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Revolutionary ideas like decentralisation, freedom to operate without the fear of law, freedom from financial mediators for transactions etc. led to an unprecedented crypto trade boom in the last few years. The same ideas appear to have become the undoing of the nascent digital asset this year. Hit by frequent crashes and the loss of over $2 trillion in market cap within a few months, crypto markets are now struggling to find new investors. The diminishing interest of buyers is also reflected in the decreasing trading volumes across exchanges.
Crypto prices are based entirely on speculations. Not backed by real-world assets or real-world use cases, the prices of these digital assets largely depend on how much buyers want to pay. While speculations often drive prices up, the recent Terra (Luna) debacle has shown that the same speculations can wipe out the total value of a cryptocurrency within a few hours.
“Crypto’s bull run has been fuelled by excessive speculation, fear of missing out, the surplus money supply in the hands of idle retail investors and hype. It is surprising that it had every sign of prior speculative manias, like the tulip mania or the dot-com bubble, but participants and observers alike overlooked them, fearing there was some core tenet they were failing to grasp,” Utkarsh Sinha, Managing Director at Bexley Advisors, a boutique investment bank firm, told FE Online.
As of today, the total crypto market cap has shrunk to $914 billion while the price of the most popular cryptocurrency – Bitcoin – is down more than 70% from its all-time high of $68,789 recorded just eight months back in November 2021.
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In what is being seen as a direct result of lack of oversight or regulation, many crypto firms like Vauld, Celsius, Voyager Digital, Huobi Thailand and Three Arrows have faced the brunt of the massive downturn in the market.
Experts say that ideas like complete decentralisation cannot sustain a market where money is up for trading. Crypto trading, which operates much more like financial markets, is also not an exception.
“Complete decentralisation is a false belief. We need gatekeepers in the cryptoverse to ensure governance and compliance necessary for the growth of the industry,” said Sharat Chandra, VP, Research and Strategy at blockchain-based identity management platform EarthID
“In the traditional financial market, errors are bounded, and regulation attempts to control their quantum. While crypto has shown to be a democratic technology that exploits system and individual flaws, this time the scale of error is global with no oversight or restrictions and repercussions are visible,” said Gaurav Mehta, founder of Catax, a crypto tax platform.
Way forward, beyond finance
While the lack of regulatory oversight may have triggered the current fall of multiple crypto companies and markets, crypto as an asset class has come a long way from the circle of early proponents. So much so that one cannot simply write it off.
Crypto industry veterans blame the current turbulence on the growing correlation of crypto markets with the traditional markets. “The turbulence that we see in the crypto industry is because the crypto market is closely correlated with the traditional capital markets, especially the US tech stocks. That is the nature of capital flow in a highly globalised world,” said Ashish Singhal, Co-founder and CEO of cryptocurrency exchange CoinSwitch.
He further said what crypto brings to the table is the power of decentralisation, removing single points of failure.
“Again, decentralisation is not a replacement of traditional means of doing business, instead it is an evolution. While today Crypto’s use-cases are largely in finance, the technology can be leveraged to build a new form of the internet—Web3—where the core infrastructure is not centralised or controlled by a few big companies, but is instead open and distributed. This benefits India,” Singhal said.
(Cryptos and other virtual digital assets are unregulated in India. They are considered extremely risky for investment. Please consult your financial advisor before making any investment decision)
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