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The recent meltdown at Terra, subsequent questioning and doubting of the decentralized finance (DeFi) space in general, and the dramatic drop-off in cryptoasset prices has led some to dub this era the next “crypto winter.” On the surface such a description is correct, with hundreds of billions in value having been wiped off the cryptoasset market in the recent sell-off. That said, and despite the surface level similarities to the crypto winter that existed during 2018-2019, there are several traits that differentiate current market volatility from an existential crisis of confidence.
From a higher level perspective the recent price declines and volatility that the cryptoasset sector is experiencing should not strike market participants as a dramatic surprise. Rising alongside higher risk assets such a tech stocks and emerging market debt instruments, cryptoassets have experienced a dramatic increase in value since mid-2020. Even as global uncertainty and geo-political conflict continued to rise across the board, cryptoassets of all stripes thrived. Entirely new applications – including decentralized finance and non-fungible tokens – burst into mainstream conversation and attracted billions in investments.
Countries adopted bitcoin as legal tender, and over 100 nations have researched, developed, or launched a central bank digital currency (CBDC). Every trend and market commentator seemed to indicate that crypto was destined to dominate and supersede fiat currencies in virtually every marketplace. As has been proven time and again, however, there is no such thing as a sure thing; the current price volatility and declines have reinforced this reality. With uncertainty, however, there is also room for improvement.
Let’s take a look at a few of the reasons while price declines cause short term pain, they also can pave the way future improvements.
Crypto declines lead to operational improvement. Following previous declines (and the predicted end of crypto), there have consistently been marked improvements to how the cryptoasset ecosystem operates. Several examples come to mind, including the improvements made to centralized exchanges after the failure of Mt. Gox (among others), and the increased rules around reporting after the 2018-2019 declines in bitcoin and other crypto prices. In addition the rise of decentralized autonomous organizations (DAOs), which themselves were reputationally damaged following the 2016 DAO hack, have also led to better regulatory frameworks around how blockchain based organizations can become integrated within the wider business landscape.
Following the collapse of the Terra stablecoin there are increased conversations around the need for improved reporting, transparency, and reporting requirements; these are issues that need to be raised for stablecoins to continue developing. As painful as the findings may be, and the damage that certain specific projects will suffer as a result, greater transparency and standardization will be a positive development for stablecoins.
Crypto is a fast moving sector, and continued operational developments are critical to further growth.
Crypto is more than price. Headlines around price volatility and speculation in the crypto sector make for exciting discussions and debates in both in-person and virtual forums, but that continuously overshadows the more important points. Blockchain and cryptoassets are, at the core of the ideas, platforms and technologies that enable a decentralized and distributed way of sharing and storing information. While certain innovations such as NFTs are certainly exciting and generate quite a bit of buzz, they can lead to interest and investment dollars being allocated to projects that will not lead to longer term progress.
Price volatility and declines are definitely not good news or a positive development for either the individual projects impacted nor the sentiment surrounding the space at large. That said, such volatility should not come as a surprise to any individual that either has first hand experience investing, or even a knowledge of market trends and history. Asset classes can be volatile, and the more attention an asset class attracts, the higher the likelihood of questionable projects receiving excessive fundings become. Price swings are a characteristic of any developing asset class, but should not be the sole aim of any project or developer team.
Volatility leads to oversight. On top of the increased regulatory conversations, hearings, opinions, and debates that have been filling the headlines around the blockchain and cryptoasset space, the accounting standard setters are beginning to enter the conversation. The Internal Revenue Service (IRS) has certainly been very prominent in the areas of tax enforcement, tax collection, and tax pronouncements, but other accounting standard setters have not been as forthcoming. The recent announcement by the Financial Accounting Standards Board (FASB) that certain types of cryptoassets will be part of the upcoming research agenda is a major step toward increased clarity.
Oversight and regulation might not be the topics that generate the most excitement and happiness among blockchain and crypto advocates, but it is an absolutely essential one to pave the way for wider adoption. As accounting standards improve and become more consistent this will, in turn, encourage more institutions to readily embrace these technologies, which ultimately lead to a more mature, stable, and developed cryptoasset marketplace.
Volatility is a tricky topic to address for any asset class, especially since market participants are only typically fans of volatility going one direction; upwards. During times of increased market uncertainty and volatility the calls of doom and gloom can reach a fever pitch, but that is not a reliable indicator of the of the future of sector as a whole. As the market has proven time and again, cryptoassets have the ability to consistently recover from price declines, and come back stronger. This time will be no different.
