Cryptocurrencies hit by volatility but investors keep the faith

Trump has emerged as the preferred candidate for crypto community – promising to protect people's right to hold the currencies and being announced as a headline speaker at the Bitcoin 2024 conference later in July. It puts him starkly at odds with the Biden administration's anti-crypto stance.

Bitcoin's gains look modest compared to another form of digital currency: Trump-inspired meme coins. There are several. All of them saw dramatic price jumps, up to 71%, after news Trump survived the shooting.

Earlier in the week, the German government sold off its entire Bitcoin holdings, initially causing a slip in the market, before a recovery in price.

Crypto analysts have expressed cautious optimism about Bitcoin's resilience and the improving prospects of digital money.

The Republican Party has taken a supportive stance toward crypto, the first major US political party to do so, while Democratic lawmakers hosted a crypto roundtable to set up dialogue with industry leaders.

Congress, however, failed to override President Joe Biden's veto of a bill that would have allowed US banks to hold crypto, highlighting the partisan divide on crypto policy.

Despite this setback, some hope for bipartisan cooperation remains, with senior Biden advisor Anita Dunn attending a recent roundtable on crypto, leaving attendees cautiously optimistic.

Pandemic uplift

During the COVID-19 pandemic, cryptocurrencies boomed, driven by an unprecedented wave of speculative investments.

But their prices soon plummeted, in a pattern reminiscent of the collapse of e-commerce bubble in the early 2000s.

There was then a series of rises and falls, as the market remained volatile. The market came under intensified scrutiny from global regulators.

China imposed bans on crypto trading and the so-called mining of coins, while the US introduced stricter rules, creating uncertainty and fear among investors.

Technological vulnerabilities have also played a role in the unease that has accompanied the rise of crypto.

The coins remain susceptible to cyberattacks, such as the 2022 Poly Network hack, which resulted in a loss of over $600mn, eroding investor confidence.

Wider macroeconomic currents across global markets – from rising inflation, interest rate hikes, and global economic uncertainties – led investors to seek safer assets. Cryptocurrencies, seen as risker options,  became less attractive compared to traditional assets like gold and government bonds.

And Bitcoin recently experienced its worst weekly decline in nearly a year due to fears over the potential liquidation of tokens from the defunct Japanese exchange Mt. Gox. The anticipation of creditors selling their returned Bitcoin added significant selling pressure to the market.

The collapse of the cryptocurrency exchange FTX also significantly impacted the market. Founded in 2019 by Sam Bankman-Fried, its downfall in 2022 came amid an $8bn gap in its finances. The sentencing of former FTX executives Nishad Singh and Gary Wang, scheduled for the autumn, marks a crucial step towards accountability for investors who suffered substantial losses.

Read more: Sam Bankman-Fried's $16 billion-foot fall from grace

Signs of a maturing market

Despite the downturn, many experts believe the cryptocurrency market will stabilise and recover. As it matures, weaker coins and exchange platforms will be weeded out, leaving behind those with strong fundamentals.

But the adoption of cryptocurrencies by the major institutions of the financial establishment remains slow and cautious. Some are offering cryptocurrency-related services – including JPMorgan and Goldman Sachs – and large corporations such as Tesla and Square have made significant investments in Bitcoin, indicating its growing acceptance.

The crypto world has always been characterised by rapid technological innovation.

Projects focused on scalability, interoperability, and security are expected to drive the next wave of growth. Integration with traditional financial systems is another key area, with several countries exploring central bank digital currencies (CBDCs) to combine the benefits of cryptocurrencies with the stability of currencies backed by the state.

Global regulation

Governments worldwide are rapidly considering new rules for digital currencies. A World Economic Forum publication, Pathways to the Regulation of Crypto-Assets details key regulatory developments. 

The US has passed laws to define how crypto should be regulated, addressing uncertainty if it should be treated as a commodity or a security to define which agency should cover it.

In 2023, lawmakers passed the Financial Innovation and Technology (FIT) for the 21st Century Act and the Blockchain Regulatory Certainty Act. Nonetheless, federal oversight efforts have generally stalled.

