In 2021, the global crypto population rose from 106 million in January to 295 million in December, showing a vast increase of 178%. It is further predicted that the number of global crypto owners will reach 1 billion by the end of 2022. These large numbers denote the unprecedented growth of the crypto industry, which has given rise to countless new financial opportunities. Yet this also means that it is going to present a whole set of challenges that investors might have to face in the long run.

The following are 3 main profound challenges that lie ahead which investors should remain wary of when considering the long-term allocation of cryptocurrencies.

    1. Conflict with ESG goals: The industry has been increasingly emphasising environmental, social, and governance (ESG) practices as not only do they show good leadership from an organisation, but a robust ESG program can also benefit organisations with access to large pools of capital, ability to build a stronger corporate brand and sustainable long-term growth. However, cryptocurrencies remain deeply problematic from the ESG’s perspective.
      Environmentally, Bitcoin – the most prominent cryptocurrency in the market, causes 30.7 kilotons of e-waste each year and consumes approximately 150 terawatt-hours of electricity each year to support mining activities. When placed into perspective, the annual amount of electricity used to support the mining of Bitcoin exceeds that consumed by the entire nation of Argentina, which has a population of 45 million.
      Socially, crypto seems to be not as financially inclusive as it has promised. Although cryptocurrencies are decentralised in nature which allows anyone to have access to financial services on DeFi platforms, some have argued that involving in crypto activities requires access to the internet, capital and knowledge of the asset and industry, which is not easily attainable by every single person around the globe. Crypto wealth is believed to be as unequally distributed as conventional wealth.
      The prominent problems are the potential governance issues associated with cryptocurrencies. The lack of governance‌ referring to the decentralised framework, cross-border nature and anonymity of cryptocurrencies, has made them extremely attractive and lucrative for illicit activities including cyber thefts, money laundering and sanction evasion. It is reported that over $1.22 billion worth of cryptocurrencies has been stolen by hackers in just the first three months of this year. Market manipulation is another area of governance concern, especially with the presence of celebrities or influencers, such as Elon Musk who can impact market prices tremendously.

    3. Regulatory uncertainties across the globe: Crypto regulations remain highly divided within and across countries. For instance, in the U.S, the Securities and Exchange Commission (SEC) typically sees cryptocurrency as a security, however, the Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity. Despite having a high number of investors and firms in the country, the U.S. government agencies have yet to reach a consensus on a clear regulatory framework for the asset class. While crypto is ‌legal and adopted in most nations, including the U.S. and E.U, several countries such as China and Russia have maintained a hostile stance regarding crypto, essentially banning crypto activities. With countries taking varying approaches toward cryptocurrencies, there is a lack of clear and consistent regulations which creates uncertainty for long-term investors. 

    5. Volatility of crypto remains: As a relatively new commodity, cryptocurrency is still in its infancy as it has only been around for a short period compared to fiat currency, whose value can be reasonably predicted based on the issuing country and economic circumstances. Hence, still in the price discovery phase, cryptos are highly volatile and susceptible to major inflation. The extreme price fluctuations of crypto prices poses profound risk, especially for long-term investors. Since last year, Bitcoin has shown price swings from doubling its value to being down over 50% from their all-time highs, erasing almost the entire previous gains. This raises the question of whether crypto is truly a stable currency and a ‘safe haven’.


Future of Crypto

The future outlook for crypto is highly debatable. As cautious investors, it is crucial to remain vigilant of the long-term challenges lying ahead in the crypto ecosystem, and continue to observe the direction of where the crypto industry is heading.