Business Analysis Behind Cryptocurrency Markets: Blockchain, Law and Beyond
The cryptocurrency market crash of 2022 has raised ongoing concerns about the future of cryptocurrencies, but many investors still prefer the digital asset. Anyone considering investing in this space should ensure they have a solid foundation in both the challenges and opportunities of cryptocurrency.
The challenges are many: Excitement, mental bubbles and fraud have undermined the value of digital currencies for years. Business still lacks accountability, regulation and control. Consumers and governments are alarmed by the environmental damage caused by cryptocurrency's energy consumption.
Despite these concerns, the hopes of cryptocurrency enthusiasts are still high. As of May 2023, the capitalization of the global cryptocurrency market exceeded $1 trillion. Equally important is the non-cryptographic potential of the blockchain technology behind the coin, which has powerful applications that provide on-chain control in everything from healthcare to social media.
In this article, I explain some of the controversies and issues that have plagued the cryptocurrency market in recent years. I will also provide a lengthy overview of the nature of cryptocurrencies, their regulatory and financial implications, and what investment opportunities to be aware of when evaluating this volatile market.
Current Issues in the Cryptocurrency Market
According to a 2023 Pew Research Foundation survey, most Americans do not believe in the security and reliability of cryptocurrencies. There are many things that can keep even cryptocurrency enthusiasts awake at night.
Volatility and Cryptocurrency Crash
Many crypto tokens are volatile and susceptible to fraud, but even the businesses themselves are stable and stable, and are allegedly backed by assets to ensure price declines clearly occur.
In May 2022, the collapse of the digital stablecoin TerraUSD and the algorithmic stablecoin LUNA plunged the crypto market into crisis and caused investors to lose more than $400 billion. Then, in November of the same year, cryptocurrency exchange FTX collapsed due to lack of capital, poor financial management, and excessive withdrawals by unscrupulous investors, causing the token FTT and many other cryptocurrencies, including Bitcoin, to collapse in value.
Other major exchanges were also affected by FTX's loss: BlockFi froze withdrawals, as did Gemini's third-party lender, Genesis Global Capital. Crypto.com is also freezing USDC and Tether (USDT), whose currency is based on the US dollar. Coinbase laid off nearly 1,000 employees due to the effects of the crash.
The collapse of cryptocurrency also caused the decline of the NFT market. The prices of the most popular NFTs, such as Bored Ape Yacht Club and CryptoPunks, dropped by more than half in August 2022. While the crash occurred with the decline in cryptocurrency prices, others such as high fraud and oversaturation of the market also play an important role. .
Long before these declines, the cryptocurrency market crashed many times, including in 2021. In 2020, 2018, 2013 and before, this was mainly due to investor speculation and media hype. While this shows that the instability is coming to an end for cryptocurrencies, it also shows that the technology and the currency are good.
Crime and Fraud
In 2022 only, FTX's Sam Bankman-Fried; Do Kwon, CEO of Terraform Labs, parent company of TerraUSD and LUNA; and Su Zhu and Kyle Davies of Three Arrows Capital.
Also in 2022, criminals stole billions of dollars from investors by producing 117,000 fake tokens. Many initial coin offerings (ICOs), especially cryptocurrencies with speculative business models, have been viewed with suspicion and also criticized for fraud.
In a centralized transaction, if the product or service is damaged, the transaction can be canceled and the money refunded to the buyer. However, there is no central organization to facilitate sellers in the cryptocurrency ecosystem.
Security and privacy issues
Although the blockchain itself is very difficult to hack for exchanges trading cryptocurrencies. Hacking and theft have plagued the business world for almost a decade. The first major stock market hack occurred in 2015, when hackers attacked Tokyo-based Mt. Gox. In November 2022, FTX announced that trading was halted after criminals hacked the exchange and stole $600 million. Last month, hackers stole $570 million from Binance. Another attack occurred in 2021 and early 2022, with more than $1 billion in funds stolen in total.
The right to support smart contracts can also be stolen. In one of the “biggest digital thefts in history,” a hacker stole $613 million from Poly Network in 2021. This decentralized financial (DeFi) platform supports peer-to-peer (P2P) transactions, which are exchanges of tokens bought and sold directly between blockchains. Hacking is possible due to a flaw in the smart contract used to exchange tokens. Even though the hacker returned the money the next day, claiming he only wanted to “make a bad impression,” the situation demonstrates the significant risks facing platforms and their users.
Ransomware attacks are also common, in which hackers gain access to a user's account, encrypt the target's personal information inaccessible, and blackmail them with payment requests in cryptocurrency.
Environmental impact
Plans confirming the agreement with evidence; Working like Bitcoin requires a lot of effort. After the 2022 transaction, proof-of-stake tokens like Ethereum have higher overhead. While Ethereum says it uses 99.9% less energy than before, the Center for Alternative Finance at the University of Cambridge says comparing Ethereum's energy consumption before and after the merger is like comparing a London Eye Care wheel to a raspberry.
According to US government data, cryptocurrencies are believed to consume 120 to 240 billion kilowatt hours annually as of August 2022; This is more than the annual electricity consumption of some countries. Although it is not at a high level, it is an important factor in global climate change.
In addition, cryptocurrency mining caused problems in the electricity projects of many countries, including Iran and Kosovo, causing major power outages.
Responsibilities, regulation and oversight
As cryptocurrency technology crosses political boundaries, the influence of national regulators is limited. Global regulators, the Financial Stability Board and the International Monetary Fund, are collaborating to develop a global regulatory framework, and the new rules are expected to come into force by September 2023.
