A Deep Dive into Crypto

Crypto has never had such solid foundations and prospects for future growth as today.

Crypto is no longer the domain of nerds and outcasts living in their basement and mining digital coins.

It is entering the day-to-day world of the youth due to the change of the Internet we see nowadays. It slowly becomes the new standard. Constantly growing and solidifying its foundations even during the times of emotional apathy after the bull run hype.

Intro

The price of Bitcoin rose and fell across the previous cycles setting new All-Time Highs each time. However, what matters is not only how high we rise but how low we fall as well. In this case, each cycle’s bottom was set at new and higher All-Time Lows.

One may think there is only one way for us to go — to rise in price after each cycle. Before reaching such conclusions, we have to ask ourselves some questions.

Why does the price of crypto assets rise? Is it only pure speculation on a new asset class resembling the dot-com bubble?

Do we have new money flowing into the space?

Are developers devoted to building, or are they leaving the space?

Is crypto space becoming more friendly for newcomers?

What about the change in the perception of digital assets by the regulator and other financial institutions? Is Bitcoin from the 2017/18 bull rally the same as the one from 2020/21?

There is no definite answer to that question. However, we have to consider the massive shift in fundamentals of the whole crypto industry that has been taking place for some time and has rapidly accelerated in the recent year.

The Regulations

For crypto assets to be legally traded on a Centralized Exchange like Binance or FTX, we need legal regulations allowing real-world companies to do so.

The better the regulation, the easier it is for the company to flourish as it does not have to worry about the lack of regulation. Therefore without proper directives, companies have no clear path to follow in order to obey the law and not be sued in the future.

Lex Prospicit Non Respicit — The law looks forward, not backward.

Well… not in the financial world.

Imagine setting up your business where no one tells you what is legal and what is not. Additionally, at any moment, you might be sued for past doings, which the regulator will find illegal. On top of that, we cannot be certain about the future as we might encounter a regulation introduced the following day, crippling our whole business model and making us unable to operate in the same way we did in the past. Not to mention the financial penalties that might follow.

Having established how important proper regulation is for the future of the whole industry, we might advance to real-world examples.

One of the most important legal decisions concerning the crypto industry is coming to European Union. In the following months we will witness the final form of the Markets in Crypto-Assets regulation, also known as MiCA.

In short, MiCA’s aim is to thoroughly regulate the market of crypto assets in the European Union, making it easier for the companies to operate in EU countries. The set of rules MiCA is going to introduce will encourage crypto-related firms to settle down and operate on the Old Continent, increasing the odds of making the EU the world crypto hub.

The European Union became the vassal to the USA in the terms of Web2, in other words, the present Internet. So why not try to turn the tables and become the leading figure in the realms of Web3?

Not every European state is equally safe from the regulator’s point of view, and that is something worth taking note of. Taking a look at the Financial Action Task Force (FATF) list of countries, we might see different levels of trust.

London’s wish to become the crypto hub for various companies does not seem to be disrupted by the regulatory companies as the UK is ranked as a safe state. In fact, London is one of the biggest financial hubs in the world, and such having position might be easily leveraged.

Taking a small trip to the South, we will see Gibraltar, which has been demoted from being a safe state to the grey list of countries and put under increased supervision due to several reasons listed in the FATF report.

The opposite example is Malta, which tightened its laws and vigorously fought illicit funds operations. In response to its engagement, Malta has been taken off the grey list and marked as a safe state. The sheer fact of being on a grey list or a list of safe countries is negligible for the average citizen. However, it is crucial to the reputation and financial possibilities, or their lack, a given country might experience.

The point I wish to make here is that the regulatory foundations are crucial to making long-term plans and becoming a leading figure in the crypto asset industry.

The vision of anonymous crypto transactions and detachment from the state always has been of great importance to many individuals in the crypto space. However, crypto will not be allowed to grow as an industry without proper regulations. It is a sad truth we all have to embrace.

Maybe the development and spread of zero-knowledge proofs technology will change the state of things; however, for this to unveil, we will have to wait for at least a couple of years.

