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Cryptocurrency–Trends, Outlook, Challenges and Regulations

In the past few years, the crypto market has channeled the interest of investors, entrepreneurs and companies and has influenced them to invest in different variations of cryptocurrencies. Notwithstanding the recent flurry of activity in the crypto market, regulatory issues, security and other challenges associated with the industry have become a concern. The article will present a discussion on the trends and outlook of the crypto market and blockchain industry as well as the regulatory issues and challenges associated with the industry.

Trends

  • There is a growing interest from regulators to oversee cryptocurrency activity as security and fraud issues have plagued the headlines, particularly in the ICO realm. Companies that have challenges accessing fundraising via traditional methods are turning to cryptocurrencies to raise funds. Additionally, more startup and venture capitalist companies are also actively investing in ICOs to add cryptocurrency to their asset class mix. [1] In 2017, venture capitalists transacted in more than 120 deals and raised $550 million for cryptocurrency companies.1
  • A trend is also developing for large corporations to embrace the blockchain, where mainstream companies are entering the ICO space.
  • New structures for pricing ICOs have become a new trend. Although, ICOs were priced between $10 million and $100 million in 2017, companies are limiting crowdfunding in large amounts. ICO companies plan to raise amounts in the bare minimum from $2 million to $10 million.
  • ICO adoption is also expanding in different jurisdictions. Territories that have been banned from ICOs may have opportunities to launch ICOs due to new regulation and ICO limitations defined by countries.10


Outlook

  • Increase in ecosystem – A recent published article by the Royal Bank of Canada (RBC) suggested that the blockchain technology, decentralization and cryptocurrency has the potential to become a $10 trillion ecosystem. Although, the cryptocurrency space has been associated with a myriad of risks, the report stated that the protocol layer for cryptocurrency protocols will be an added value that will enhance the success of the ecosystem.[2]
  • In 2018 decentralized blockchains will have challenges with scaling. Although, blockchain transactions and blocks are increasing, small client devices will still experience limitations in maintenance due to the growth in the size of Blockchains. Ultimately, Blockchains will have challenges managing the scale of transactions.
  • Cryptocurrencies will continue to encounter liquidity and volatility in the next year. The commencement of exchange-traded funds (ETFs) and the increased liquidity provided by ETFs caused major swings in the values of cryptocurrencies in December 2017. Value swings and significant volatility are expected to continue in 2018.
  • Maturity and yield in Blockchain. Blockchain-related projects are expected to develop products that have lasting value. New businesses such as Centra Cards and TenX Cards are accepting cryptocurrencies. Holders of credit cards have opportunities to spend virtual currencies such as cryptocurrencies and connect their blockchain assets to global payment platforms.
  • Major correction or major bubble burst. There is the possibility that the blockchain industry may encounter a correction or major bubble burst. Recent concerns published by the SEC reflect a similar sentiment here. While, ICOs are effective ways for investors and entrepreneurs raise money, there are associated risks with ICOs such as potential violation of U.S. federal securities laws.[3]
  • Increase in European ICOs. Although, European companies have a majority stake in ICOs in the global market, it is anticipated that larger European venture firms will engage in ICOs in 2018.10


Regulations

In the digital currency market, blockchain technology is the new trend word. Though a number of major players in the finance market including Ripple, Global BlockChain Technology Market, IBM Corporation (U.S.), Deloitte, Inc., and Microsoft Corporation are investing in digital currencies, the blockchain industry is facing challenges with regulatory and security issues.6 The blockchain industry has not been regulated by the SEC, however, in the past recent months, the SEC is demanding that blockchain companies comply with existing laws.

One of the regulatory issues that impacts blockchain industry is the susceptibility of cryptocurrencies to hacking, violations, breaches and other cybersecurity risks. For example, there can be breaches with digital storage and customer digital wallets. Unfortunately, US regulators do not have the capability to recover lost funds. The decentralization and unregulated aspect of cryptocurrencies can leave victims of hacking with no or little recourse.