The European Union also introduced new measures in 2023 with its Markets in Crypto-Assets (MiCA)regulations. From January 2026, the rules will require all crypto service providers to obtain licenses and the names of senders and beneficiaries.

Sweden's Finance Minister Elisabeth Svantesson pointed to the "urgent need for imposing rules to better protect Europeans who have invested in these assets, and prevent the misuse of [the] crypto industry for money laundering and financing of terrorism."

In Asia, regulations vary significantly. Japan recognises crypto as legal property, managed by the Financial Services Agency. South Korea has a bespoke set of rules on the way, via the Virtual Asset Users Protection Act.

China's strict bans on crypto exchanges and mining remain. India's Supreme Court removed a crypto ban in 2020, and new regulations are being considered.

Brazil started regulating cryptocurrency in June 2023, making the central bank the supervisor for crypto assets.

Roberto Campos Neto, governor of Brazil's central bank, noted a shift in local demand toward stablecoins,a form of digital currency designed to be less volatile by being pegged to traditional assets.

The United Kingdom requires any company offering digital currency to be authorised by the Financial Conduct Authority (FCA). The Bank of England and FCA have proposed specific regulations for stablecoins to harness their potential benefits while protecting consumers.

The International Organisation of Securities Commissions has laid out 18 recommendations for global rules on managing crypto and digital assets.

The World Economic Forum underscores the necessity of a global approach to maximise the advantages of blockchain technology, which underpins cryptocurrency, and manage the risks associated with it. 

The appeal of decentralised money

Cryptocurrencies offer decentralisation. This means that unlike state-backed money, they are not beholden to the policy decisions of central banks or government.

Their advocates see them as offering a purer form of financial sovereignty, and as protection from the risk of devaluation that can happen at the behest of the governments which control traditional money, known as fiat currencies.

Bitcoin, in particular, is likened to digital gold due to its limited supply and deflationary nature.

Cryptocurrency has also historically provided significant returns on investment, attracting risk-tolerant investors..

The cryptocurrency space is a hotbed of innovation, constantly attracting tech enthusiasts and forward-thinking investors. Additionally, cryptocurrencies offer accessibility that traditional financial systems often lack, appealing particularly to regions with limited banking access.

Building trust in the blockchain

Interest in cryptocurrencies reignited during the pandemic, as government economic stimulus measures in response to COVID-19 stoked fears about inflation and devaluation of fiat currencies.

Bitcoin investors still highlight this part of its appeal, and that it remains a relatively safe investment during times of economic upheaval, not least compared to the stock market. Bitcoin also remains the most valuable crypto asset, with an aggregate market value of around $589bn.

Its value is based on its limited supply – there are a finite number of coins which must be mined, or identified, by computer – and their authenticity is guaranteed by the digital ledger tracking them and their use, known as the blockchain.

This automated technology has significant wider potential in a range of applications and is being closely watched across world finance.

Bitcoin took its first steps to providing a truly electronic cash system during the financial crisis of 2008. Its credentials as an alternative to fiat currency were burnished as governments bailed out financial institutions deemed too big to fail, fuelling distrust in banks.

Blockchain's shared network ledger streamlines operations in banking. It can be used to authenticate transactions across supply chains, in healthcare, and even for voting. Annual global funding of blockchain projects has jumped from several billion to nearly $30bn from 2020 to 2021.

Since Bitcoin, a second generation of cryptocurrencies has evolved, led by the Ethereum coin. Ethereum's programming language allows for self-executing smart contracts, powering thousands of decentralised applications.

Concerns persist, about the energy consumption needed for coin mining and the wider market volatility of crypto currencies. But newer coins are finding ways to verify transactions with less energy. And Stablecoins are designed to be less turbulent, and may offer a potential way into cryptocurrency for traditional finance.

Cryptocurrency and blockchain markets are still in the early stages of their development. But they are moving quickly into the mainstream.

The total market capitalisation of cryptocurrencies briefly reached $3tn, and over $100bn is locked into decentralised finance applications. Large companies like IBM, Amazon, and Bank of America are integrating blockchain technology into their operations.

It is likely that this new form of money will become a bigger part of the financial world in the years ahead.