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The Future of Crypto: Boom or Bust?

Environmental concerns and government regulation - where could cryptocurrencies be headed?

This article will give insight into the current issues surrounding cryptocurrencies, as well as the future that lies ahead.

At a moment in time on May 19th, Bitcoin plummeted by 30%, dropping to about $30,000. This extreme volatility is not unusual within the world of cryptocurrency. It is certainly not the first time the flagship cryptocurrency saw a crash like this and it is unlikely to be the last. This time though, the cause of the crash was different. In the past, Bitcoin bubbles have inevitably ‘burst’ through surges and sell-offs in retail trading characterised by a fear of missing out (FOMO). While speculative fear was still a part of the recent pullback, it seems other more legitimate factors have weighed in. Tesla CEO Elon Musk, a key proponent of the cryptocurrency frenzy, has expressed environmental concerns associated with mining cryptocurrencies like Bitcoin and a new round of regulations by the Chinese government has also worried investors. What is undoubtedly clear from this recent drop in Bitcoin, however, is the interconnectivity of cryptocurrencies. Many Bitcoin alternatives – such as Ethereum – fell in a similar fashion during the pullback, demonstrating an industry-wide risk for all investors involved in cryptocurrencies. The graph below illustrates this volatility by depicting the worth of one Bitcoin (blue) and Ether (orange) in U.S. dollars over time.

Source: TradingView

Although being an ever-present issue, environmental concerns have only recently hampered the momentum of cryptocurrencies. This is partly because of a growing movement towards socially responsible and environmentally-conscious investing in recent years, but it is also important to note the exponential rise in crypto mining over the COVID-19 pandemic. If you don’t know too much about ‘mining’, you can check out our article on cryptocurrency basics. Essentially, the increase in price of various cryptocurrencies during the pandemic has encouraged more and more people to engage in a mining process that ultimately rewards them with the cryptocurrency itself. The process has proven to be incredibly lucrative, with Bitcoin miners earning a record $1.4bn of revenue in February according to Coin Metrics and CoinDesk Research. However, it is notoriously energy-intensive, raising concerns among many environmentalists about the potential damage it is doing to the planet, with some suggesting that Bitcoin mining consumes ‘more electricity than Argentina’.

These recent environmental concerns have seemingly slowed the momentum of cryptocurrencies, and are proving to be a major obstacle in the way of broader acceptance. Some companies, such as Tesla, have revoked the ability to pay for their products with Bitcoin, as a result of environmental concerns. Elon Musk announced this reversal in another controversial tweet, causing the price of Bitcoin to drop around 15%. The Tesla CEO had previously been a staunch supporter of cryptocurrencies, so the change in opinion came as a surprise to many investors. The tweet, and Bitcoin’s drop in price, had knock-on effects to other cryptocurrencies. However, many coins rely on the same ‘mining’ processes to sustain themselves, meaning energy concerns are not unique to Bitcoin. For example, Ethereum, the second-largest cryptocurrency by market capitalisation, dropped by around 12% following Musk’s tweet, and popular meme-based cryptocurrency Dogecoin plunged by 34% as well. These environmental issues are posing a great threat to many cryptocurrencies, and must be resolved if they are to survive in the long-term. Governments around the world are already beginning to notice the problems with cryptocurrencies, and the ECB specifically has issued ‘grounds for concern’ surrounding the environmental impact of cryptocurrency mining.

But it is not only environmental concerns that are causing governments to take notice of cryptocurrencies. In China, Vice Premier Liu He and the State Council issued a statement highlighting the dangers of cryptocurrencies. The statement cited ‘individual risks to the social field’ and ultimately caused the price of Bitcoin to drop by more than 8.5%. For China, the existence of alternative currencies by which business could be conducted is a threat to the existing financial system implemented by Beijing. Additionally, the anonymity that many cryptocurrencies provide goes directly against the Chinese governments’ measures to monitor citizens and their financial transactions. For the US, the issue of illegal activity and tax evasion is driving a push for stricter compliance and regulation. Fundamentally, although the anonymity associated with cryptocurrencies is a great liberty for some investors, it is seen by governments as an easy way to conduct nefarious business or evade tax. What is clear, however, is that cryptocurrency’s ‘free trial’ is over. Coins such as Bitcoin and Ethereum have enjoyed their infancy as speculative assets without much regulation or oversight, but a global governmental crackdown is in the works, threatening their longevity.

Ultimately, the future of cryptocurrency will depend on many variables. Whether cryptocurrency-related processes are adapted to growing environmental concerns remains to be seen, but it seems like this may be a decisive factor in their survival. Some currencies such as Ethereum are already moving to a proof-of-stake model which will eliminate the mining process that requires significant amounts of energy. Others, such as Bitcoin, risk falling behind unless they are adapted to an increasingly environmentally-conscious world. Cryptocurrencies will also need to become compliant with incoming governmental regulation, but the feasibility of this idea is doubtful. If it means sacrificing the anonymity of a coin, then a principal factor that attracts many investors will vanish. So far, cryptocurrencies have enjoyed a relatively trouble-free time, but this is changing. Now, a storm lies ahead.

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Oliver Wainwright – 10/06/2021

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