Crypto Market Musings
On Wednesday, the Fed raised interest rates for the third time this year by 75 basis points. Both the stock and crypto markets responded quickly to the aggressive rate hike. As of this writing, bitcoin is down 2.6% and trading below $19,000. Ethereum fell by 6.6% and is trading below $1,300. Last week ethereum fell by 16% and bitcoin fell by 6.3% — in part because the Consumer Price Index (CPI) came in higher than expected at 8.3%.
This probably won’t be the last time the Fed raises interest rates in an attempt to bring inflation back to 2%. Further rate hikes could trigger a recession, which would drive the crypto markets down even more. I think it is going to take a while for it to recover. Smaller crypto coins might even shut down entirely.
I am bearish on the crypto market for this year. And that’s not only because of the “bad” economy. It’s also because the SEC is tightening regulations and the Fed is taking more notice of the crypto market.
What Yasmin Is Thinking About
One thing I think will play a big role in determining future crypto prices is crypto market regulations. As crypto has become more popular and mainstream, policymakers have been getting more serious about regulating the market.
As I was writing this article, I learned that Colorado has become the first state to accept crypto as payment for taxes through PayPal. This is big news. When crypto started, many people thought of it (and many still think of it) as a Ponzi scheme… and now a state government is integrating it into its tax payment system. This is a major step for crypto as it is gaining more recognition and trust. However, this also creates problems as it means the government and regulators are now more aware of the space and more likely to create regulations that could stifle the crypto market’s growth. In a paper published back in August, the Fed acknowledged the importance of decentralized finance (DeFi) but also argued that DeFi and the crypto market should be regulated more.
And to no one’s surprise, this is what the SEC has long been after. On Monday, the SEC sued crypto influencer Ian Balina. And in a 23-page court filing, it stated that Ethereum nodes are more clustered in the U.S. than anywhere else — and the clustering of those nodes means Ethereum transactions happen inside the U.S. More than 40% of Ethereum nodes do operate within the U.S. But whether that means all Ethereum transactions happen in the U.S. and whether that gives the U.S. jurisdiction over all Ethereum transactions is a novel and untested legal argument. But it does show that the SEC is grasping for ways to establish regulatory oversight over crypto.
Last week, SEC head Gary Gensler stated that cryptos that allow users to stake coins pass the Howey Test, a test created by the Supreme Court to decide whether a transaction is a security. For coins that use staking, Gensler said, “the investing public is anticipating profits based on the efforts of others.” Gensler believes that coins that use proof of stake — which now include Ethereum — could therefore be considered securities. Although Gensler did not specify any crypto while discussing proof of stake, the statement came the same day that Ethereum transitioned from proof of work to proof of stake. The Merge has clearly been on Gensler’s mind too.
There seems to be a split among crypto enthusiasts on whether the SEC should regulate the crypto space. I personally lean against SEC regulation of the crypto market. Although SEC oversight could make it more secure, I also think tight regulations and policies could ruin many projects and could possibly put too many restrictions on investors, which in turn would steer them away from investing in the space. This has already happened outside the U.S. The Ontario Securities Commision just introduced restrictions on non-accredited investors that limits their altcoin purchases to $30,000 Canadian dollars a year. I believe these small changes will definitely have a bigger impact on crypto prices down the road.
Recently — thanks to a friend — I have gotten a taste of how powerful the metaverse could become. At first I was skeptical. When I used a virtual reality (VR) headset before, all I experienced was headaches and nausea. But with my friend’s super gaming computer connected to the Oculus Quest 2 VR headset, I was able to experience what’s considered the best VR game made so far — “Half-Life: Alyx.”
I was blown away. The game changed my view of what the metaverse could become. The graphics quality was on a completely different level. The game is very detailed and even takes a player’s height into consideration. (I had to stand on my tiptoes sometimes to reach items up in cabinets.) The game lets you do a lot of things you can do in real life. It felt like a parallel universe.
I was privileged to experience it, and I encourage everyone to do so if they get the chance. This time, instead of dealing with nausea or a headache, I was in awe and fear of how real everything felt, especially as the enemies in the game were getting close to me. After I took off the VR headset, all I could think was “now I get why people are excited about the metaverse.”
I understand that “Half-Life” is not exactly the metaverse, as the metaverse is more about how people interact with each other, and it means different things to different people. However, the game is a very good example of the huge potential the space has with the right graphics and immersive and interactive VR technology. As VR technology advances in different areas, I have no doubt more people will use it and understand it just like I did.
Meta is having its VR Connect conference on October 11 to reveal its new Oculus Quest Pro VR headset. If a 2-year-old Quest made me change my perspective about the metaverse, then I can only imagine what a Quest Pro would do. Take my money, Meta!
I think with the release of Meta’s new headset, people will steadily become more aware of the metaverse’s potential. And I think this awareness will affect the crypto market too. In the future, the metaverse might not exist without crypto as it becomes its primary digital payment. Soon we could see many metaverse crypto projects take off as they attract more supporters who experience the “aha” moment like I did. If you are interested in what crypto metaverse project we have eyes on, check out Vin Narayanan’s latest metaverse crypto recommendation for Crypto Asset Strategies members. (If you’re not already a member, you can sign up here.)