOs Thousands of new crypto projects are deployed every year. While most deplete within months, the cryptocurrency landscape is ever-expanding.
- National digital currencies. Some countries, including Venezuela, Ecuador, and China, have issued their own government-backed cryptocurrency. While this in some ways defeats the purpose of crypto, enough support for these projects could legitimately threaten the decentralized currencies we have come to enjoy.
A wider economic collapse
As you can imagine, cryptocurrency growth could also come to a halt in the event of a broader economic collapse. If people start to fear for their economic future, they might pull out of the crypto markets. And, they can return to the comfort and security of more familiar financial systems.
- Federal Reserve action. The Federal Reserve kept interest rates low for many years to avoid an economic recession. Recently, the institution announced its intention to steadily increase rates over time; rate hikes that are too sudden or too extreme could have a lingering effect on the overall market.
- A real estate/stock market crash. While crypto should hypothetically operate independently of other markets, a major crash in another financial market would likely have a noticeable effect on crypto prices. For example, if there is a stock market crash or another real estate bubble forms and bursts (like in 2008), the crypto’s momentum could collapse.
- Geopolitical events. Major geopolitical events, such as the outbreak of another major war or other forms of economic turmoil, could also have a deteriorating effect on almost all financial markets. These, of course, are largely unpredictable, but they could have a powerful impact on the future of crypto.
What to do if you anticipate an accident
What if you notice some of these developments and suspect an upcoming crash?
There are a few actions that can help you if your prediction turns out to be correct:
- Diversify your holdings. Portfolio diversification is a good strategy for any investor, even if you don’t hold any crypto. This is even more critical if you have risky holdings.
- Table of regular withdrawals. If you want to recognize your profits and minimize losses, you can start slowly withdrawing your investments in small installments.
- Influence what you can. If you believe in the future of cryptocurrency, be active. Evangelize the benefits of currency and denounce new regulations that could threaten it.
The world is getting more and more used to the presence of cryptocurrency, but crypto is still a relatively new financial tool. As a result, there is a lot we don’t understand about crypto’s eventual place in the world. And, there are many unknown variables that will influence its development.
For this reason, it is essential to continue to treat crypto as a volatile and risky asset, even if it looks like crypto’s momentum will continue to pick up in the future.
By Deanna Ritchie for Due.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.