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The Power Balance in The Cryptoverse: Who or What is Driving the $3 Trillion Cryptocurrency Market

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On one side, we have respectable crypto millionaires dubbing Bitcoin “a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy” (I double-checked the quote). Crypto-savvy opinion leaders echo the sentiment with “Bitcoin is the Archimedean fulcrum for a global, digital, non-state economy.” 

Crypto zealots’ flamboyance is countered by numerous old-school investors and the general “old fart” types who don’t mince words defining the crypto craze in no less colourful language. New-wave academics don’t fall far behind with statements like “Bitcoin is a gambler’s fear index for rich people. […] The notion that Bitcoin is a harbinger of the democratisation of finance is complete horseshit.” 

Amid all these wordy spars on the citizenry side, governments take steps “for” or “against” that would make even the coolest heads spin. On the one hand, New Zealand adopts crypto as the legal means of paying salaries, and El Salvador passing the Bitcoin Law gives Bitcoin a legal tender status in the country. On the opposite side, we have China banning crypto altogether and India about to do the same while working on their CBDCs along with the rest of the civilised world. 

It’s no longer a competition. The space is beginning to resemble a mud-wrestling pit before the final gong, so this may be a high time to clean up the grapplers, look them in whatever’s left of their eyes, and see who or what drives this generational, social, and political phenomenon we call cryptocurrency markets.

Big Tech

No doubt, Big Tech (let’s call it fintech for euphony) plays a significant role in driving the cryptocurrency markets, but since it relies heavily on discounted government options, it can hardly be considered the actual “driver” of the cryptocurrency markets. It’s the jolly (as opposed to vicious) circle that began with the 2008 crisis and hasn’t been broken since the TARP elevated QE to a systematic trait of the markets. As a result, parachute money and negative rates created the monetary surplus that had to be syphoned into something, anything. The social sector, infrastructure? Nope, that’s not how capitalism works. 

Luckily, the Silicone valley extended a helping hand, which once again appropriated public resources for all kinds of privatised technological experimentation. We’ve already seen something similar in the mid-20th century when then-big tech utilised publicly-funded research for private gains resulting in, among other things, today’s iPhone. Fast-forwarding to Satoshi, whose paper changed the world once and for all by throwing blockchain in the pot with the rest of the ingredients for the Web 3.0 soup – same thing. It was inevitable that DeFi would attract the kind of institutional attention that it does today: fifteen years ago, institutions paid for it with the money they got from the taxpayer. Now they want to cash in. 

But that’s big tech. Smaller tech is now on its own footing creating solutions for paying in crypto for groceries, building hybrid payment services for practical use in what I call the “token economy.” There are plenty of cases of technology evolving to accommodate the growing cryptocurrency landscape. The likes of PayPal and Visa have all moved to adapt their models to transact cryptocurrency in recent months. Hybrid fintech platforms have been working tirelessly on bridging the gap between digital assets and legacy banking, and many successes have lately emerged from this space. 

DAOs 

It’s appealing (to say the least) to think that DAOs are the drivers of cryptocurrency markets, especially after the infamous ConstitutionDAO escapade. By now, we know that the $45 million to buy a copy of the US Constitution wasn’t enough, and the online flashmob was promptly disbanded, but that’s not the point. 

The point is that we have to remember the old adage that today rings truer than ever: everything new is well forgotten old. Our brilliant content team has done a 10-minute video on how similar self-rule is in ancient cultures to today’s developments in blockchain-based autonomous governance. And how persistent humanity was in implementing this governing concept through passionate volunteers, like-minded followers, and core principles (yes, often compensated handsomely) through history. And the reason that DAOs are all the rage today, attracting more and more institutional money is simple: it works. 

Whether DAOs actually drive the cryptocurrency markets remains largely unanswered, but many believe that the DAO structure is the most promising for the token economy. The proof is in their treasuries: Andreessen Horowitz-backed Friends with Benefits (FWB) DAO manages more than $700 million in assets. The Gitcoin DAO is estimated to have a treasury worth more than $643 million, and the list of DAO millionaires goes on.

Still, many DAOs cater to crypto newcomers, and some donate to charitable causes. The space is indeed full of scholarship programs and multimillion-dollar donations to various charities because cryptocurrency markets are primarily based on social proof, and projects like Dirt, founded by journalists Daisy Alioto and Kyle Chayka, crypto social clubs like PleasrDAO and almost numberless hosts of others deliver plenty of it.

DeFi

There’s another potential cryptocurrency market driver for you that’ll make your head spin. Since December 2020, DeFi’s potential has seen tremendous interest. The recent Consensys report indicates that as of July 2021, 183,000 people had staked upward of 5.8 million ETH on Ethereum protocols, scoring an inflation-beating average of 6.8% APR in the process (not taking into account the underlying asset-price increase Ethereum has undergone). At the time of writing, defipulse.com clocks at $85 billion of TVL (Total Value Locked) in Ethereum DeFi protocols, with the all-time high TVL topping at just under $100 billion.

Furthermore, striving blockchains like Solana, Avax, and the Binance Smart Chain also offer DeFi solutions, each with its own token set. DeFi Llama, which aggregates TVL from larger chains, estimates current TVL in DeFi to be $175 Billion, with an ATH of over $200 Billion.

These are some dizzying figures. Clearly, the DeFi world is maturing, but it’s not allowed to drink alcohol just yet. Perhaps, simplified liquidity onramps, concrete regulation, and crypto literacy will unlock the genuinely massive potential of this new technology. However, the possibility for global permissionless engagement with the market is still limited by access to capital, government resistance, and a host of other factors that are just too many to list (though putting DeFi in a driver’s seat of the crypto markets surely sounds like a lot of fun).

