Future Challenges in Cryptocurrency

Bitcoin and other cryptocurrencies have gone from an obscure technology to a popular worldwide asset class, fueling all sorts of interesting blockchain projects. But the phenomenon is still in its early days, and the cryptocurrency market remains notoriously volatile. As global cryptocurrency adoption grows, there are a few issues for both investors to keep in mind and for developers to target.

1. Bitcoin Fails to Beat Bonds

Over the course of its first decade of existence, bitcoin stood out as an investment asset thanks to its lack of correlation with the wider equities and commodities market. But the more cryptocurrency investing becomes mainstream, the more it follows the mainstream. Over the last two years, bitcoin has stayed positively correlated with US bonds without offering better risk-adjusted returns than the equities market.

2. The Busting of the Digital Gold Myth

Cryptocurrencies, and bitcoin, in particular, have typically been pitched as a hedge asset against inflation, much like gold. Advocates point to BTC’s deliberately finite supply as a point of comparison. However, market performance during the recent COVID-19 economic disruptions and subsequent inflation has dispelled this myth.

3. Environmental Costs

The energy consumption required for cryptocurrencies to function remains a major roadblock to adoption. One proposed solution by Ethereum and newer cryptos is to upgrade from proof-of-work to proof-of-stake consensus models, but this is not possible for bitcoin, which holds over 40% of the cryptocurrency market cap.

4. CBDCs Could Kill Stablecoins

Central bank digital currencies, effectively digital versions of the dollar, euro, etc., are being researched, which would provide advantages over the current crop of stablecoins and make them redundant.

5. No Consistent Regulation

Investors in cryptocurrency have to deal with a great deal of uncertainty thanks to unclear and wildly varying regulations across different countries, with different implications as to the legality, tax status, etc., of cryptocurrencies.

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