One of the Anti-Money Laundering (AML) procedures, called Know-Your-Customer (KYC), has been opposed by many due to the aforementioned anonymity reasons. However, taking a shift in the perspective, we might see many crypto exchanges and similar crypto-related platforms strictly following the KYC and other AML procedures. The better the procedures, the easier it is for clients to legally cash out their money.

As for those who do not wish to pay taxes, there is always a way to do so if you are very devoted.

Can this be considered a positive phenomenon? It depends on your anonymity and data security attitude. Nonetheless, I would risk stating it is a positive phenomenon leading to faster and smoother crypto industry regulation across the continents.

Why across the continents? Because the laws have to be mutually accepted and introduced to provide a friendly environment for the industry to grow despite the location.

What if, on top of regulating crypto assets, we will establish Bitcoin as a legal tender in the country? El Salvador followed the path of becoming the first country to adopt Bitcoin as a legal tender, in other words, accepting Bitcoin as a currency. Panama took similar steps and accepted Bitcoin as a legal tender in part of their country, creating some sort of a Bitcoin hub.

It might not be huge news today, but who would have thought a couple of years back that Bitcoin would become a legal tender in a country?

Who knows what awaits us in the near future…

The better regulations are introduced over time, the easier it will be for the crypto industry to flourish and grow, increasing the overall safety of both customers and companies.

The Stablecoins

One of the most significant aspects of the whole crypto industry are stablecoins.

Setting up an account on a crypto exchange is neither a complicated nor a lengthy process. Once entered the exchange, you will see the trading pairs available to you, and most of them will be traded to a stablecoin like USDC, USDT or DAI.

For the newcomers, it is rather logical and something they are used to. You are buying Bitcoin with your USDC dollars — BTC/USDC — and not buying an XYZ altcoin with Bitcoin — XYZ/BTC.

Although such trading pairs might not be the first choice nowadays, those were almost the only ones available during the bull run of 2017.

Tether (USDT) was the first stablecoin, out of the main ones today, that got introduced to the market in 2014 and started trading in 2015. The second largest stablecoin by market capitalization is the USD Coin (USDC), issued by Circle and entered the market in the second half of 2018. The third most common stablecoin DAI was issued at the end of 2017 as the Ethereum smart contracts involving DAI stablecoin were officially launched.

During the recent bull run, the stablecoin’s significance in the crypto industry grew immensely and became an inseparable part. The whole submarket of stablecoins emerged, led by the Curve protocol, where most of the volume is created by trading stablecoin pairs and providing liquidity. Additionally, Curve seems to have plans to issue their own stablecoin soon.

Coming back to the previous chapter, we might see that the crypto regulation I have talked about does not only concern Bitcoin, Ether and other cryptocurrencies. It also regulates crypto assets like NFTs and, more importantly, stablecoins which became a doorway to the crypto industry for the newcomers, spreading the adoption of digital assets.

The crypto industry is growing, and so is the importance of stablecoins, their usage and their connection to real-world assets. I will even risk stating that stablecoins became the backbone of the whole crypto industry. Therefore it is crucial for them to be secure, thoroughly audited (yes, I’m looking at you, Tether), and safe to use from a legal point of view.

The Blockchain Security

For those of you who have been in the space for some time, the Chinese crypto banning saga is almost a feature in crypto.

If you are new, let’s do a quick recap.

China has been banning crypto, then saying it is legal, then banning it again, and so on. Those decisions, or manipulations, had a significant impact on the market and the price of Bitcoin. However, each time the ban occurred, the impact seemed to lessen.

The year 2021 brought us a little bit more decisiveness from China as they banned Bitcoin mining and shut down all Bitcoin mining facilities on its territory. The event led to the fall of the Bitcoin hashrate by about 50%. However, the hashrate quickly began recovering as the miners decided to move their facilities to other countries like the United States and Canada.

The visible collapse in Bitcoin hashrate due to China’s ban on crypto mining.

What could have happened if such an event took place in the early days of Bitcoin? We can only wonder about the consequences and whether it would bring doom upon Bitcoin or not. However, such a stress test proved the security and resilience of the network, strengthening the faith in Bitcoin.

The Merge of Webs

It is hard nowadays to find a person without a smartphone. Having constant access to the Internet made smartphones an inseparable part of our daily lives.

