Key Drivers of the Crypto Market

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Key Drivers of the Crypto Market

The cryptocurrency wildfire has swept throughout society, and it has reached the extent where every fight against crypto has only stoked this fire. This new craze has not spared any sector of the global economy, with the sector of every nation adopting new strategies to work with digital currencies. In this article, we want to get down to brass tacks and discuss the key factors that drive the crypto market. Let’s get started!

Introduction

Many factors have improved the integrity of digital assets after initial doubts.  A few years ago, most companies in the financial capital of the United States, Wall Street, approached the digital currency topic with initial incredulity but are now getting swooned by the idea of adopting cryptocurrencies into their everyday working systems.

Recently banks such as Signature, Silvergate, and as recent as some days ago, Goldman Sachs, are exploring the ways of using the Satoshi-backed cryptocurrency, Bitcoin, for collateral in exchange for cash loans. This is coming off the back of the fact that some banks are now open to the idea of digging into the $2.4trillion-worth crypto market.

There is the general acceptance among financial institutions that Bitcoin is an asset (a digital asset, albeit), and it is worthy of being exchanged for cash loans. However, this was partially approved by the Chief of Office of the Comptroller of the Currency (OCC), Brian Brooks, in the last U.S. administration. He also expressed that banks can be safe custodians of crypto assets. This, of course, will not be a ride in the park with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) having a watchful eye on proceedings. This is

Another factor that has bumped up the credibility of cryptocurrency was the Bitcoin-backed Exchange Traded Funds (ETF) launched by the ProShares group some months ago which has allowed BITO to be tradable away from crypto exchanges and on the New York Stocks Exchange (NYSE). Again, the SEC is still dragging its feet to allow ETFs to invest in it.

Coinbase (by far the biggest cryptocurrency exchange in the U.S.) IPO will not be forgotten in a hurry too. In April, the company launched with an IPO price of $381 per share and became the flagship crypto-based company on the NASDAQ exchange.

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As with any asset, the value of Digital Currencies can go up or down and there can be a substantial risk that you lose money buying, selling, holding, or investing in digital currencies.

With every passing day, the authenticity of digital assets – with Non-Fungible Tokens becoming the talk of the town in recent times – rises, and there seems to be no end in sight anytime soon.

Five Key Drivers of the Crypto Market

Fear Of Missing Out (FOMO)

There have been many acronyms and jargon that have cropped up since the advent of crypto. Hold On To Dear Life (HODL), Fear Uncertainty and Doubt (FUD), Whale, Initial Coin Offering (ICO), Tokens, Pump, Dump, Non-Fungible Tokens (NFT), Halving, just to name a few. But one major crypto market driver amongst these is the populace’s FOMO (Fear of Missing Out).

When the price of Bitcoin started to gain an astronomical rise at the beginning of the year, there were calls all over the internet to get in on the Bitcoin game now or regret it later. You come across so many phrases that go like: “If you had $100 worth of Bitcoin in 2010, you would have multiplied by a little over a thousand” and statements along the same line.

Trust social media platforms to put statements like these in your faces until your hands are forced to get in on the game. Social media platforms blow up the value of crypto than the actual value, giving people a false sense of what is actually going on.

Then there is the offline part of this fear. The fear of missing out on a great opportunity when your neighbors, friends, and families are getting rich from the crypto vibes that surrounds you every day, and you are like the sore thumb amidst them. This situation leaves many people pondering why their peers are suddenly getting rich and making them question their life decisions.

crypto market cycle

This fear has made many people delve into the crypto pool despite not understanding what the topic is all about. They do not want to miss out on the next big wave while people around are getting rich off it. Of course, they might get burnt with losses, but they have the solace that they are part of something big and might soon strike gold sometime in the future.

Failure of Existing/Customary Financial Systems

Sometime in 2013, a country in Europe experienced a financial meltdown that caused the nation’s government to resort to levying individuals about 6.75 – 9.9% of their money depending on the existing amount in their bank accounts. That country is Cyprus. The Eastern European nation experienced one of the worst episodes in their financial history, and this came fast on the heels of Greece’s financial cratering around the same time.

Cyprus had most of its money invested in Greece, but after their neighbors’ financial demise, they were not spared its ripple effect. This pushed these nations to depend on the Eurozone (a group of nations having euros as their legal tender) for funds to revive their economy. They were not the only ones to turn to Eurozone for succor. The Republic of Ireland, Spain, and Portugal also were found in the same situation.

The Cyrus episode was a singular event that changed the course of Bitcoin, which at the time was struggling for acceptance from the populace. The price of BTC climbed from then on from $40 around May 2013 to somewhere around $200 in October of the same year. This pointed only to one factor, the citizens of various nations are beginning to lose confidence in their respective financial institutions. Paraphrasing a quote from Ben Mezrich’s book, Bitcoin Billionaires, in his narration of the financial crises that gripped E.U. nations, “If this could happen in an E.U. country, what prevented it from happening anywhere else?”

