Crypto

Cryptocurrencies and their environment

Ecosystem

Apart from the evolution of the price and the speculative aspect of cryptocurrencies, the ecosystem is facing many challenges that could lead to the disappearance of many players, but could also lead to the emergence of leaders in the sector. During the last bear market, many projects emerged such as FTX, which should also be one of the big winners from the current sector consolidation.

Many players are facing liquidity issues, forcing some of them to ban withdrawals from their platform. This could spread to other players and lead to the collapse of the house of cards, weakened by the decline of Bitcoin and the fall of some stablecoins and other projects.

On the other hand, the difficulties of some increase the stability of others. Indeed, FTX, one of the largest cryptocurrency trading platforms in the world, offers lines of credit to struggling platforms and buys companies in the sector as well as the traditional financial sector. This may allow him to make the most of the situation.

This difference is also felt when applying for a job. While some companies are laying off some of their employees, others continue to develop their teams. This shows that despite the difficulties of some companies, others remain strong and continue to grow. This reflects a booming sector that should continue to grow in the coming years.

In addition, the fall in the price of bitcoin is also putting pressure on El Salvador, which is losing tens of millions of dollars on these purchases, and the loss of confidence in its bitcoin-backed bond project could cause the country to default on payments. for $800 million in government bonds maturing in January 2023. With no more IMF backing, he could find it difficult to fund himself in the markets and force the country into default.

Finally, mining activities are closely monitored. Not necessarily about the profitability of the miners, because it depends on many factors, such as the characteristics of the machines, the price of electricity, or even additional costs.

Rather, a crash that lasts too long could cause more machines to shut down, which could affect the security of the network. The risk of such a configuration is far from being achieved given the mining data, but we must not forget the consequences that may arise.

Environmental impact

Mining activity allows for decentralization and secures the network, but Proof of Work (PoW) verification is heavily criticized by governments and regulators. Ecological footprint is the first argument.

A significant proportion of miners use renewable energy to power their machines, but given that the main cost of this activity is the price of electricity, some of them are created in countries where there is little commitment in the face of global warming and where the use of fossil fuels dominates.

Falling cryptocurrency prices could drive more miners to low-cost countries and increase the use of non-renewable energy sources.

It is difficult to accurately estimate the energy consumption of cryptocurrencies, but some estimates show an impressive amount of electricity required for mining. Market critics regularly use many comparisons of Bitcoin or Ethereum consumption with consumption in certain countries.

The consumption estimate of the transaction carried out by Visa and the Bitcoin blockchain highlights the excessive consumption of the latter. The same comparison is made between gold mining and bitcoin mining, and the same conclusion suggests itself.

However, Bitcoin can fulfill both missions and therefore should not combine them. In addition, the advantage of the blockchain lies in the elimination of intermediaries, therefore, in order to make an appropriate comparison, all consumption of the latter must be taken into account.

Regulation

Regulation is a delicate topic, especially since the collapse of some projects and the blocking of funds from some clients have only accelerated and hardened this desire of institutions at the global level.

In the US, as in the European Union, consultations and bills continue to flow, although the former seem to want to take it slow, time is running out on the other side of the Atlantic.

From regulation of stablecoins to regulation of players and marketplaces, there is a lot of consultation going on. On the other hand, the implementation of various measures that we hope will be aimed at protecting investors and not destroying the market and the sector will probably not see the light until 2023.

Vincent Boy | Market Analyst | GI France

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