Digital finance is one of the many things that changed significantly as a result of the COVID-19 pandemic. Digital payments, which utilize payment apps and online banking, boomed during the pandemic as lockdowns and social distancing made it difficult to exchange cash. E-commerce also rocketed to new heights during the pandemic, driving widespread acceptance of digital payment systems among consumers and businesses.
The pandemic also triggered growth in the cryptocurrency space. Investments in crypto, which was seen as a hedge against inflation, soared in the uncertain financial landscape created by COVID-19. Bitcoin, for example, started 2020 with a value of just under $7,000 and ended the year with a value of just under $29,000. A number of global companies also began accepting crypto as payment during the pandemic.
One area where crypto has not advanced in recent years is public adoption, as the growth of crypto so far has primarily involved investors and institutions. In fact, consumer interest in crypto is actually on the decline. The apparent reluctance by the general public raises questions about the role crypto will play in the future of digital finance.
Cryptocurrency Basics
Bitcoin, which was developed as a tool for supporting the decentralized exchange of currency, introduced the world to the concept of cryptocurrency in 2009. The technology behind it enables the exchange of digital currency without the need for a centralized bank or other government authority, empowering decentralized finance, or DeFi.
Bitcoin and other cryptocurrencies rely on blockchain technology to establish and protect their value. Blockchain creates an immutable and decentralized public ledger that tracks and verifies the exchange of cryptocurrencies. With each new crypto transaction, a new block containing the details of the exchange is created and added to the coin’s ledger.
Today, there are over 23,000 cryptocurrencies available, with Bitcoin commonly considered to be the most valuable. They are purchased on crypto exchanges, stored in digital wallets, and used to purchase items in a growing number of marketplaces.
Cryptocurrency Investment Strategies
Despite the lackluster interest by consumers, crypto markets continue to grow because of investors. Crypto is a purely speculative investment, as the vast majority of coins have no intrinsic value, and shifts in the market are driven by supply and demand.
Consequently, crypto markets are highly volatile and news cycles prompt quick shifts in market sentiment. Individuals holding huge amounts of certain currencies — known as “whales” — can also influence market shifts with massive buys or selloffs.
This volatility, which scares off the average investor, is considered by many to be natural due to the emerging nature of crypto. The hope is that volatility will decline as crypto matures. For now, however, there are a handful of investment strategies that have been identified as promising in the crypto space.
Buy and hold, commonly referred to as “HODL,” is a popular long-term crypto investment strategy. HODL is a passive trading strategy focused on buying a top cryptocurrency like Bitcoin or Ethereum and holding it for an extended period of time. Leveraging this strategy requires resisting the temptation to cash out when coins rocket upward or bail out when they crash.
Dollar-cost averaging is a systematic crypto investment strategy that focuses on buying a fixed amount of crypto at set intervals. By purchasing once per week or per month over time, dollar cost averaging looks to decrease the impact of crypto volatility.
Crypto trading takes full advantage of the market’s volatility. It is a high-risk strategy that actively buys and sells crypto based on market swings. Traders typically leverage technical analysis to determine the best times to buy or sell.
Regulatory Development
The relative lack of regulation in the crypto space is often cited as a factor that contributes to its volatility. Crypto exchanges have no formal regulators, meaning there is no watchdog to discourage the manipulative practices that can trigger dramatic market shifts. Without regulators, facts about crypto offerings can be more difficult to nail down, which allows hype to drive irregular activity.
US legislators are pushing a number of initiatives aimed at regulating crypto markets. A recent crypto bill moving through Congress seeks to grant oversight powers to the Commodity Futures Trading Commission. Another bill seeks to protect crypto as a means for DeFi, limiting the powers the federal government has to control its use.
The Future of Digital Finance
Legislative developments will undoubtedly play a huge role in the ongoing evolution of cryptocurrency. The appearance of strict regulations could encourage more inveinvestors butld also scare off the investors needed to support crypto through its infancy, as well as hampering the development of the broader crypto ecosystem.
Public sentiment may be the biggest factor in crypto’s future development. While surveys show an overall downtick in crypto adoption, other studies reveal younger Americans are embracing crypto at a faster rate than the overall population. As the US population ages, the emergence of a new spending class comfortable with digital finance could be the push needed to bring crypto into the mainstream.
The author, Philip Alberstat, is Managing Director of Embarc Advisors.