The Internet as we know it today could be referred to as Web2. The upcoming (r)evolution will change the Internet by incorporating blockchain technology, decentralization and other features. Web2 will evolve into Web3, and a new chapter in the era of information will begin.

How is it tied to the fundamentals and overall strength of crypto?

It all comes down to the fact that Web3 is slowly trying to expand and attract new clients by merging with the present Internet.

One of the most prominent usages of the Internet happens with our smartphones being constantly connected to the network. So why crypto companies shouldn’t try to get into the smartphone market?

The recent announcement of Polygon creating a metaverse smartphone along with HTC and Solana designing its own smartphone called Saga seems like a reasonable step to establish the grounded position of crypto companies in the real world.

Another example might be the FTX exchange with all its partnerships, sponsorships and company acquisitions. However, it is the topic for another article as the influence and advertising leverage FTX creates is astonishing. Let me just say FTX has bought the rights to the American Airlines Arena in Miami, renaming it to FTX Arena and playing the game of PR incredibly well.

The User Experience

In the early days of crypto, it was quite hard for an average human being to buy Bitcoin or any other crypto asset. Even today, some applications are cumbersome and might overwhelm the potential user, especially the one who does not feel accustomed to the technology.

Along with the shift towards the smartphone industry and the NFT hype, crypto is seeing a visible improvement in providing its customers with high-quality application interfaces leading to a more satisfactory user experience. The visuals are becoming more appealing, and the interface becomes clear and user-friendly, making the apps intuitive and easy to use.

The whole process of onboarding new clients becomes faster, and all the bottlenecks are being identified and solved. The industry prepares for the incoming wave of new clients.

The easier the access and the visuals, the more people will enter crypto in the following years.

The Retention

The cycles come and go, as does people’s interest in crypto. The market conditions, prices and cycles might differ; however, emotions always stay the same.

It’s one of the most important lessons and rules, not only in crypto but in every financial market. The below graphic is the most iconic one, showing how people behave in the markets. It’s the holy grail of every investor since…

… emotions on the markets always stay the same.

The inflow of new people to the crypto space is extraordinary in times of bull markets, especially during the last phases when the euphoria peaks. The price reaches its heights just to experience the downfall. As the price falls down, reaching lower lows, the emotions change, the interest falls along, and people begin to leave the space full of anger, resentment, and despair.

Once bitten twice shy, as George Michel sang?

Not everyone, as each cycle introduces new people to crypto who are going to stay here long term for various reasons. One might have found a job as a developer, the other might have been very successful as an investor, and someone else might have learnt and experienced so much, that he gained an understanding of what crypto might become in the future by seeing the hidden potential.

More and more people decide to stay in the crypto industry, making it a more secure, vast, and exciting place. New friendships are made, new contracts are signed, and another Arthur Hayes’ article gets published.

Over time the space becomes more solidified and prepared for a new wave of interest growth and emotional rollercoaster. Crypto consists of more and more people who are not going to leave, no matter what happens. No matter the odds.

The Opportunity and Loss

The waves of emotional interest and inertia among retail investors are obvious to anyone who has been in the markets for some time or for people interested in human psychology.

If you master both, well… that’s a worthy edge to have on the markets.

How does it affect crypto-related companies and various crypto projects?

What we see today is a duality of mass layoffs and numerous hiring offers. Even the biggest players on the market are following the scenario of parting ways with their employees. The NFT niche giant, OpenSea, decided to lay off 20% of its staff due to market conditions and decaying interest. It might sound reasonable since the NFT craze indicated this bull run euphoria phase with mindless projects reaching exorbitant prices but…

What about exchanges? Those do not seem to be so intertwined with the NFT hype, yet Gemini exchange laid off 10% of its employees a couple of weeks ago and announced the second round of layoffs. Blockchain.com decided to close its Argentina-based offices and halt its expansion plans in several countries.

The reasons might vary, however, the most common ones might be an overall decrease in profit, negative cash flows, or loss in the value created by holding or trading certain positions. Not to mention the recent events connected to 3 Arrows Capital (3AC) problems that took its toll on the markets and some companies in particular.

On the other hand, going through crypto-related job-offering sites, we will see numerous hiring offers. It indicates the devotion of some companies to building projects despite harsh market conditions. Although devotion is a nice addition, the prerequisite to building projects is the money.

