The COVID-19 pandemic accelerated acceptance of digital currencies like Bitcoin and the underlying blockchain technologies that power them. And while Bitcoin volatility continues — with the currency hitting its lowest point in months this week — investors are optimistic momentum will continue even as the world slowly starts to return to normal.
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The crypto and blockchain sector has attracted nearly $12.4 billion in venture investment into U.S.-based companies since 2017 and $19.4 billion globally, Crunchbase numbers show. In fact, data so far for 2021 shows dollars were nearly 3x from 2020 for both global and U.S. investments. But the sector also faces continued opportunities and challenges going forward, including more widespread adoption and new regulatory pressures from governments around the world.
Case in point: Earlier this month, El Salvador became the world’s first country to adopt bitcoin as legal tender. At the same time, Thailand’s Securities and Exchange Commission ordered its exchanges to delist meme coins, such as Dogecoin, as well as NFTs, exchange tokens and fan tokens, saying those tokens have “no clear objective or substance or underlying [value].”
Stepped-up efforts by China’s government to rein in the crypto space had the largest impact on valuations. On Friday, authorities in China’s Sichuan province, one of the country’s largest mining centers, reportedly ordered cryptocurrency miners to shut down their operations,
Cryptocurrency experts say these kinds of polarizing events put a spotlight on the space.
Here’s a closer look at four factors that are likely to drive big changes in the cryptocurrency space in years to come.
1) Mainstream adoption
Cryptocurrency startups are working to make the process of using, buying, trading and finding digital currencies easier, driving greater consumer awareness and adoption.
Increasingly, mainstream adoption of cryptocurrencies is “crazy important” to the growth of the sector, according to Goren. Still, some of that adoption has come from less serious applications of digital currencies, including “meme coins” — assets based on jokes but with no real value other than those given to them by social indicators — a phenomenon that also concerns Goren because they reinforce the notion that cryptocurrency isn’t legitimate.
“Publicly traded companies can show quarterly earnings, you can follow the CEO on Twitter and you know their opinions on things,” Goren added. “In crypto, you don’t have those kinds of things to show legitimacy.”
Meanwhile, Hsuan Lee, CEO of Portto/Blocto, said the adoption of NFTs — non-fungible tokens — is one of the biggest factors that has changed the industry in the past year. Portto is a Taiwan-based company that aims to make blockchain simple for users and developers.
Although NFTs have been around since 2017, they were initially not appealing for typical use, but that all changed when they became approachable by retail investors, including when sports organizations got involved in selling digital clips and cards, he said.
“The National Basketball Association doesn’t market itself as a blockchain, but offering collectibles on it appeals to fans,” Lee said in an interview. “With those kinds of applications, even introducing a music NFT would potentially attract existing music fans. With that kind of people joining the party, it will make crypto more mainstream.”
Muneeb Jan, a cryptocurrency and fintech expert operating out of Hong Kong, said the investor base for cryptocurrency is still largely retail investors, while major financial institutions are in the discovery phase.
Still, new companies are announcing on a daily basis that they will accept bitcoin and other cryptocurrencies, and banks are facing crypto investor demand to get more involved in the space, Jan said.
“Crypto funds are increasingly viewed as an asset class,” he said in an interview. “There is not much of a use case currently, but they want to jump onto the bandwagon. If more large institutional investors come in, there will be price stability, and it will improve the legitimacy.”
2) Price volatility
Jan believes two of the biggest headwinds slowing more mainstream cryptocurrency adoption are price volatility and the fact that bitcoin as a mode of payment is not yet completely viable due the current inability to quickly process transactions.
Bitcoin has been particularly volatile in recent days. After surging above $40,000 about a week ago, the currency fell below $30,000 this week, recovering to around $32,400 as of Tuesday afternoon. Over the past year, the price grew to a peak of more than $60,000 before falling back to half that at the end of May.
Just processing transactions is not a sustainable use long-term due to the expensive transaction fees associated with it, even though people want bitcoin to be able to do that, he added.
“Other cryptocurrencies are not volatile because the community investing in them have come to a consensus on the price,” Jan said.
Lee said price volatility will be aided by regulations, especially as cryptocurrency is adopted more broadly. Price volatility will only be fixed with time, he said.
“This is a very young market and it has attracted attention, which makes prices volatile,” he added. “It can be dangerous to get into a space without established regulations. Being at an early stage, there is a lot of imagination that can be had for these cryptocurrencies. At the same time, when bad news comes out, it can easily dump harder on crypto than other companies.”
3) Regulatory pressure
Regulations proposed for cryptocurrency have gained steam since the beginning of 2021.
Among them: The U.S. Department of the Treasury announced in May that it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service as part of an effort to curb tax evasion.
“I’m happy to see regulations come into place because it will be good for the industry overall,” Lee said. “It will minimize possible scams or malicious use cases and make it better for everyone to get on board.”
The government is also examining possible regulations of cryptocurrency exchanges with a focus on protecting investors and preventing market manipulation, as well as financial account reporting as it relates to cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies.
Goren called a focus on Bitcoin, Etherium and the public markets “a double-edged sword.” Any real value is eroded when inflation occurs, but Bitcoin is a decentralized currency, so its value holds up well against inflation.
And the more institutions that participate, the more legitimacy it creates so regulators are less likely to fight it, he said.
“Most lawmakers know crypto is not used by criminals, but the people who put them in office are large financial institutions that are cheering when they say that happens,” Goren said.
While he understands why there have to be IRS reporting requirements for tax purposes, he disagrees when government regulations don’t consider Bitcoin a currency, but then treats it like cash.
By instead treating cryptocurrency as a capital asset, the IRS is taxing capital gains, which could also have implications on the venture capital world, he added.
Goren said other countries have a bit more clarity, but there is still misunderstanding in the U.S. when it comes to how cryptocurrencies should be reported financially, and it won’t change until there is clear categorization of cryptocurrencies.
4) Beyond Bitcoin
Rocketfuel Blockchain founder Peter Jensen said it will take time for the public to understand and be comfortable with cryptocurrency, much as people had to acclimate to the idea of online banking and ATM cards before that.
Jensen’s company, based in San Francisco, processes crypto payments. He believes people are distracted by the price volatility of Bitcoin, although it is just one out of some 200 cryptocurrencies.
“We need to move people’s minds away from Bitcoin because who knows if cryptocurrency will survive,” Jensen said in an interview. “There are many cryptocurrencies pegged to the dollar, which means they have zero volatility. If you take those and use them for payment, then you get the benefits of that.”
Global developments — such as El Salvador adopting cryptocurrency and both Sweden and Dubai issuing their own digital currencies — bring promise for the future of the industry, and Jensen predicts the U.S. will eventually issue a digital version of the dollar.
He sees a world where when you get a job, you will have the choice of receiving your paycheck in dollars or cryptocurrency, and there will be no volatility because those funds will be guaranteed by the U.S. government.
“We feel that the U.S. has an opportunity to be ahead, even though China is adopting cryptocurrency faster, as well as those with less-efficient banking systems,” Jensen added. “If we don’t stay in front, we are going to be last.”
Crunchbase Pro queries listed for this article
The query used for this article was “Global Cryptocurrency Companies,” in which “Bitcoin,” “cryptocurrency” and “virtual currency” were the organizational industry search terms. The data was then separated out by changing the headquarters location to “United States.”
All Crunchbase Pro Queries are dynamic with results updating over time. They can be adapted with any company or investor name for analysis.
Illustration: Dom Guzman
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