Young investors keep the faith with crypto

Those investors who arrived recently to crypto investing are feeling anxious, especially if they bought in during 2021 when Bitcoin and Ethereum were reaching dizzy all time highs. Since then the market has dropped by around 50%. Market commentators worried that new retail investors might be lost forever because of this. Eben Burr, president of Toews Asset Management told Reuters, “If the market decline continues, it will become too painful and retail investors will bail.” However, that doesn’t appear to be the case, especially with the youngest retail investors.

According to Callie Cox, investment analyst at eToro in the USA, the current correction hasn’t deterred the younger investors: “We surveyed 1,000 investors across age groups in March, and 58% of investors ages 18–34 thought Bitcoin would present the best buying opportunity in crypto over the next three months.”

This is surprising, given that Glassnode reported that in May 40% of Bitcoin holders were underwater on their investments at a time when BTC was $33,800. So, are younger investors still as optimistic as they were in March? Bobby Zagotta, CEO of Bitstamp USA, said, “Retail traders between 35-45 years old decreased their crypto balances amid market volatility in the last few weeks. By contrast, our younger users seem to be more bullish and have chosen not to sell.” 

Younger people are more optimistic

Is this because younger people are generally more optimistic? A 2021 research study on crypto investors’ beliefs, found that “younger individuals with lower income are more optimistic about the future value of cryptocurrencies, as are late investors.” Cristina Guglielmetti, financial adviser and president of Future Perfect Planning discussed first-time retail investors with Cointelegraph, saying: “The clients I have who own cryptocurrency haven’t really sold their holdings from last year to this year. They’re looking at it more as an educational experience and not assigning an expected return per se. They’re expecting it to be speculative and very volatile.”

Another question on some minds is whether the market can attract new investors. Bobby Zagotta said, “Headlines might have you believe that there’s more volatility than there really is and that investors are fleeing when prices fluctuate. But, that’s not really happening.” Etoro’s Cox added that 42%  percent of investors surveyed by eToro in March said they don’t buy crypto because they simply don’t know enough about it: “But, the appetite for decentralization and digital transformation is still there, especially among younger investors.” She believes the reason for this is “younger investors naturally have higher risk appetites, and they’ve seemed willing to stomach these swings because of their longer-term optimism about the technology.” Ultimately, Cox says, “We haven’t seen investors abandon the crypto space en masse, but we have seen them become more selective of what crypto they buy.”

Crypto’s positive reaction to Biden’s executive order

Although there has been a slight pullback in the crypto market since yesterday, and watching it daily is like some version of the game Snakes and Ladders/Chutes and Ladders, there has been a positive response to the Biden administrations executive order. The order “will require U.S. federal agencies to create a regulatory framework for digital assets, as well as explore a future digital dollar,” Cointelegraph reports.

For example, Coinbase surged up 10.5% at market close, and Microstrategy posted a 6.4% gain. Exchange traded funds (ETFs) also experienced a renewed positive view of crypto, with ProShares Bitcoin Strategy ETF gaining 10% and Valkyrie Bitcoin Strategy ETF closing up 10.3%.

Mining companies had some of the biggest gains following the executive order. Riot Blockchain Inc. shares shot up 11.2% and Marathon Digital Holdings Inc. were up by 13.5%.

Tom Miitchelhill comments that while the crypto market is used to volatility, “these are unusually volatile moves on traditional markets.” However, before everyone gets to excited, let’s remember that Coinbase “is still down nearly 48% from its direct listing price in April last year.” And Bitcoin, although it initially racked up a 9% price increase when details of the executive order were leaked, it then retraced its steps sometime after.

Why so much positivity about the US order? Mitchelhill says, “the executive order was considered by most investors to be if not a net positive for the crypto industry, at least a lot less bad than had been feared.”

One reason is that President Biden has positioned the rise of digital assets as, “an opportunity to reinforce American leadership in the global financial system and at the technological frontier.” And whilst nobody knows exactly what sort of regulatory measures may be expected, the general view is that the US government is being ‘constructive’. It also potentially means “that the executive order will potentially work to expand the adoption of virtual currencies within the U.S. financial system.”

US Treasury Secretary, Janet Yellen, commenting on it, said: “President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy. This approach will support responsible innovation that could result in substantial benefits for the nation, consumers and businesses.”

There are of course divisions in the crypto community over it, but it will be interesting to see how this plays out and who it benefits in the long term.

What is a DAO and how does it work?