Institutional Investors

Institutions don’t drive progress, they don’t care about innovation at the brain-storming stage. They sit back and watch (it’s called “trend monitoring”); just remember what the C-level execs have been saying about the cryptocurrency markets five years ago. 

Over the last few years, the trends have been staggeringly indicative of crypto going mainstream. But it was the early stage adopters and miners – not the CEOs, who ploughed through every obstacle and restriction in their way to give the space enough coins to play with, and boy, did they deliver! 

Today after years of “trend watching” investment bankers rejoice at unparalleled opportunities to put newly created assets to work and make “hot money” even hotter. Or in the words of Mark Blyth, Brown University economics professor, prominent writer, and brilliant podcaster whom I never tire to quote, “…so long as other people are buying [crypto] and there are real gains to be made, why would they not do it? It tells you something fundamental about finance, which is that oftentimes finance doesn’t really care about the fundamentals, it cares about what people’s expectations are because that’s where the real money gets made.” 

Today “real money” is being made all over the place by the same people who called crypto “a fraud” a couple of years ago and have now issued their own coin (wink-wink, J. Dimon). The influx of institutional investment in DeFi is unprecedented by any measure, according to Chainanalysis; basically, pick any player from the City of London – they all are after the crypto gains.

Governments

Name one instance in history when the ruling class represented by governments would voluntarily give up the most lucrative of all possible activities – formulating and implementing monetary policy – and delegate it to the masses. Go ahead, I’ll wait. I don’t mean to draw thousand-year parallels, but it’s kind of a cool thought that China, being the inventor of fiat money, knows all the ins and outs of it. And again, if history has taught us anything, it’s that a country ruled by ignorance and pride of the elite can easily end up on the curb for hundreds of years (in China’s case). Or having composed itself, armed with the right ideology (right for the time, anyway) and the right economic theory, a country can soar to unimaginable heights (again, China, Venezuela). 

It’s not that governments like China are banning cryptocurrencies because they necessarily expect the technology to fail. It’s that they want to lead the charge when there are trillions to be made. The Chinese government aims to unleash its own CBDC endowed with all the conveniences of crypto and none of its speculative investment traits. What a brilliant move in time for the winter Olympics in Beijing in 2022! And judging by the fact that the U.S. politicians want to ban American athletes from using e-coin while there, it’s the right one.

In the U.S., the “open door” policy for any kind of money moves prevails. Investors there are largely free to take highly leveraged positions that could lead to potentially catastrophic financial losses. Institutions continue to be free to package garbage into ABSs, CDSs, and CDOs and sell it on the street – there’s no shortage of buyers. The SEC is “signalling a robust oversight regime over the industry,” but the big wigs of the said industry have no idea what that means. All in all, former U.S. Treasury Secretary Lawrence Summers put it best when he said in an interview that “the crypto industry should shed the idea that it’ll function as a “libertarian paradise” where government rules can’t be imposed.” We heard you, Larry!

Conclusion

Still, I believe it’s the governments of the world that drive cryptocurrency markets. All the above-mentioned players do their part, but to an astute observer, the re-centralization trend is quite apparent because it’s the government debt (mostly the US, of course) that throws more and more chips on the global crypto table. Just think that 36% of all US dollars in existence have been printed since January 2020. The inflated dollar, for example, gives the likes of Bitfinex the perfect opportunity to manipulate the price of Bitcoin and conjure up schemes lauded as huge successes in the space. It’s the inflated dollar that allows MicroStrategy to continue to buy back its stock driving up its price… Oops, did I say “stock”? I meant to buy up more and more Bitcoins, of course!

There are some useful memory exercises that will convince you that governments play a key role in every single development on the crypto market. We all can still feel the heat of the battle over some articles of the Biden’t infrastructure bill that sent Bitcoin spiralling down from the high of $68.000 to the current $54.000 in a fortnight. We already know the cost of the moves China can put on crypto. We’ll see what India’s announcement to tighten regulation around crypto in order to pave the way for its own CBDC will do to the market (let’s not forget that China + India = ⅓ of the Earth’s population). 

It’s the governments that have to deal with cybercrime. Governments will have to deal with the redistribution of the labour force once crypto takes over and yesterday’s bank tellers and branch managers line up at the unemployment office. Governments are responsible for the value of fiat money (capital controls) and for the soundness of deposits at times of crisis. 

Hardcore bitcoinists often suggest that the government’s backing of the state currency is a myth and that the dollar has been bereft of value ever since Nixon took us off the gold standard in 1971 (this resounding motif has reverberated throughout the space so many times, I ought to take it into quotes). However, let’s not forget that the cycle of transactions in any economy involves borrowers, lenders, and consumers, and relies on externalities that simply cannot be codified in a “trustless” environment (physicality of goods, personal relationships, existing legal structure, human resources, logistical intricacies, political machinations, the pitfalls of policy implementation and a great many other factors). 

It seems that governments are gradually figuring out the many dimensions of the cryptocurrency market and are leading the creation of an infrastructure that would allow the tech behind crypto to shine in all its glory. The global financial system is ripe for eliminating the distance between the payer and the payee, lender and borrower, equity issuer and investor. Tech entrepreneurs can’t do it on their own, the crypto community is a tight group, but not in itself a force of nature. Institutions are busy seeking out money-making schemes to “maximise shareholder value.” Markets are in acute need of a rulebook and writing one has always been a government’s prerogative. Let’s hope that this time the book will truly be of the people, by the people, and for the people. 

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