A Look At Some Of The Factors That Could Cause Headwinds For The Crypto Industry In The Coming Months

The last few months have been extremely challenging for the cryptosphere. Several of the top coins have fallen 70 percent below their all-time highs. Moreover, the global market capitalisation of the crypto industry has dipped below $1 trillion twice since June.

What’s worse is that the road ahead doesn’t look much better, with three vital factors threatening to cause more pain for those involved in the crypto industry. Let’s look at these factors and how they could end up hurting the digital asset space.

Inflation and rising interest rates

The first among them is the impact of the 4-decade high US inflation, which the US Federal Reserve is trying to combat through stiff interest rate hikes. While interest rate hikes have no direct relationship with the crypto industry, they have historically dented investor sentiments.

For instance, Bitcoin dropped nearly 10 percent in May when the US Federal Reserve raised interest rates by half a percentage to combat inflation. The legacy coin then dropped as low as $17,500 after the Fed’s two-day meeting on June 14 and 15 (after which the Fed increased interest rates by 0.75 percent).

Most recently, BTC fell from a tight range of $23,000 to below $20,000 after the Federal Reserve Chair, Jerome Powell, announced the possibility of further interest rate hikes in the year. The crypto industry could be in further pain if these interest rate hikes do arrive in the remainder of the year.

Tether could tumble

The Terra collapse has sent shockwaves across the crypto industry, and investors are now looking at the industry with greater scepticism and apprehension. Therefore, when Tether got briefly de-pegged in May 2022, it triggered a redemption spree against the USDT.

Ideally, Tether is supposed to maintain 100 percent reserves, i.e., $1 for every USDT, for precisely such situations. However, recent investigations into its reserves have hinted that enough transparency may not have been maintained.

It was found that Tether held only 3 percent of its reserves in cash, and the rest was sourced from other vehicles. For the same reason, the USDT has been banned in the state of New York based on the Attorney General’s investigation into the matter.

“Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie,” said NY Attorney General Letitia James when she imposed the ban and slapped an $18.5 million fine on iFinex (Tether’s parent company).

A recent article by the Wall Street Journal added further doubts about Tether’s reserve backing and future performance. According to Jean Eaglesham and Vicky Ge Huang, the journalists behind the report, Tether’s balance sheet is in a very critical situation. They said even a 0.3 percent drop could render the stablecoin “technically insolvent.”

Tether is the third-largest cryptocurrency by market capitalisation and the most-traded stablecoin in the cryptoverse. Any collapse will again send the dominos falling, causing yet another crypto bloodbath.

Regulations could be a roadblock

Thirdly, since the Terra catastrophe, policymakers have been eyeing the crypto markets with greater vigilance. Regulations are the only way for authorities to be abreast of all the fund inflows and outflows happening in the otherwise decentralised crypto markets. Taxation in India and the stablecoin regulation in Japan are examples of the same.

Following suit, the US crypto markets are preparing for President Joe Biden’s Executive Order that is set to be implemented in September 2022. The order puts the spotlight on six key parameters:

1. Protection of US consumers, businesses, and investors

2. Mitigation of systematic risk and national economic stability

3. Mitigation of financial risks arising from the unscrupulous use of digital assets

4. Financial inclusion and equitable asset distribution

5. Responsible innovation and technological advancement

6. Exploration of a Central Bank Digital Currency (CBDC)

Investors and exchanges will be keenly waiting for an update on whether crypto exchanges will be brought under the same regulatory umbrella as stockbrokers or not. President Biden’s executive order from March 2022 was not so well received in the crypto community. It remains to be seen how the executive order will impact the overall market sentiment in the cryptoverse.