The serious volatility of cryptocurrency would make some of us believe that it is having serious mood swings. Either cryptocurrency goes into therapy or we will. However, a lot of cryptocurrency investors appear to be ready to face the volatility as long as they can generate wealth by investing in it. According to a study conducted by the Philadelphia Federal Reserve Bank, over 50% of existing cryptocurrency holders were confident that they will continue making further investments into crypto in the future. Such investors appear to believe that cryptocurrency gives them a great chance of generating significant returns on their capital. And given the way stocks and commodities have performed in recent months, they might have a point.

The Rising Interest In Cryptocurrency

Retail investors have been enamored by stories of how a few dollars were turned into millions when Bitcoin first erupted around 2018. It gave people the impression that quick profits could be made by investing in cryptocurrencies. Large institutions, well-known influencers, and celebrities started talking about Bitcoin and some even invested large amounts in it. This was also the time when a lot of different cryptocurrencies started coming to the market. A study conducted by Pew Research estimated that in 2015, only 1% of US adults had invested or traded in cryptocurrencies. In 2021, that number went up to 16%. So clearly, in the few years between 2015 to 2020, there was a significant growth in the number of investors putting money into cryptocurrencies.

If one delves deeper into this survey, then one will find that men are more likely to invest in cryptocurrencies. About 22% of US adult men were estimated to have participated in the cryptocurrency markets as compared to 10% of US women adults. Also, the younger demographic had a higher involvement in cryptocurrencies than people aged 50 and above. Among ethnicities, Asian Americans were the most active when it came to investing and trading in cryptocurrencies.

A Tough Regulatory Environment

While the interest in cryptocurrencies skyrocketed, regulators were deliberating how to get a grip on the burgeoning cryptocurrency asset class. There were several deliberations and debates. Regulators in some key economies were seen to be sharpening their knives against cryptocurrencies.

Central banks appear to be viewing decentralized currencies as a direct challenge to their authority over a country’s monetary system. They may be of the opinion that a parallel currency hinders their ability to implement their policies and influence the economy.

There has also been the case of New York regulators shutting down any new issuance of BUSD, a stablecoin. Regulators in places like India and China have also had negative stances against cryptocurrencies. Events like the collapse of FTX exchange are poised to attract more negative attention from regulators.

What Drives Crypto Investing Despite The Challenges

The natural question one would have after reading about the challenges of cryptocurrencies is – WHY? Why would someone want to invest in a volatile asset that is being chased by central bankers and regulators? One possible answer could be the lack of belief in traditional asset classes. 

Supporters of cryptocurrency give examples of real estate and the stock market cycle. They point out that investing in real estate requires significant capital upfront. Real estate is also vulnerable to interest rate changes, something we have all witnessed in recent months. A rise in interest rates tends to push down the valuation of real estate causing losses to those who purchased real estate when interest rates were lower. Real estate, in their opinion, becomes a play of being in the right place at the right time and having a lot of capital upfront.

According to some crypto proponents, the concept of being in the right place at the right time is also something applicable to the stock markets. The economy goes through its expansion and contraction cycle and has been doing so for a long time. So, there have been instances when stock market investments haven’t given meaningful returns even after 3 or 4 years, especially if the entry was made at the top of a cycle.

Such perceived challenges in traditional asset classes have led some to think that stocks, real estate, and other conventional asset classes are either out of reach for small investors or have high barriers to entry (such as deep insight). There is also a growing narrative about how the Fed’s money printing is chipping away at the value of money through inflation. Small investors see cryptocurrency as a low-entry-barrier, accessible, and inflation-protecting alternative to generate meaningful wealth.

There is also a psychological part to this discussion on why crypto. You may have heard of FOMO – the fear of missing out. Those who saw the average Joe turn into a millionaire and heard stories about how a pizza delivery person was paid in Bitcoins which were worth millions also want to participate in the crypto boom. This psychological feeling of not wanting to miss out also drives some to attempt to create wealth through cryptocurrencies.

What Does The Future Hold?

There is never a dull moment in the cryptocurrency market. After reading the above, you will probably understand why. Plenty is happening in the crypto world and there is some significant event almost every month. So, the volatility isn’t expected to go away anytime soon. Those traders and investors who can digest the large price variations and other regulatory shocks will likely continue investing and trading cryptocurrencies. However, they may have to use proper risk management principles to protect their capital.

The outlook of cryptocurrencies may also be influenced significantly by how it gets adopted as a payments currency. The regulatory environment and government policies will also impact cryptocurrency prices in a meaningful way. If governments finalize a taxation policy on cryptocurrencies and work out other legal aspects, then cryptocurrency adoption may rise further. The trajectory of interest rates in the US is also another important metric because it affects liquidity in risk assets like cryptocurrencies. Then there is the narrative of de-dollarization.