The troubles in crypto and the rising interest rate prove: Bitcoin has no future; The market needs a new vision

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Stock market crashes and, losses to customers in the crypto market are increasing

  • At the same time, the rising interest rates and the return on the value of money are shattering the vision to replace the traditional currencies
  • What does this mean for the future of Bitcoin and the crypto exchanges, and why are the institutional bodies the ones who can restore it?

 

Almost 15 years after the launch of Bitcoin, and about two and a half years after the currency reached a peak of nearly,

69 thousand dollars, the digital currency market is at a crossroads.

After years of increases under the guise of zero interest rates,

which encouraged speculation, the year 2022 was particularly difficult. This is not only due to the sharp price drops in the leading cryptocurrencies but mainly due to a series of resounding collapses of leading entities in the market. These led to heavy customer losses and exposed extremely problematic practices in handling their money and scams.

At the head of these was the collapse of the FTX exchange in November 2022,

exposing the lack of basic separation between the exchange’s funds and the customers’ funds, and the prohibited use of the customers’ funds to finance risky investments and support the trading needs of the exchange and the Almeda fund associated with it. The collapses of the trading and lending platforms Celsius and Voyager also resulted in heavy losses for their customers.

Another major incident occurred this week when the American Securities and Exchange Commission (SEC) filed a lawsuit against Binance,

the largest cryptocurrency exchange, alleging substantial violations of American law and the criminal use of customer assets for its purposes. These developments make it impossible for the market to continue growing in its current shape.

Need for infrastructure regulation!

The main lesson from the collapse of the FTX exchange is the basic need for separation between the trading platforms and between the custodial body for the client’s assets.

Therefore, the Basic condition for the continued development of the Market,

and the entry of Institutional Entities into activities in digital currencies is the regulation of the basic infrastructures of the crypto Market so that they operate following accepted international standards and by traditional, stable, and supervised entities.

Indeed, these processes are beginning to take place. For example,

the banks Standard Chartered, Nomura, and BNY Mellon are currently establishing separate exchanges and custodians for digital assets. The Nasdaq stock exchange is also currently awaiting regulatory approvals for the launch of a custodian for crypto assets.

At the same time, the trading platform EDX Markets,

established by brokers Citadel Securities, Charles Schwab, and Virtu Financial,

declares its intention to operate in the crypto market “using the best practices from traditional financial markets”.

These new entities are expected to compete head-on with the exchanges that exist in the crypto market, which, as mentioned,

do not meet basic standards of transparency towards their customers.

Binance, which dominated about 60% of the market at its peak,

has already lost about a quarter of its market share, against the background of the serious regulatory claims against it in recent months, which as mentioned this week have matured into a lawsuit that is expected to exacerbate the trend. The Coinbase exchange, the second largest, also experienced a decrease of more than 50% in trading volumes in the last year, due to a decrease in the number of customers, 95% of whom are retailers.

Need for a new and realistic vision.

At the same time as the infrastructure is regulated, in my opinion,

the digital currency market will be required to give up a significant part of its original vision and replace it with a realistic and useful designation within the financial and banking markets.

The aspiration to replace the traditional fiat currencies (the “real” money we use daily) with unbacked crypto-currencies,

as accepted means of payment in economies, is unrealistic. It didn’t make sense in the first place, but now the accumulated experience proves it decisively.

The high volatility in the values of cryptocurrencies proves that they are not suitable to be used as a stable means of payment that prices products and assets. At the same time,

it is not possible to create tangible value for currencies in the absence of a central entity that manages and adopts them as a means of payment in the economy,

from paying taxes to consumption. It is worth recognizing that there is no chance that countries will allow a private currency that is not controlled by them to become legal tender.

At the same time, the return of interest rates and the reduction in the supply of money in the world against the background of the fight against inflation,

make far-fetched apocalyptic scenarios regarding the “loss of the value of money” and the “collapse of traditional financial institutions”, which will be replaced by crypto-currencies,

which governments or central banks would not allow to happen anyway.

In my opinion, the aforementioned also directly attacks the idea that cryptocurrencies are “investment assets” whose value will rise sharply,

at the expense of fiat currencies. In any case, the perception of a currency as an asset whose value will rise sharply over time,

to be used as a means of payment in the economy, makes no sense,

because of the need for a stable value. If such occurs, it will cause a continuous and severe deflation.

Therefore, in my opinion,

the existing cryptocurrencies, led by Bitcoin,

have no real value or future. The value that will be left in them in the future will derive solely from “trapped money”, which entered there in the first place for improper purposes such as money laundering,

and will not have an effective legal way to exit back to fiat currencies.

Three pillars for the future:

On the other hand, the future development of digital currencies should rest on three main pillars.

The first is blockchain technology,

and its ability to provide fast clearing of financial transactions and switching between fiat and digital currencies, which will be a significant leap forward to the traditional financial world.

The fact that transferring foreign currency in the world still involves high costs, is cumbersome, and takes several days,

creates a huge need for the adoption of the blockchain,

which allows for immediate settlement and full transparency in the process. It should be adopted while preserving responsible parties for completing the settlement,

mainly clearing houses and banks, contrary to the original blockchain vision For full decentralization, which is not applicable.

The second tier is the use of stable currencies, fully backed by fiat currencies,

as efficient means of making payments on the blockchain. In recent years,

the stablecoin market has grown sharply and is currently valued at approximately $130 billion. The largest of these is Tether’s USDT and Circle’s USDC.

While today stablecoins are mainly used as a bridge for converting fiat currencies to crypto investments and back,

in my opinion, their main purpose should be the fast and efficient clearing of fiat money and its digital storage. At the end of the process,

the leading ones should become regulatory-controlled payment systems, alongside, or as part of,

the existing payment systems.

This purpose could serve the third tier for the future of digital currencies: the issuance of tokens by various companies,

for payment for services or products,

through their quick and efficient conversion to fiat currencies or other tokens, through the bridge that the stable currencies will provide.

When traditional financial entities issue tokens,

they will be connected and given a clear intrinsic value based on the right to receive payment in money or services.

These tokens will be traded on regulated exchanges, operated by regulated financial entities,

and held in custody by separate entities under close regulatory supervision.

 

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