Cryptocurrencies potentially stand a chance of integrating into mainstream society, provided they manage to overcome their internal obstacles.
Cryptocurrencies potentially stand a chance of integrating into mainstream society, provided they manage to overcome their internal obstacles.
Following decades of protests about digital assets being unfairly restricted by oblivious regulators, the sector now stands on the brink of having a U.S. president advocate for their products and appoint enthusiasts to former law enforcement roles. Traditional funds are flooding in, and the idea of a U.S. bitcoin reserve is even being considered.
However, crypto's success may be its own downfall.
As Matthew Homer, a former regulatory figure and now a general partner at crypto venture firm Department of XYZ, puts it, "We've got a history of shooting ourselves in the foot." Homer expresses concerns that an exuberant response could result in another crash.
The festivities have already started.
Bitcoin, often seen as an industry benchmark, surpassed the $100,000 threshold earlier this month, soaring around 50% since the election and more than doubling over the course of a year. Interestingly, crypto's reputation was at an all-time low around this period last year, when talk of Sam Bankman-Fried's multibillion-dollar fraud conviction in November 2023 was still fresh in people's minds.
Even for a sector known for its rollercoaster cycles, this rally has felt extraordinary.
Four major factors fueled crypto in 2021:
- Conventional finance. A court decision forced the Securities and Exchange Commission to approve the long-awaited spot bitcoin ETFs, making it simpler for traditional investors to engage with bitcoin's price fluctuations without the usual hassle.
- Halving. Bitcoin's reward for mining was cut in half every four years, increasing its scarcity and triggering a price increase. This process had occurred in late April.
- Easy money. Investors typically benefit from low-risk assets like crypto during periods of low-interest rates. With the Fed lowering rates in the previous three months, the situation has become even more favorable for the crypto market.
- The Trump impact. During the elections, Donald Trump radically changed his stance on crypto, labeling it a fraud yet promising to support the sector's interests if reelected. Key focus areas included ousting Gary Gensler, the SEC chair who has openly criticized crypto, and relaxing regulations. At the same time, crypto PACs contributed a record amount to the campaign. Although contributions were split between parties, crypto-aligned groups targeted major opponents, such as spending $40 million to oust Senate Banking Chair Sherrod Brown.
The president-elect has since appointed high-profile supporters of crypto to key administration roles, including Howard Lutnick, a financier with strong connections to stablecoin Tether, to run the Department of Commerce, and Paul Atkins, a proponent of more flexible regulations, to head the SEC.
Industry figures argue that they are simply seeking a fair regulatory landscape, not special treatment.
"If you're a regulator, it's not your role to select which markets exist – your focus is to establish rules that secure these markets," Homer, who previously managed the digital asset licensing sector at the New York State Department of Financial Services, said. "I'm looking forward to a shift towards open communication between the industry and these appointees."
Detractors still see crypto as this generation's tulip mania – a worthless speculative asset. An unequivocal demonstration of the Greater Fool theory if there ever was one.
However, even stern critics recognize that times have changed. Cas Piancey, a Protos reporter and Crypto Critics' Corner podcast co-host, now seems prepared to watch the events unfold.
When he first began reporting on crypto, he hoped to warn people of the risks to prevent them from losing their money.
"I was in a casino, shouting at gamblers, 'You'll lose it all!' They'd respond, 'Are you sure you know how slot machines work?' I got the message – I shouldn't try to change minds in the casino," Piancey explained. "So, I figured I could shift my focus to discussing the issues that arise when involving risky assets like crypto, instead of trying to dissuade people from gambling."
The upcoming years will serve as a significant test. Is crypto ready to part ways with its past criminal activities and embrace polite society? Can it flourish without triggering another financial system meltdown caused by its unstable ecosystem?
As always, the stakes are high – a massive gamble.
The influx of traditional funds into the cryptocurrency market is a testament to the sector's growing legitimacy in the eyes of mainstream businesses. However, Matthew Homer's concerns about an exuberant response could potentially lead to another market crash, underscoring the unpredictable nature of the crypto business.