- The cryptocurrency market is currently caught in a downturn amid global macroeconomic pressures.
- The growing adoption of fintech could attract the next wave of cryptocurrency users, which could help prices rise.
- Bitcoin could rally if the Federal Reserve changes its hawkish stance or if people lose faith in central banks altogether.
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crypto report looks at four potential events that could revive interest in digital assets.
A Fed Pivot Reducing Pressure on Cryptocurrencies
One of the most discussed catalysts that could give cryptocurrencies and other risky assets a boost is the end of the Federal Reserve’s monetary tightening policies. The Fed is currently raising interest rates to help fight inflation. When the prices of goods, raw materials and energy reach unsustainable levels, central banks intervene to reduce prices and prevent lasting damage to their economies.
In theory, raising interest rates should cause demand destruction. When the cost of borrowing money and paying off debt becomes too high, less viable and efficient businesses are pushed out of the market. In turn, this should reduce demand and lower prices for commodities such as oil, wheat and timber.
However, while the Fed is aiming to raise interest rates to its 2% inflation target, it may be easier said than done. Every time the Fed raises rates, it becomes harder for those with debts like mortgages to make payments. If rates go too high or stay too high for too long, eventually mortgage holders will default on their loans en masse, leading to a collapse in the housing market similar to the Great Financial Crisis of 2008.
Therefore, the Fed will have to move away from its monetary tightening policy in a short time. And when it does, it should relieve much of the downward pressure by keeping risky assets like cryptocurrencies suppressed. Eventually, the Fed will also begin cutting interest rates to spur economic growth, which should also act as a major tailwind for the crypto market.
When the Fed is likely to change course is up for debate; however, most experts agree that it will be difficult for the central bank to continue raising rates beyond the first quarter of 2023.
Fintech Cryptocurrency Adoption
Although crypto assets have made great strides in recent years, their benefits are still quite inaccessible to the average person. Use cases such as cross-border transfers, blockchain banking, and DeFi are in demand, but the simple and easy-to-use infrastructure for mass onboard users has yet to be developed.
As it stands, using crypto is complex and a far cry from what most people are used to. Managing private keys, signing transactions, and avoiding scams and hacks may seem intuitive to the average crypto geek, but it remains a major roadblock to adoption by more casual users.
There is a huge gap in the market to get the average person into crypto. If fintech companies start to integrate cryptocurrency transfers into their offerings and make it easier for users to put their funds to work on the blockchain, cryptocurrencies could see a new wave of adoption. As crypto infrastructure becomes easier to use, more people are likely to recognize its usefulness and invest in the space, creating a positive feedback loop.
Some companies have already recognized this vision and are working on products that make it easy for anyone to start using crypto. Earlier this year, PayPal integrated cryptocurrency deposits and withdrawals into personal wallets, marking a significant first step toward broader adoption of cryptocurrency payments. Last month, the Financial Conduct Authority granted registration to Revolut, one of the largest digital banks, to offer crypto services in the UK.
However, the most significant development may be yet to come. Robinhood, the no-fee trading app that fueled the so-called “meme stocks” mania of early 2021 and the subsequent Dogecoin rally, is preparing to launch its own non-custodial wallet. Last month, the beta version of the wallet was sent out to 10,000 early adopters, with the full launch scheduled for late 2022. The Polygon-based wallet will allow users to trade more than 20 cryptocurrencies through the decentralized exchange aggregator. 0x, no charges. The wallet will also allow users to connect to DeFi protocols and earn returns on their assets.
At its core, crypto bull runs are driven by adoption, and products like Robinhood’s new wallet could become the ultimate app to onboard the next generation of users.
The Bitcoin Halving
Coincidence or not, a new bull run has historically begun shortly after the Bitcoin protocol halved its mining rewards every 210,000 blocks. This catalyst has predicted every major bull run since the first Bitcoin halving in late 2012 and is likely to continue to do so in the future.
After the first halving on November 28, 2012, Bitcoin skyrocketed over 7,000%. The following halving on July 9, 2016 catapulted the leading cryptocurrency up 2,800%, and after the last halving on May 11, 2020, Bitcoin was up more than 600%.
The most likely explanation for the halving rallies that have taken place roughly every four years is simple supply reduction. Economic theory posits that when the supply of an asset is reduced but the demand remains the same, its price will rise. Bitcoin miners typically sell a large portion of their Bitcoin rewards to cover the cost of electricity and maintenance for their mining machines. This means that when the rewards are halved, this selling pressure is drastically reduced. While this initial supply halving acts as the trigger, bullish rallies often carry cryptocurrencies much further than can be attributed to the halving alone.
At the current rate of block production, the next Bitcoin halving will take place sometime in late February 2024. It is worth noting that for each subsequent halving, the number of Bitcoin increments decreases, and the time between the halving and the bull run increases. . This is likely due to increased liquidity in the Bitcoin market, which cushions the effect of reduced supply. However, if history is any precedent, the upcoming halving should propel the top crypto substantially higher than its previous all-time high of $69,044 hit on Nov 10, 2021.
One caveat to the halving thesis is that the next 2024 halving could be the first to take place in a gloomy macroeconomic backdrop. If the world’s central banks cannot fix the current inflation crisis while maintaining economic growth, it might be difficult for risky assets like cryptocurrencies to recover even with the supply halving.
Loss of confidence in central banks
The latest potential bull run catalyst is the most speculative of the examples listed in this article, but it is definitely worth discussing.
In recent months, the shortcomings of the major economies run by central banks have become increasingly apparent. Most world currencies have tumbled against the US dollar, bond yields have appreciated substantially as confidence in national economies wanes, and central banks in Japan and the UK have resorted to buying debt. of its own government to avoid breaches of a yield curve control policy.
Today’s debt-based financial system relies on constant growth, and when this stops, fiat currencies that aren’t backed by anything face a very real risk of hyperinflation. Even before the current spike in inflation due to supply chain problems, a prolonged period of low interest rates likely caused irreparable damage to the US economy. The cost of living, house prices and business valuations soared while wages stagnated. Instead of using cheap debt to grow businesses and create real economic value, many have borrowed money to buy real estate or invest in stocks. The result is a huge asset bubble that may not be undone without collapsing the world economy.
When fiat economies show weakness, gold and other precious metals are often seen as safe havens against financial collapse. However, investing in gold-based financial products such as gold ETFs is not a viable option for most people. Even those that do may be caught up in the whirlpool if contagion reaches broader financial markets. This leaves Bitcoin and other hard, decentralized cryptocurrencies with fixed supplies as obvious candidates to replace gold as a reserve value if the public loses confidence in national currencies.
Before the current financial crisis, investors had begun to recognize Bitcoin as a hard currency due to its fixed supply of 21 million coins, earning the leading cryptocurrency the title of “digital gold” among adherents. More recently, top hedge fund managers like Stanley Druckenmiller and Paul Tudor Jones have expressed similar views. in a september CNBC In an interview, Druckenmiller said that cryptocurrencies could enjoy a “renaissance” if confidence in central banks declines. Similarly, Jones has stated that cryptocurrencies like Bitcoin and Ethereum could go “much higher” in the future due to their limited supply.
Disclosure: At the time of writing, the author owned ETH, BTC, and several other cryptocurrencies.