A DAO (Decentralized Autonomous Organization) is defined as an organization represented by rules encoded as a transparent computer program, controlled by the organization’s members, and not influenced by a central government, or any other centralised entity. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles. 

In more basic terms, a DAO is also a way of organizing people globally into a movement, without their knowing each other, establishing your own rules, and making your own decisions autonomously, with all of that encoded on a blockchain.

Blockchain enables automated trusted transactions and value exchanges, but even so, internet users around the world want to organize themselves in a “Safe and effective way to work with like-minded folks, around the globe”, according to Ethereum.

Bitcoin is the original DAO

Bitcoin is the first example of a DAO. It has programmed rules, functions autonomously, and is coordinated through a consensual protocol. But it is the growth in DeFi protocols that have really shone a light on DAOs again.

Smart contracts are essential

For example, with a DAO, financial transactions and rules are recorded on a blockchain using smart contracts, thus eliminating any need for third party involvement in the transaction. The smart contract is very important because it represents the rules of the organization, and is where all information is stored. No one can edit the rules without people noticing, because DAOs are transparent and public. A DAO, unlike the current way in which we form companies by registering them and giving them legal status, needs none of that. A DAO can be structured as a general partnership.

According to Cathy Hackl at Forbes: “DAOs envision a collective organization owned and managed by its members with all of them having a voice. Many analysts and industry insiders affirm that this type of organization is coming to prominence, even potentially replacing some traditional companies.”

What DAOs are used for

So far DAOs are being used for many purposes such as investment, charity, fundraising, borrowing, or buying NFTs, all without intermediaries. For example, 3LAU is a DAO organization in the Metaverse that provides fractional ownership of NFTs, including songs. While DAOs are not exactly mainstream yet, they do seem to be picking up steam with many creators, and large brands and businesses need to keep an eye on them.

The Case for Crypto Optimism

As the crypto markets experience a sharp sell-off, it is pleasing to note that not everyone is suffering from extreme pessimism. In an opinion piece for Coindesk, Michael J. Casey, a respected commentator on the market, argues that this is nothing like the events of 2018, despite the slump.

Certainly, 2021 was a boom year that “generated overblown prices” for tokens, whether fungible or non-fungible. However, Casey points out something very important: “In many ways the building and problem solving that followed the 2018 meltdown has served us well. It meant the speculation behind the most recent boom was built on a more established foundation than in 2017.” And while crypto is not yet anywhere near being mainstream, it’s an awful lot closer to that goal than it was in 2017-18. There is a feeling that it is here to stay, and “that’s why this crypto winter feels less brutal” Casey says.

He suggests there are six reasons to say, “this time is different,” which may also give cause for cautious optimism.

  1. Layer 2 scaling is a reality

From the Lightning Network to DeFi apps, cryptographic advances have over the past three years gone from concept to deployment. This means we’re closer than ever to seeing the scalability that will bring mainstream adoption.

  • The success of permissionless projects

Recent crypto success stories are concentrated among permissionless projects open to any participants. DeFi, non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) are where money is being made. As Casey says, “Users are finding value in blockchain technology’s most disruptive, paradigm-changing promises rather than in incremental adjustments to existing business models.”

  • Institutions and corporates are in

Thousands of mainstream firms are experimenting with NFTs and social tokens, especially those in entertainment, fashion, media and gaming. Plus, the engagement in crypto among hedge funds, family offices and even pension funds has surged last year, and even if they have sold off some of their crypto holdings recently, “those investments now stand as a base of established infrastructure for handling future transactions.” In other words, institutions etc are not leaving crypto.

  • Regulations equal normalisation

Whilst regulations may hamper innovation, they are also a framework for normalizing the industry and for making the general public feel more comfortable with it.

  • Don’t blame crypto

In 2017, ICOs fuelled investor mania. This year it is quite different. Indeed, it is the extra fiat money available that prompted the 2021 boom. That surfeit of dollars, euros and yen flowed into risk assets: stocks, commodities, real estate, fine art and, significantly, cryptocurrencies. As Casey says, “Now we’re all paying the price for that as an inevitable inflation problem is prompting the U.S. Federal Reserve to remove the punch bowl.”

  • Let it settle

The market will eventually settle. Anyone who has been in crypto for a few years knows this will happen. Casey says, “I think the excessive part of the crypto price rally – the part that took Bitcoin from $30,000 to $65,000 but not that which drove it from $10,000 to $30,000 – was perhaps due to external factors. Once we get to the other side, we will be able to see if future price advances are driven by legitimate crypto-only factors rather than “the risk-on/risk-off whims of a global financial system addicted to central bank largesse.”