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Despite increasing volumes of institutional adoption, the cryptocurrency landscape has still suffered from widespread volatility in recent months and years which has severely impacted the uptake and recognition that digital finance has gained over time. However, we may yet see reward coins emerge as an influential means of protecting assets against the widespread sell-offs that can lead to price crashes.
Although major institutional adoption – such as the 105,085 BTC held by MicroStrategy and approximate $1.3 billion in crypto assets held by Tesla – has helped to ease the likes of bitcoin away from the wild volatility of the early years of crypto, we saw in mid-2021 that cryptocurrencies can still be subject to mass selloffs that lead to extreme swings in value.
(Image: CoinTelegraph)
As the chart above shows, whilst volatility in BTC is becoming less aggressive, it’s certainly still far more pronounced than across the vast majority of the stock market. These fast alterations in value are generally more pronounced across smaller cap coins, too.
During the market crash of mid-2021, Bitcoin saw around 50% of its value wiped off the market in a matter of days.
One of the leading issues that drive volatility is the fear factor that investors experience when seeing the early signs of a cryptocurrency on a downward trend. This can lead to a chain reaction of sell-offs as asset holders look for calmer waters as the storm passes. However, a rewards-based coin that actively gives investors more assets in return for holding their assets may provide a solution that can save cryptocurrency from its volatility problem and the dangers of mass sell-offs.
Whales make their presence felt
There are many factors that can contribute to volatility across cryptocurrency markets. Threats of regulation, FUD (fear, uncertainty, doubt) infused news stories and broader financial downturns like the initial stock market crash as the Covid-19 pandemic spread across the world can all drive volatility.
However, one key contributing factor that can drive unexpectedly severe volatility is trading activity from the many whales that populate the crypto ecosystem. ‘Whales’ is a popular term given to an investor who holds at least 1,000 in BTC or equivalent across crypto assets – though the term is also commonly used for large-scale investors outside the world of cryptocurrency too.
Because they hold such a high volume of an asset, when they decide to sell or make a trade, the market is suddenly flooded with it – causing a significant price movement.
Sadly, cryptocurrencies are especially vulnerable to whale activity because there are generally more whales active alongside far smaller levels of liquidity and volumes across a wide range of crypto exchanges. Without a healthy level of liquidity, cryptocurrency whales will inevitably make big waves through the market as soon as they make a move.
(Image: Coindesk)
As we can see in the table above, the number of whales holding more than 1,000 in BTC grew almost in line with the rise in Bitcoin’s price last year – illustrating the key role institutional adoption played in leveraging the bull run of late 2020 and early 2021.
However, the increasing prevalence of whales also meant that as soon as one shifts their investment or opts to cash in their chips, shockwaves are sent across the market.
Whilst the number of whales entering the cryptocurrency landscape has grown, so too has the number of retail investors looking to invest in coins like BTC, ETH and various altcoins. In a bid to find appeal with investors who may be more averse to volatility, we’ve seen the rise of reward coins designed to encourage far more long-term holders. Could rewards-based models offer a glimpse into the future of a more stable crypto ecosystem?
The path to passive income
When many investors look to the world of crypto, it’s common for them to associate the buying, selling and trading of assets as a key method of profiting from digital finance. But with staking, this doesn’t have to be the case.
If you’re already investing in cryptocurrency, you’re likely to have heard about staking already. Staking refers to the way many cryptocurrencies verify their transactions – allowing participants to earn rewards based on their holdings.
But what actually is staking? The notion of staking cryptocurrencies is a process that hinges on committing your crypto assets to support a blockchain network and confirm transactions.
This process is available with cryptocurrencies that are built on proof-of-stake models to process payments. This process is largely more energy efficient than the mining-based proof-of-work models and opens the door to investors earning a passive income on their holdings.
Coins like Ethereum, Cardano, Solana and Polkadot can all be staked, and the interest rates associated with the practice are generally high – although it’s essential that you do your research before volunteering to stake your assets.
Away from staking, we can also see evidence of rewards-based assets like ADACash. While many investors typically look to trading assets, climbing from a total of 215 holders on release in early November to 12,500 investors in less than a month, we can see that there’s certainly a market for users who are intent on sidestepping volatility in order to earn.
Rewards from ADACash are paid directly to investors in the form of Cardano (ADA), and despite being in its formative stages, the token’s long-term model has helped to bring more stability at a time when traditional low-cap altcoins can see wild swings in price as more tokens are bought and sold.
However, it’s also important to note that investors must always conduct their own research prior to investing in small-cap tokens of all forms. Due to the increasing popularity of Bitcoin, Ethereum and Dogecoin, the space is populated by many scams, rug pulls and pump-and-dump schemes which are designed by creators who own huge volumes of the asset to lure investors in to pump up the price before they sell their stakes at a massive profit whilst crashing the price.
Could the passive income approach bring stability to the future of cryptocurrencies?
There’s certainly a bright future for the environmentally friendlier approach of staking cryptocurrencies and reward tokens in the cryptocurrency landscape. Although many investors will invariably continue to find themselves lured in by the trading aspect of major assets like BTC and ETH, the growth of the digital financial ecosystem will mean there will be more strong options for investors of all kinds.
We’ve seen with the growth of decentralized finance on a range of different asset blockchains that anything’s possible in the world of crypto – and the notion of generating a volatility-free passive income from investing in cryptocurrencies will naturally become more prominent over the coming years, particularly in between Bitcoin’s halving cycles from mid-2022 to 2024.
The beautiful thing about the cryptocurrency ecosystem is that there’s truly a financial solution that suits everyone – and with rewards-based investing, this will also apply to investors who are volatility averse.