Furthermore, the high risk of cryptocurrency investments may not be appropriate for investors. The North American Securities Administrators Association (NASAA) reports that there is the likelihood for investors to lose all their money to crypto-related investments. Other risks that crypto investors face is high risk of fraud. Unsolicited offers, unlicensed sellers and pledged high returns increase the risk of investing in cryptocurrencies. Since many such offerings remain somewhat unregulated, investor threat to losing funds is a reality.[4]

Challenges

Despite the large market capitalization of the crypto market, huge price fluctuations and the increase in demand to trade cryptocurrencies, the market faces major issues associated with structural, functional, security and regulation. One of the major issues that confront the market is excess volatility and liquidity issues. Exchange platforms for cryptocurrencies experience drastic swings in cryptocurrency prices, often caused by larger players. For example, individuals with large holdings, swing the market to manipulate cryptocurrency prices by using a ‘buy and sell wall’ strategy. They open a crypto trading platform with a ‘buy position’ to stir up the interest of investors. Once the price of cryptocurrencies favors the big players, they cash in on the price and the price drastically falls.[5] Price differences and fluctuations have also been attributed to lack of regulation and oversight as well as time and value gaps from trading bitcoin to US dollars and reversing them back again to bitcoin.

Outdated technology also affects the trading of cryptocurrencies. Although, cryptocurrencies involve innovative technology, the existence of outdated technology on exchanges restricts the operations of crypto. Furthermore, there are limited algorithmic triggers on exchanges that have the capacity to halt trading when dramatic crypto price fluctuations mislead the market. [6]

Pump and dump schemes are critical issues that confront the industry. When tokens are presented to the crypto market via ICOs, investors purchase the tokens to trade in fiat money. Implemented processes for decreasing token velocity remains critical for ICO and token offerings.

Furthermore, speculations during ICOs stimulate the prices and attracts more investors. Upon completion of ICOs, entrepreneurs cash out and leave investors with coins that have little to no value.

Another challenge that the crypto market faces is cybercriminal activity. Hackers and cybercriminals are active on the crypto market and engage in hacking the wallets of traders and investors. Millions of dollars have been stolen by hackers and cybercriminals.5

Conclusion

Despite, the buzz about the crypto market and the gains associated with launching ICOs, the blockchain industry has challenges with regulatory and security issues. Recent trends related to the industry include new structures for pricing ICOs, expansions in different jurisdiction and large companies embracing the blockchain industry. Although the industry has a positive outlook, regulatory issues and challenges such as hacking, securities law violations, security breaches, pump and dump schemes, outdated technology, cybercriminal activity, liquidity and coin/token volatility should not be overlooked.

Sources

[1] Tony Simonovsky, Five Biggest ICO Trends for 2018, (Jan 11, 2018), https://www.financemagnates.com/cryptocurrency/news/five-biggest-ico-trends-2018/.

[2] Aaron Stanley, RBC Report: Crypto and Blockchain Could Unlock $10 Trillion Market, (Jan 3, 2018), https://www.coindesk.com/crypto-blockchain-create-10-trillion-market-rbc-analyst-says/.

[3] Ken Alabi, 2018 Blockchain and Cryptocurrency Outlook: Expert Blog, (Dec 19, 2017), https://cointelegraph.com/news/2018-blockchain-and-cryptocurrency-outlook-expert-blog.

[4] Legal and Compliance, LLC, SEC and NASAA Statements on ICOs and More Enforcement Proceedings, (Jan 16, 2018), http://www.reverse-merger.com/tag/icos/.

[5] Hackernoon, Major Problems in the Cryptocurrency Market, (Jan 25, 2018), https://hackernoon.com/major-problems-in-the-cryptocurrency-market-c9c9ff53b266.

[6] Cointelegraph, Crypto Markets are Broken, (Dec 24, 2017), https://cointelegraph.com/news/crypto-markets-are-broken.

Jenn Abban contributed to this report.

Carl Christensen
Carl Christensen is a Principal with Deal Capital Partners, LLC and InvestmentBank.com. Before joining InvestmentBank.com Carl served as CFO for a $50M consumer events company. He is a former employee of both Goldman Sachs and Deloitte. He brings both breadth and depth to the M&A advisory team here at InvestmentBank.com.
2 Comments
  • kalani cripto
    Posted at 22:29h, 08 February Reply

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  • Kerry LINY
    Posted at 04:47h, 16 February Reply

    —-
    Major correction or major bubble burst. There is the possibility that the blockchain industry may encounter a correction or major bubble burst. Recent concerns published by the SEC reflect a similar sentiment here. While, ICOs are effective ways for investors and entrepreneurs raise money, there are associated risks with ICOs such as potential violation of U.S. federal securities laws.[3]
    —-
    Well done!!!

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