Cryptocurrency is entering a new season. Ownership is on the rise, with recent reports showing that the number of people who own crypto has doubled over the past three years, reaching more than 65 million in the U.S.
The climb in crypto ownership highlights how individuals and organizations that once kept their distance from crypto, including the U.S. government, have begun to see it as an investment worth considering. However, popularity doesn’t necessarily indicate reliability.
3 Factors Influencing Crypto’s Current Trend
- U.S. government policy and creation of a crypto reserve.
- Industries are taking steps to tokenize assets.
- Development of regulation that could shift crypto away from decentralization.
It’s crucial to determine whether this new season is a good one for crypto, steering it in a direction that benefits both investors and those who want to see digital assets play a larger role in the financial landscape. The following key factors are influencing the current direction of crypto and are expected to play a key role in how it will evolve in the future.
Government Encouragement and Support
U.S. President Donald Trump made it clear during his 2024 campaign that he intended to take a different tack when it came to crypto. While the prior administration did little to support the growth of crypto, President Trump promised to make the U.S. the “crypto capital of the world.”
For the most part, it would appear President Trump remains committed to encouraging the growth of crypto. In the early days of his second term, he signed an executive order to establish a Presidential Working Group on Digital Asset Markets to secure America’s position as “the world’s leader in the digital asset economy.” The order aimed to undo actions taken by the Biden Administration that President Trump said “suppressed innovation and undermined US economic liberty and global leadership in digital finance.”
However, there are also feelings in the industry that government initiatives have not gone far enough to provide the framework needed for crypto to flourish. The recent call for a Strategic Bitcoin Reserve, for example, left some experts feeling that the momentum is flagging.
The March 6 announcement on the reserve explained that it would be created from the US government’s current Bitcoin holdings, which include only digital assets acquired through criminal or civil asset forfeiture proceedings. Investors seemed frustrated, however, that the order stopped short of committing the U.S. to future crypto investments, which said that only the Treasury and Commerce Departments “are authorized to develop budget-neutral strategies for acquiring additional bitcoin.”
The U.S. government’s current attitude toward crypto is encouraging, indicating they are committed to moving crypto in a good direction, but most activity to date has involved only promises. To truly see positive change, the government will need to take solid steps to translate its intentions into actions.
Why Crypto’s Utility Still Remains Shaky
Bitcoin, which remains the flagship asset in the cryptocurrency space, was launched to provide consumers with a “peer-to-peer electronic cash system” that could support e-commerce. Since the launch, however, Bitcoin and other cryptocurrencies it inspired have not achieved the level of utility initially suggested. Hype, rather than practical application, has been the primary driver of market movements.
There are signs that things are shifting in a way that could encourage more utility. As more large financial institutions enter the crypto market, legitimacy, expertise and capital grow. The SEC’s approval of crypto-based exchange-traded products in January of 2024 is another step in the right direction.
Industries are also taking steps to tokenize assets, which adds more momentum to mainstream adoption. The real estate industry, for example, is exploring how tokenization can open the market to smaller investors and streamline the sales process.
Yet, more is needed if utility is to become the norm. The framework crypto rests upon is still shaky, a situation caused primarily by the lack of clarity from officials with the authority to map out its future.
On the day following the announcement of the Strategic Bitcoin Reserve, the Trump Administration hosted what it called the first-ever White House Digital Asset Summit. Those who had high hopes that the White House would lay out a solid path for crypto development moving forward were disappointed. Official comments on crypto from officials were ambiguous, creating an atmosphere that will likely discourage institutions from entering the market and cause price volatility in crypto markets.
Crypto’s Interplay Between Regulation and Decentralization
Cryptocurrency was designed to function in a decentralized environment. Just like cash, which is exchanged from buyer to seller with no intermediary, it was meant to be managed without the oversight of a trusted third party.
Such decentralization, however, can be intimidating to consumers who are more comfortable with a credit card company managing their transactions. Consumers want convenience and protection, which conventionally has involved centralization.
While idealists in the crypto space remain committed to decentralization, a more practical perspective sees a certain level of regulation as key to legitimizing the industry and inspiring innovation. Enhanced investor protection fueled by greater transparency and accountability would make it easier for new players to enter the market. Greater regulatory clarity would also allow crypto companies to develop new products with confidence.
However, greater regulation could inadvertently lead to a shift from decentralization to institutionalization. If requirements raise the barrier to entry, the industry could become dominated by a small number of large developers, leading to an environment similar to the current financial services market. Regulation could also place exchanges at the center of the crypto landscape, which would shift activity away from pure peer-to-peer platforms.
Much of the current interest in regulation focuses on protecting crypto against use by criminals through the application of know your customer (KYC) controls. If such controls are ultimately applied to the industry as a whole, it could result in a framework that frustrates any attempts at decentralization.
Growth is challenging for any industry, but especially for one as innovative as crypto. To move toward maturity without abandoning its initial vision, key players in the crypto space must remain committed to providing clarity and pursuing healthy regulation, ultimately leading to an environment where consumers and investors can find the type of utility that drives long-term growth.