This article from the World Economic Forum clearly explains how our global financial system is broken and the below chart gives you an idea of the same.

central bank policy rates

Citizens were not satisfied with the existent financial institutions in their countries, but they had no alternative to store or invest their cash in. But when they were introduced to a decentralized system where they had autonomous control over spending and investing their money, they took advantage, and there was no looking back. More and more people bought into digital assets pushing the crypto market to break new boundaries.

Traders Willingness to Deal in Crypto

Walking into any mom-and-pop shop these days, you would find that many of these small ventures prefer to exchange crypto for their goods and services. While bigger organizations and conglomerates still have to go through a lot of processes and protocols, small establishments or independent businesses have taken to the whole digital currency system like a duck to water.

Of course, the first argument that would be presented is that there is less tier in small businesses, less personnel to deal with, and less infrastructure to handle. But sellers’ liberality to accept this budding system of transactions is in turn reciprocated by buyers’ willingness to trade with the same system. This reactionary stance by the buyers has ramped up crypto use today. Of course, the ease of transacting with crypto is a pulling factor for buyers and sellers alike, but there is a bigger factor. With every business switching to crypto transactions, no one would like to be left behind. It is a race for which business adapts quickly to trading in digital assets.

The below infographic explains the growth of retail traders entering the crypto market in one prominent crypto exchange (Coinbase) alone.

crypto monthly transactions

Source: VentureCapitalist

The number of small-time crypto traders far outweigh the crypto whales, and most individuals who patronize small businesses are the former. This sheer number of these retail crypto owners has been an active factor in fueling the crypto market. This has translated to more use and improved the public interest and awareness in crypto.

Substitute for Existing Fiat System

One crypto that has gained prominence and has been discussed among circles as a new fiat system is Bitcoin. Bitcoin has gained worldwide acclaim, partly due to its feature of being the most popular crypto by market cap and also being the first crypto to pierce world market resistance. In the early weeks of August, El Salvador announced that Bitcoin would be a legal tender. Despite the country having a meager 21,041km2 of landmass, the news resonated worldwide.

Just like every news, it generated polarizing opinions. Some section of people applauded the move as a progressive and tending towards the future. However, others questioned whether it was wise to give crypto this pedestal since the world government is still struggling to accept it. There is the counter-argument by naysayers who think the small nation is taking the de-dollarization approach. Excluding the U.S. and surrounding territories, El Salvador is one of eight sovereign nations to adopt the U.S. legal tender.

Another disadvantage is Bitcoin’s volatile nature, although the transparency of cryptocurrency offers a very tempting advantage that outweighs the drawbacks. This bold step taken by the Central American nation will usher more nations to take the same step even if it does not happen anytime soon. A monetary system independent of third-party financial intermediaries or government authorities is what digital currency offers. Still, some other nations have also started discussions to follow the same path.

Cryptocurrency provides an open system where no one is anchored to any principal source. The establishment of Central Bank Digital Currency projects (CBDC) by nations of the world is a step in the positive direction towards a legal tender path. Still, the cryptoverse is boosted by concerted efforts by some nations to make crypto its official fiat.

Anonymity, Privacy, and Autonomy

Here is how the first crypto worked. A little over ten years ago, Satoshi Nakamoto introduced a peer-to-peer system of financial transactions. Every transaction made creates an additional layer of block and encryption on the previous transaction block, with the genesis block being the first foundation of any transaction made.

That first crypto is called Bitcoin, and the technology that underpins it is called Blockchain. Blockchain technology has proven to be a foolproof mode of transaction and has been the major appeal for people who have adopted crypto. This new system has offered a big disruption in the traditional way of doing many things.

One particular characteristics crypto offers are anonymity and privacy. This has always been a concern with electronic transactions as they are easily traceable with all the details one has to necessarily input during one registration stage or the other. But the ledger that comes with blockchain technology creates a failsafe system by providing a complex system riddled with complex mathematical puzzles and is very difficult to decrypt. This system has allowed for safer means of transaction.

Many individuals have always wanted to be in control of their finances as they continue to lose trust in financial institutions that have come up short time and again. Financial institutions come up every time with various ways to extort from customers. With cryptocurrency mining, the miners or developers get a reward for all their hard work from start to finish without any third party involved.

There is total user control with integrity maintained. The decentralized nature of cryptocurrency does not mean it is a fully decentralized system. Many cryptocurrencies are controlled by their creators or by people who hold a substantial amount of this coin. However, this decentralization is just enough to prevent monopoly. This liberality has driven up the popularity of crypto and advanced its cause.

Conclusion

We are in an era where we need a safer, faster, and more efficient way to make a transaction. The world is fast hurtling towards a world that has adopted technology in every sector. Every sector has embedded tech in its infrastructure to be in tune with a tech-obsessed world. Cryptocurrency is the tech answer to the world’s financial system, and it is going to be around for quite a while.

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