Ethereum co-founder Vitalik Buterin shared in a recent interview that he’s worried about crypto’s future. He cautioned overeager investors from swarming crypto, hoping for a gold rush. Buterin’s warning comes after this week’s Federal Reserve quarterly meeting, announcing that interest rates will increase by a quarter percentage point. This is the first time the Feds have raised rates since 2018.
In major crypto news last week, President Biden also issued an executive order outlining the “responsible development of digital assets.” While this was fairly well-received since it didn’t specify a regulatory path, it does mean that the U.S. is prepared to coordinate further action. Unfortunately, this is enough to make some investors uneasy.
Furthermore, the context of the COVID-19 pandemic, 40-year-high inflation, and the Russian invasion of Ukraine is all bearing down on markets.
Each of these factors will significantly affect crypto’s longevity. One expert, the man behind Ethereum, worries that crypto is on the wrong track.
Vitalik Buterin Worries About Crypto’s Future
Buterin warns that crypto is not a get-rich-quick scheme and that investors should still stick to tried-and-true principles. This means understanding your goals and keeping under 5 percent of your portfolio in crypto.
Known as the world’s youngest crypto billionaire, Buterin is a voice of influence who worries about how greed will harm crypto.
“Crypto itself has a lot of dystopian potential if implemented wrong,” Buterin said.
With one of the biggest names expressing concern, let’s understand the main factors affecting crypto this year, starting with rising interest rates.
Interest Rate’s Impact on Crypto
One lesson from early 2022 is that crypto markets are sensitive to interest rates.
After the Federal Reserve hinted that it planned to increase rates, markets responded. Many investors sold off their crypto, opting for a less volatile haven for their funds. On January 22nd, the price of Bitcoin fell to $35,075, a stark difference from its November all-time high of $69,000.
So, why are interest rates and the price of crypto correlated?
Generally, as inflation endures and higher interest rates approach, consumers raid their crypto piggy banks. Instead, they opt to invest in assets they see as less risky, such as risk-free bonds.
Additionally, consumers have less liquidity than before. As a result, those who invested excess stimulus check funds in crypto may now withdraw them.
Stock markets also took a hit in response to the interest rate news, so crypto isn’t alone.
Experts predict we may see as many as seven more interest rate hikes this year.
Other Factors That May Spell Trouble for Crypto
It’s not just interest rate hikes that have crypto investors keeping a watchful eye on their portfolios.
2022 is set to be a year of global crypto regulation. Digital assets have matured, and governments are seeking to regulate this newer economy that is defined by being unregulated.
This week, the European Union (EU) took a big step toward passing broad regulation. Meanwhile, Ukraine has signed a bill into law legalizing crypto amidst its invaluable role in funding its fight against the Russian invasion.
As crypto becomes more mainstream, a crucial factor in its sustainability is the level of trust consumers have in it.
Breaches undermine this trust. And while crypto cybersecurity does a great job at rooting out the culprits, thefts like February’s $320 million hack of Wormhole, a popular DeFi platform, damage crypto’s image. This can hurt the market in the long term.
Lastly, environmental concerns appear to threaten the success of cryptos like Bitcoin that rely on energy-intensive Proof of Work (PoW) mining. Yet Bitcoin remains the biggest name in the space, regardless of ongoing criticisms from environmentally-conscious consumers.
Meanwhile, cryptos like Cardano and Ethereum that either use or are working toward alternative kinds of mining have a lower economic impact.
Promising Signs for Crypto
Though conditions aren’t as bullish as they could be, cryptocurrency still has quite a few things going for it.
First, institutional and mainstream support for crypto is on the rise. Big banks like Goldman Sachs and JP Morgan Chase are throwing capital into crypto markets and adding to their in-house crypto capacity. In addition, celebrities like Reese Witherspoon, Elon Musk, Snoop Dogg, and more are publicly endorsing various coins and NFTs.
Finally, the growing demand for Decentralized Finance, or DeFi, and non-fungible tokens, or NFTs, in particular, isn’t slowing down. This is true even when demand for other blockchain products is down.
Take the last time interest rate news caused crypto markets to drop as an example. While Bitcoin and Ethereum were down in January, NFTs were thriving. The major NFT marketplace OpenSea broke records with over $5 billion in trading volume.
But Buterin stated in his TIME Magazine interview that the influx of NFT investors should still be reasonably conscious and not expect to become overnight millionaires.
“The peril is you have these $3 million monkeys, and it becomes a different kind of gambling,” said Buterin, referring to the massively-popular Bored Ape Yacht Club NFT. Bored Apes trades for million and are held by stars like Jimmy Fallon.
Varied Predictions of Crypto’s Future
Unsurprisingly, there’s tons of division among experts about whether Bitcoin and other digital assets can hold onto their value heading into 2023.
Some experts characterize this year as a bit of a “crypto winter” that may or may not last.
On the other end of the spectrum, some think crypto price depreciation will only happen in the short term. These analysts continue to predict that bitcoin will hit new highs this year, from $100,000 to $500,000.
This is certainly not impossible based on past cycles, though 2022 brings added layers of uncertainty to the market. If so, crypto investors should ride out the storm, says Michal Cymbalisty, founder of Domination Finance.
It’s too soon to predict exactly how this week’s Federal Reserve news combined with President Biden’s Executive Order will affect crypto markets in the long term. But, as Ethereum’s Vitalik Buterin warns, crypto’s future may be at a critical inflection point. So for investors and non-investors alike, it’s worth watching to see where crypto markets are headed as the world of crypto continues to grow.
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