But many countries decided not to wait any longer. Due to environmental and/or criminal concerns, a number of countries, including China, Egypt, Iraq, Morocco, Algeria, and Tunisia, have banned the issuance or holding of tokens, and an additional 42 countries have imposed bans on the issuance or holding of tokens. tokens. limited amount of money. Cryptocurrency exchanges may limit how banks handle money. But other countries are still trying to attract companies that will develop businesses for these assets.
Japan, Switzerland and the United Arab Emirates changed their laws or announced new laws between September 2022 and January 2023. PwC calls the Swiss framework one of the most familiar trends to date, and the UAE has announced the creation of the new law, the world's first organization dedicated to virtual currencies. Other countries, including Canada, the United Kingdom and Australia, are still developing legislation and the EU is also about to implement the rules.
What Is Cryptocurrency?
Cryptocurrency is a digital asset that uses cryptography and encryption technology to ensure security. Cryptocurrencies are mostly used to buy and sell goods and services, but some also have additional smart features. Most cryptocurrencies are not backed by other commodities (like gold) and are generally not accepted as legal tender. It is also mostly provided by private organizations.
But this is not universal. Stablecoins pegged to other assets such as the US dollar, gold or other cryptocurrencies have surged in recent years, with central banks in some countries such as Nigeria and the Bahamas publishing digital results.
Sometimes companies use ICOs to raise money to develop new blockchain and cryptocurrency technologies. What they offer is not membership but a digital token. Investors can benefit from early access to cryptocurrencies and it is all profitable. Blockchain-related projects have raised billions of dollars through ICOs.
It is estimated that by 2023, approximately 420 million people worldwide own cryptocurrencies.
Types of Cryptocurrency
There are two broad categories: Cryptocurrencies: pure coins, such as Bitcoin, and tokens, such as Ethereum, used to purchase goods and services. Tokens also support other digital documents such as NFTs and smart contracts.
Bitcoin
Bitcoin was launched in 2009 by a person named Satoshi Nakamoto. During commerce, buyers and sellers use mobile wallets to send and receive payments. The list of merchants accepting Bitcoin has expanded in recent years, but some, including Microsoft and Twitch, have temporarily stopped accepting Bitcoin at times due to too many changes on the Exchange.
Bitcoin has its disadvantages. For example, it can only process seven transactions per second, while Visa can process thousands. The function of the currency is also limited: since it was created primarily as a tradable coin, it does not support smart contracts and business applications. Bitcoin's price has fluctuated and fallen over the years due to developments such as tighter regulations in China and India, the U.S. Securities and Exchange Commission's crackdown on cryptocurrency exchanges, and the announcement of a hack on the Binance cryptocurrency exchange in 2018. Bitcoin rebounded and flourished again in 2021 as institutional investors began using cryptocurrencies more heavily, but fell again in 2022 following the FTX scam.
Ethereum and Ethereum
Ethereum is a blockchain that allows smart contracts to be created relatively easily, while Ethereum is the token used for transactions on the Ethereum blockchain. Ethereum and other currencies based on the Ethereum blockchain have become popular. As of May 2023, Ethereum market cap is approximately $218 billion. Although its 19% market share is several points higher than two years ago, the result has been controversial for the last few years, partly due to economic problems.
Last year bitcoin and Etherum holds the majority of share in the market, or so we witnessed the emergence and rapid growth of many new digital currencies and tokens, including Litecoin, Zcash, Dash and Dogecoin. There are currently approximately 23,000 different cryptocurrencies.
How do cryptocurrencies work?
Blockchain technology is the basis of Bitcoin and many other cryptocurrencies. It is based on a constantly updated public or private ledger that records all transactions. Blockchain is decentralized and can process and verify transactions without the involvement of a central authority such as a bank, government or payment institution. (This is called trustless.)
Alternatively, blockchain uses a consensus process to verify transactions and then record them across multiple nodes. A node is a computer that is connected to the blockchain network and automatically downloads a copy of the blockchain when it joins the network. For a transaction to be valid, all nodes must complete an agreement.
For a transaction, both buyer and seller must agree and verify it before it is added to the supply chain. A third-party user (called a “miner” or “verifier” depending on the verification method) is responsible for the security of the chain. Transaction information cannot be changed unless all parties agree. There are two main concepts for consensus confirmation (Proof of Work and Proof of Stake) and the process will vary depending on the process the particular blockchain uses.
The ultimate challenge of cryptocurrency
Five years after its heyday in 2017 and 2018, cryptocurrency still has a lot of people to win over; Including Warren Buffet, who deftly called Bitcoin “an illusion” but ultimately “an illusion.” But other investment experts like Bill Miller remain bullish.
In the simplest terms, cryptocurrency is a fintech phenomenon; At a difficult level, it is a technological change that complicates political, financial and social relations.
Even as the benefits of cryptocurrencies continue to diminish, the blockchain technology that emerges from them has the power to change the way we do business. Technology consultancy CB Insights analyzed how blockchain could transform processes as diverse as banking, cybersecurity, voting, education and supply chain management. As per the Financial analysts we can assume that global blockchain market revenue will be around to $1.24 trillion by 2030, up from $5.85 billion in 2021.
The challenge that most interested parties must address is to realize the full potential of blockchain. While building public trust in the cryptocurrency market enough to drive adoption of the technology.
This article has recently been fully updated to include the most accurate and up-to-date information. The following statements can confirm these changes.
