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The nascent crypto ecosystem remains unregulated in the United States, which poses some serious risk for crypto traders… and, evidently, the planet. While crypto had quite the popular year in 2021, there’s a lot about which investors should be mindful.
It’s no secret that the world of cryptocurrencies is a volatile one. Just this week, for example, top coins like Bitoin and Ethereum, as well as popular meme token Dogecoin, dropped drastically. The declines came on the heels of the Federal Reserve’s meeting minutes, suggesting that its COVID crisis-spurred monetary policy may soon meet its end. And, when the Central Bank announced this acceleration of its tapering plan, it took a toll on crypto.
But every investor knows all too well that, where there’s risk, there’s also potential for reward. So crypto traders haven’t all shied away from market swings.
After Bitcoin surged to an all-time high of $68,000 in November 2021, the potential gleaned in the eyes of traders who saw a hedge against continuous concerns of inflation. Even if cryptocurrencies have witnessed their fair share of ups and downs (including some pretty ugly plummets last year), traders are holding onto hope as ever more businesses begin adopting these coins as legitimate payment alternatives. Some retailers have already long been accepting crypto and, in 2021, companies from AMC Theatres to office-sharing firm WeWork hopped on board.
In 2022, many businesses are even planning to pay workers in crypto as part of comprehensive benefits packages.
So it’s no surprise that the crypto-crazed and crypto-curious aren’t quitting at the first fear of loss. But it’s important to understand that volatility isn’t the only vehicle of risk for traders.
Scammers across all corners of the globe pocketed a record $14 billion in cryptocurrency in 2021, and crypto theft ticked up 516 percent from 2020, equating to $3.2 billion, according to the annual Crypto Crime report by blockchain analytics firm, Chainalysis.
All in all, losses from crypto crimes rose 79 percent from 2020, the release purports. Of the stolen funds, 72 percent were taken from decentralized finance (DeFi) platforms.
DeFi is a budding sector of the market that seeks to ditch the middleman (read: banks) from financial transactions. Instead, DeFi leverages programmed code, called a smart contract, on a public blockchain. And this contract executes under specific conditions.
DeFi transaction volume ticked up a whopping 912 percent in 2021, according to the Chainalysis report. But hackers can exploit loopholes and vulnerabilities in code; it’s what they do. And with the rise of trading platforms being pushed into app stores, coupled with burgeoning hype surrounding potentially promising gains, people are anxiously dumping funds in insecure places. Many seem to fear the possible opportunity losses more than the possible crime-induced losses.
“DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike,” Chainalysis stated in its report. “But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.”
However, the good news is that the growth of crypto crime is relatively low compared to the growth of legitimate crypto trading. According to the report, crypto transactions that used illicit addresses made up a record low of just .15 percent of the $15.8 trillion trade volume last year (down 75 percent from 2020 and nearly 96 percent from 2019). In fact, total transaction volume grew by more than 550 percent in 2021.
“The fact that the increase was just 79 percent—nearly an order of magnitude lower than overall adoption—might be the biggest surprise of all,” the Chainalysis report writes. “Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.”
The decline in crime is largely thanks to the inherently transparent nature of blockchain technologies and innovation in the aforementioned trading platforms that are cropping up left and right. And that’s why, as with all investments and trades, it’s up to investors to decide just how much risk—if any—they’re willing to take.
For those who do choose to participate in the potentially lucrative space, however, it’s also worth being aware of crypto’s carbon footprint.
The House Subcommittee on Oversight and Investigations is reportedly planning Congress’ first hearing on Bitcoin’s environmental impact. More specifically, it’ll look into the carbon footprint of proof-of-work crypto mining. (The proof-of-work model refers to a consensus mechanism that records crypto transactions.) A list of witnesses who may testify by the end of the month is, allegedly, already in the works.
This is just one more step to mitigate the mayhem that the crypto craze could cause. In October 2021, 70 activist groups came together to write up a joint letter to Congress, pleading that the country take action to reduce crypto’s contribution to climate change.
After all, the growth of crypto mining in the United States has made the country the guiltiest contributor to Bitcoin’s global hashrate—especially after China’s crackdown on operations—according to data from the Cambridge Center for Alternative Finance.
Whether you’re a fanatic or a skeptic, considering crypto’s full story, as well as the price that both people and the planet pay, is key. And as crypto continues to become more mainstream, this information will ideally become even more transparent and decipherable for the average retail investor, too.
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