What is that one thing that you would change if you could go back in time? Well, a lot of us might want to purchase Bitcoin back in 2010. For who knew, a decade later all that conviction would pay off like this. Talking of conviction, do you know CZ, founder of Binance sold his house to buy Bitcoin back in 2013? Later, he also quit his job to work on Binance. Is it pure conviction and risk appetite or did CZ have some insights about the future?
Turns out that it is a combination of both. So while we would leave the risk-taking ability to your fine sense of judgement, we would give you a brief overview of what is the future of crypto in the next 5 years. We will try to take a shot at this by analyzing some trends in cryptocurrency.
Impact of Crypto Regulation for Investors:
Okay. We want to rip it off in bandage style. No matter what fanatics and maximalists believe, crypto has to be regulated for it to prosper. The entire raunchiness of decentralization and throwing away the intermediary evil government is fun. But only in theory. Practically, we cannot see mass adoption until governments are on the same page.
If that looks far-fetched, at least the fear of banning cryptocurrencies should stop looming on the retail investors.
Pros of Crypto Regulation:
No matter which side you are on, there are some clear benefits of regulating the cryptocurrency space. Almost everyone agrees that regulation will have a positive impact on crypto. Let us find out how:
We’ll not go back in time to bring this point home. Recently Do Kwon’s Terra ecosystem collapsed like a house of cards. Investors lost about $50B in this event. And while it pulled the entire market down, the ripple effects were also faced by Celsus, 3AC, Vauld and many others. These platforms enabled crypto borrowing and lending for its users, providing high yields on stable coins. All of them had invested in UST (the collapsed stablecoin of Terra).
Celsius once ran a contest called ‘My Celsius Story’ where people shared their stories of investing in Celsius. And some of the participants mentioned that they put their life savings, retirement funds, children’s education funds etc. in Celsius in a bid to earn that juicy 9% interest. It is painful to imagine the fate of these individuals after Celsius went bankrupt.
The bigger question here is who is accountable for all this? There has to be some sort of insurance to safeguard retail investors against such events. Guess what? Regulations might just enable that for you.
Markets need an excuse to tumble. And when the government bodies issue statements around cryptocurrency, the roller coaster ride just worsens. If there were regulations in place, investors would take a smarter, thought-through decision instead of buying and selling their assets in fear or greed.
Governments across the globe are against the speculation of crypto assets. Once the regulations are in place, investors would automatically focus more on fundamentals.
C. Wider Adoption:
And if people know what they are getting into is regulated by the state, they would happily diversify. Currently, the masses do not ape in crypto because they are not sure about the government’s stance. Once it is regulated, everyone would take it seriously.
D. Better Forensics:
Due to lack of regulation, crime investigation agencies are not sure how to catch the frauds and crimes happening under the veil of cryptocurrency. If government lays down rules of treating these assets, these agencies could invest in on-chain analytics to kill the illicit use case of crypto, no matter how small it is.
Cons of Crypto Regulation:
While regulations would have an overall benefit in the long haul, they could be quite painful in the short term. Here are some cons of crypto regulations:
A. Flexibility and Anonymity:
If regulators across the board start tightening the noose, we might experience a subtle lack of flexibility. The entire idea revolves around document-less, KYC-free, quick transactions. With the government wanting to track these transactions, you can kiss your pseudo-identity goodbye.
B. Spirit of Decentralization:
The whole idea of introducing Bitcoin, the OG cryptocurrency, was to keep it state-proof. Bitcoin was supposed to be this unstoppable force, standing tall against unlimited money printing ventures of the federal banks. But unfortunately, regulations may not help in this vision.
What is Crypto ETFs and Why are they Considered Safer?
Before we get into that, let us understand what an ETF is. ETF stands for exchange-traded fund. This is a basket of assets that generally follows an index. Doesn’t help much right? Ok, let us retry with an example.
Imagine that you are a noob at nitpicking stocks. So you plan to invest in an index fund (a fund that tracks indices like Sensex, NASDAQ etc.). But mutual funds can do that as well? Yes. But unlike mutual funds, you can trade ETFs on the stock exchange. Just like any regular stock.
Now they are obviously safer as compared to handpicking stocks. Why? Because they follow an index. This means that rather than betting on a single share, you are betting on a theme. This theme could be top 10 stocks by market cap, pharmacy, electric vehicle etc. Also, the cost associated with ETFs is also lower compared to mutual funds.
Now it is easy to transpose this concept to the cryptocurrency realm. Instead of picking a cryptocurrency, you may decide to bet on Bitcoin index (Bitcoin and all its forks like BSV, BTC, LTC etc.).
Currently Bitwise and Grayscale are two fund houses that had filed an application with SEC for the approval of spot ETFs. However, the SEC rejected these applications on 6th July owing to the fact that the market size is not enough to launch an ETF. Secondly, they claim that their concerns around market manipulation are not addressed yet. Grayscale has confirmed that they have all the ‘post-ruling scenarios’ ready with them.