If we take a closer look, those are not only the projects from a certain niche in crypto like DeFi or Metaverse. Skimming through the job offers, we will see companies and projects from the NFT world like LooksRare. The sheer fact of companies spending their money to build their position in the NFT space tells us something about the future of Non-Fungible Tokens and the overall state of particular projects.

Dissecting the job market in crypto might help us see who is building and who is not. What niches and projects are here to stay in the long run, and what has been only a hype-driven trend.

The projects are better managed financially, having saved enough money throughout the recent bull market to operate and build all the way through the crypto winter or have positive cash flows, which is an even more positive indicator as making a profit during a bear market is not an easy thing to do.

What does it tell us about the foundations of crypto?

It is evidence that crypto is growing despite market conditions and constantly strengthening its foundations to be even more resistant in the years to come.

The Onboarding

The growth allures greed.

What is the reason brands are coming to crypto? It is either the financial profit or the expansion to find new clients. To not miss an opportunity to gain recognition in the digital world emerging before our eyes.

On a daily basis, we are bombarded with news about new money flowing into the space and various real-world personas and brands securing deals with crypto projects and companies.

Binance, the leading crypto exchange, has secured the deal with Cristiano Ronaldo bringing the highly influential and world-renowned individual to the space. Adidas entered the metaverse with their own projects, partnering with the most prominent collections in the NFT world and securing their spot in the future market. However, it is not only Adidas who is eager to enter the new market; Nike has bought RTFKT, a company devoted to creating NFT projects and is doubling down on its development.

So far, I have talked mostly about people and brands related to the sports world, and there is a reason behind it. I will try to explain my point of view in the following way.

Digital world -> Digital entertainment -> Games -> E-sport -> Sport

It is not an evolution. It is rather an image of intertwined connections between those domains. In other words, the traditional sport was a natural next step in the growth of metaverse interest as it is focused on entertainment just as a huge chunk of the digital world. That is why brands are flooding the crypto market with acquisitions and investing in various projects, especially the ones from the metaverse niche. It’s a buying spree this market has never seen before. Especially the one FTX is doing.

The metaverse allows us to create our avatars, our digital selves or the digital persona we wish to be. What does the avatar need?

To be personalized. To be one of a kind. To be unique.

So what about clothing and gadgets? Yeah, that will do.

And so we have advanced to the next level. The level where we do not only see Adidas and Nike NFT clothing but also more exclusive brands like Prada and other fashion labels following its way. At the end of day, why should you wear a hoodie if you can yourself a Prada outfit?

One might think the NFT hype has already vanished or will die out during crypto winter. The thought process here is correct, and I do not wish to argue on this matter since the hype around NFT was very similar to any other euphoric trends in the past cycles. However, we have to remember that NFT technology is far more than just silly profile pictures and apes.

It is a game-changer technology in the world of culture and entertainment we can barely use today due to technological constraints and lack of imagination. We have entered an unpaved road and cannot yet imagine what is possible. As we have seen lately, the NFT is associated with overpriced pictures and nothing else, indicating how long is the road before us.

If you wish to learn what NFT is and what it might become in the future, I highly encourage you to read the following article or the short summary where I took a deep dive into the world of NFT and the future of Web3. The article and summary are based on the interview with Punk6529 hosted by Raoul Pal I had the pleasure to listen to.

In short, we are building the digital world of Web3, also known as the Metaverse, where Augmented Reality will be as common as smartphones are today. The world where advertising possibilities are boundless and consumer needs unsatisfied. That is why brands are trying to secure their place in the future market with abundant opportunities for acquiring new clients and growing their recognition.

Therefore the foundations of crypto are strengthened by world-renowned companies and individuals who do not want to miss the once-in-a-lifetime opportunity of being early.

The Takeaway

Crypto is here to stay. Developers are here to build. Brands are here to grow.

Do not be mistaken by catchy doom-foreshadowing articles and videos. Their only use is to catch the attention, to profit from the resentment and other negative emotions.

In the world of abundant information, knowledge is scarce.

Take one step away from the biased information and look for the facts. Give yourself time to analyze it and come up with your own conclusions.

Stay safe.

Stay curious.

Till next time.

~M.E.

Also published here.