The future of cryptocurrencies: boom or bust?

Despite the recent challenges, many are still drawn to the promise of a technology that could make financial intermediation faster, cheaper, and more efficient.

The cryptocurrency market was valued at almost £1 trillion (yes, trillion) at the start of last year, but has since experienced a 64% slump, now sitting at £675 billion as of January 1st, 2023.

In 2022, the industry faced numerous scandals and speculation, from ‘pump-and-dump’ schemes to impending legislation. The high-speed implosion of FTX in Q4 dealt a significant blow to cryptocurrency’s reputation, causing market value to significantly drop in November and daily trader volume to decrease by 33% when compared to the previous quarter.

Match that with increasing living costs, reducing investors’ appetite for risk and speculative investment strategies, and the cryptocurrency industry (which depends greatly on trader volume and customer trust), has faced a tumultuous year.

Despite these challenges, many are still drawn to the promise of a technology that could make financial intermediation faster, cheaper, and more efficient. New currencies are constantly emerging, with online influencers attracting younger generations who are seeking additional income streams to manage real-world inflation.

Cryptocurrency familiarity and investment among millionaires

In Q2 of last year, data from MillionaireVue showed that more than half (52%) of UK millionaires were familiar with cryptocurrency. Among those, 27% had invested, with VHNWIs (£5m+ in assets) as the most common investors (45%). Familiarity with cryptocurrency among US millionaires was lower at 38%, but VHNWIs were also the most common investors (56%).

Interestingly, in the UK, young millionaires (aged 18-34) were the primary drivers of cryptocurrency investment, with 46% having invested previously, compared to 36% of 35-54-year-olds and only 10% of those over 55. However, in the US, 35-54-year-old millionaires had similar engagement levels to their younger counterparts.

Additionally, male millionaires in both markets were more familiar with cryptocurrency, with US males having significantly higher familiarity rates (46%) than their female counterparts (29%).

When it comes to cryptocurrency purchases made by UK millionaires, digital art in the form of non-fungible tokens (NFTs) was the top choice, accounting for 49% of purchases.

This was followed by physical luxury goods (34%), tech or e-commerce products (31%), and digital luxury goods such as metaverse fashion and gaming skins (31%). However, in the US, NFT purchases ranked fourth.

Gen Z’s interest in cryptocurrency

Unsurprisingly, Gen Z (the most tech-savvy generation) are also interested in cryptocurrencies and the lure of a quick buck. Gamification and financial influencers may have driven awareness with this audience, who are particularly interested in the potential of these assets.

Last year, almost a third (32%) believed cryptocurrencies will change the world, a 14% increase since 2018. In contrast, only 29% felt the same about the metaverse.

However, Gen Z is currently placing more emphasis on saving, as there has been a 5% year-on-year increase in the number of 16-24s who have chosen not to invest.

One possible explanation for this trend is that inflated prices in the UK have led to a decrease in disposable income. As a result, Gen Z’s investment in cryptocurrencies has dropped by nearly 50% compared to the previous year.

Hedge against inflation

Cryptocurrencies weren’t the only assets to struggle in this environment. Prominent tech stocks like Amazon, Netflix, and Tesla are also down more than 50% this year. While these stocks turned upward in November, the crypto industry continued to decline following the FTX bankruptcy.

Cryptocurrencies’ prices are based on global demand, rather than national inflation, as they aren’t tied to a single currency or economy. The number of coins available is limited, preventing inflation from occurring.

However, investors are currently less likely to hold onto their crypto investments in the current economic climate and may cash out sooner., Resulting in a decrease in coin ownership.

As the number of coin owners decreases, more coins become accessible, leading to a decline in their value. For popular cryptocurrencies like Bitcoin and Ethereum, a significant drop in coin ownership can cause a decrease in the overall global market value.

Looking forward

Despite the FTX aftermath, it is essential to recognise the inherent value of the infrastructure backing cryptocurrencies, rather than the currencies themselves.

Traditional banking systems use third-party intermediaries for transaction processing, which raised concerns after the 2008 economic crisis. Cryptocurrencies, on the other hand, rely on blockchain technology, which offers anonymity and greater reliability for transactions.

As the blockchain continues to grow in 2023, investors should be aware that the current macro environment, lack of regulation and confidence in cryptocurrencies will continue to impact the industry.

Notably, the more scandals that ensue, the more the industry becomes tainted. The lure of innovation will mean nothing if risk overshadows reward and investors and consumers alike stop spending.

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