Pros of Crypto ETF Approval:
If at all this ETF gets approved, it will open the door for innumerable benefits for the industry and investors alike.
A. Hassle Free Exposure:
The biggest challenge when it comes to investing in cryptocurrencies is setting up an account on centralized exchange, KYC and eventually investing. If you wish to take the decentralized route, it is even more painful as setting up a wallet, withdrawing funds to it is even more difficult.
To top it all, an average joe is quite likely to overlook the risks of storing their funds in wallets/centralized exchanges. ETFs overcome these barriers seamlessly. All you got to is purchase a unit of ETF off the stock market. That’s all.
B. Currency Conversion:
And because you are taking the direct route, you don’t have to play the complicated game of moving your funds to the exchange/wallet and then purchase a stablecoin like USDT/USDC to start buying your favorite cryptocurrencies.
C. Low Cost:
This eventually will ensure the lower cost of exposure. If you are purchasing crypto in the decentralized realm, you might end up doing multiple transactions and hence paying gas for each one of them. With ETFs, you can kiss this mess a goodbye.
D. Regulated access to crypto:
Currently, getting exposed to crypto comes at a risk of being liquidated due to systemic risks of unregulated protocols. As ETFs are regulated, you can have some degree of assurance that government as your back.
Cons of Crypto ETF Approval:
As a prudent investor, let us we should have a 360 degree view of the entire situation. Let us explore some of the downsides of Crypto ETFs.
Ethos of web3 revolves around true ownership of your assets. Ownership that is so robust that no one else can tamper with your assets. However, ETFs defeat that purpose. While regulations are in place, if something were to happen to your funds, you risk losing your entire corpus.
B. Tracking Error:
ETFs are prone to tracking errors as well. This means that actual price movement might not be reflected in your portfolio. Say the BTC jumps by a 50%, you may not reap the complete benefit of it. In a bid to diversify, ETFs invest in an index and some other assets which causes this tracking error.
C. Management Fee:
Just like any fund out there, ETFs charge a management fee to deploy your funds.
How Close is Crypto to Institutional Adoption:
Institutional adoption is the key to success for any asset class out there. Stock markets fluctuate violently whenever institutions buy or sell. Therefore, it is safe to assume that institutional buying is a backbone for any asset to flourish.
As of June 2022, 6.47% of all bitcoin that will ever exist is held by institutions, a broad category that includes ETFs like VanEck in Canada and sovereign governments like El Salvador. (source) According to EY, nearly a quarter of fund managers expect to increase their exposure to crypto assets.
Institutional investment is also a function of the regulatory clarity. With that being said, the process of adoption is always gradual, just like every other asset.
Pros of Crypto Adoption:
So we do realize that adoption is good in general. But what are some of the key benefits? Read on!
A. Value Appreciation:
Yup. Unlike retail investors, institutions bring in big money. They have a potential of pumping in hundreds of dollars into the ecosystem at regular intervals. This means we can expect a surge in the price when these institutions join the party.
B. Targeting the next million:
With institutions buying into cryptocurrency, a larger set of retail audience becomes optimistic. Think of it like a seal of approval about the future of an asset. As a result, a lot of new people would ape into this new asset class.
Institutions generally have professional wealth managers who do not buy into FOMO or panic sell. Therefore, during turbulent times, you can expect a lot less volatility.
Cons of Crypto Adoption:
A lot of crypto bros are not happy with institutional buying. This is mainly because the entire ethos of web3 and democratization is affected. So here are a few cons of institutional adoption of crypto:
A. Market Manipulation:
Institutions are often running behind that alpha which would give them greater returns vis-à-vis others. Since Blockchains are extremely transparent it opens the room for some market manipulation by big players. This leaves retail investors at risk of losing money.
B. Over Dependence:
The flipside of big money coming is exactly what you just guessed. Yes, if these players start moving out, markets start tumbling faster than ever.
How Future Crypto will Affect the Investors?
Cryptocurrency is a highly risky asset class. However, the returns are in proportion to that. In the past, Bitcoin has outperformed every asset class to have ever existed. When it comes to the future, we need to evaluate what big players think.
As per BCG, one of the world’s largest strategy consultancy, cryptocurrency market capitalization is likely to grow 5x by 2030. Which means you are in for a lot of returns if you make your bets wisely.
Similarly, JP Morgan predicts that Metaverse could be a 2 trillion dollar economy in itself.
Let us try to take an educated guess at BTC. Considering its positioning of the digital gold, it should ideally match the market cap of Gold in the upcoming years. Current market cap of gold is approximately $8T. If BTC matches that, with 21M cap, each piece could be priced at 400K. That is an upside of 200x from the current price.
What I am trying to say is that if you believe in it, hold back. Early adopters are always rewarded exponentially.
Will crypto make it to the moon? I don’t know! But I do know that this is one heck of a journey that keeps on giving. So why not join the bandwagon? If nothing, you are surely going to learn patience amidst immense noise. Got questions?
Let me know in the comments section below. If this article adds value to your life, please consider sharing it with your friends using the links below.
Until next time..
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