The current crypto cycle is nearing its low point, and despite facing regulatory and liquidity challenges, the future crypto market is expected to improve as Web3 brings more practicality.
Author: Maksim Balabash
Translation: Plain Language Blockchain
We are nearing the low point of the previous crypto cycle, which occurred around November to December 2022. This makes me feel that it's time to slow down, relax, and think about how the current crypto cycle might end. I have an interesting idea I'd like to share with you.
Disclaimer: I am not a crypto expert or economist, and I have no idea about prices tomorrow or next year. We should all understand that most predictions tend to be inaccurate. When I mention 'crypto', I am referring to the financial part of the broader Web3 concept, which is the decentralization of the internet.
1. Why do cryptocurrencies have cycles, and why do they persist?
Whether cryptocurrencies are seen as commodities (which we seem to be leaning towards) or securities (think back to 2017-2018), we buy them with cash. The availability of cash and people's willingness to exchange it for cryptocurrencies are influenced by economic cycles.
Since cryptocurrencies often lack intrinsic value (unlike stocks or bonds), their value mainly depends on the price people are willing to pay. This makes cryptocurrencies more susceptible to psychological factors, which are often exacerbated by narratives spread through the media.
The ongoing innovation of crypto and Web3 itself, along with the evolution of regulation, introduces new variables and opportunities to the market. If more can be done, new incentives and narratives will continuously emerge, and more people will be willing to participate.
2. So, what is the crypto trinity?
The crypto trinity refers to the three interrelated variables of tokens, traffic, and liquidity, which together describe the performance of the crypto market.
If we were to describe cryptocurrency with a simple system, the working subject would be tokens, the transmission would be traffic, and the engine would be liquidity.
Tokens incentivize their holders to shape narratives and guide traffic, thereby attracting liquidity to the market, which in turn positively feeds back, continuing to drive the tokenization of everything (more and more market liquidity).
Thus, when for some reason, two-thirds of the system's components fail, favorable conditions for crashes, trend reversals, or crypto winters arise. On the other hand, when all three components of the system are functioning normally, cryptocurrencies thrive. This is what the crypto trinity means.
What indicators can we track to observe the dynamics? The simplest way is:
Get the total crypto market capitalization on TradingView.
Get the number of tokens created on GeckoTerminal.
Search 'crypto' on Google, record the number of results we need each month to gauge media coverage.
Of course, this data won't be completely pure, but it's enough for us to draw a perspective: they are relevant.
The correlation between market capitalization and newly issued tokens is quite clear. The correlation between market capitalization and media reports is somewhat noisy, which I think is simply related to the way data is collected.
The correlation between new tokens and media is evident.
This is the data I've collected. It would be very beneficial if someone could organize this data by periods and open-source it for everyone to use.
3. What potential problems might arise?
1) Tokens
There are many reasons different projects create their own tokens, but mainly there are three:
To provide some utility for the community
To allocate value among community members
To provide a club emblem for like-minded individuals
This is why tokens are an excellent community tool. I believe the community has the potential to drive the process of tokenization.
I see several relatively reasonable bottlenecks, all related to regulation (I believe experts in crypto and Web3 can come up with more, and even better, ideas):
Governments implementing stricter regulations or a total ban on crypto
Whitelisting only a certain number of cryptocurrencies while leaving the rest in a gray area to maintain legal leverage
Forcing major centralized services to adopt 'purity proofs', scanning users' 'dirty' transactions (regardless of what 'dirty' means), and potentially blocking their transactions or assets
Classifying any cryptocurrency where at least 51% of nodes are not in the country as illegal (though this sounds crazy, I still leave it here)
2) Traffic
Traffic is the degree to which something is being focused on at a given moment. Attention shapes our thoughts and ideas, and our thoughts and ideas translate into actions and behaviors. Our behavior is the primary influencing factor of our state.
This is why promotion is effective, technology plays an important role in modern society, and traffic is crucial for market pricing.
Given that the crypto market is still young, seeking better use cases, and primarily lacks practicality, the role of traffic is even more significant.
I see several plausible bottlenecks for traffic in the crypto space:
If other more attractive narratives emerge (for example, the 2024 US elections)
If the narrative fails to generate enough optimism to drive people to overcome barriers to purchase
High-profile hacking incidents and thefts can undermine optimistic narratives
Government regulation of crypto influencers aims to protect users
Platform restrictions on crypto promotional content
3) Liquidity
Cash is king. No matter how you define cryptocurrency, you need cash to participate.
Whenever nearly costless borrowing is available, capital is actively injected into the financial system, or other conditions lead people to accumulate cash they don’t urgently need to spend, we experience an increase in consumption and/or liquidity in financial markets.
We all have reasons to keep cash in our pockets, but we can roughly guess what might prevent liquidity from flowing into the crypto market:
Global economic recession or financial crisis
Opportunities with better risk/reward ratios
Prohibiting the purchase of any cryptocurrency from unlicensed brokers to isolate decentralized crypto
Imposing a 'wealth tax' on any held decentralized crypto (requiring 50% to be submitted to the government)
Institutional investors withdraw investments due to concerns about volatility, regulatory issues, or disappointing returns
4. What happens next?
If the ultimate outcome of blockchain is merely 'digital gold' or, worse, a memecoin, it would be quite disappointing.
Blockchain has experienced victories and failures, but the commitments to eliminating central authority (consider the ratio of cryptocurrency held by retail investors versus whales), resisting censorship (consider the recent cases involving Telegram and X), and privacy (consider the Tornado Cash case) have not been fully realized.
Replacing Web2 leaders with Web3 applications and communities is a vast and relatively untapped area. Many SaaS products could benefit from transforming into Web3. The technological layer is also ready for new applications.
There is still much content to explore and expand. I believe it is time to start focusing on scaling the application layer (as technological scaling is no longer an issue).
5. Summary
The use cases for cryptocurrency are very limited. However, as broader use cases (Web3) bring more practicality, this could positively impact cryptocurrencies, making them more solid.
Before that, the crypto cycle was primarily driven by idle cash in pockets, media advertising, and traffic, as well as by exploiting others' psychological biases.
I don’t know how many more cycles we will see before the financial part evolves into a Web3 world. But I hope to see this change.
Article link: https://www.hellobtc.com/kp/du/11/5507.html
Source: https://hackernoon.com/the-crypto-trinity?source=rss