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What's in Store for the Future of Cryptocurrency?

  • 4 mths ago

In recent months, casual awareness of cryptocurrencies has reached an all-time high—just as valuations have dipped by 35%.

Responding to the upswelling of interest that cryptocurrencies witnessed throughout 2021, Morningstar published its inaugural Cryptocurrency Landscape in April 2022. The paper focuses on the trends that have led to this inflection point in cryptocurrencies' history, but we also spent some time taking stock of where the market may lead us next.

While we can't predict the future, we believe two main factors will dictate crypto's growth: how long speculative interest persists and whether consumers adopt blockchain technology en masse.

Investor Loyalty and Popularity Are Key Drivers of the Cryptocurrency Market

Even a cursory glance at the return charts of cryptocurrencies unearths a litany of highly speculative boom-and-bust narratives. These narratives often emerge from optimism around new applications for a particular blockchain (the technology that underlies cryptocurrency) but sometimes rely on nothing beyond a stray tweet from Elon Musk. The chart below shows just how substantially the price of dogecoin has surged and fallen in response to that brand of tweets. 

Narratives like these aren't just blips. They shape the returns of the cryptocurrency market in aggregate.

Generally, market indexes' returns have a negative skew, which means that above-average returns happen more often than below-average returns, but those below-average returns are more extreme and drag down the total return over the entire period.

Cryptocurrency market returns are the other way around, as shown on the table below. The fact that the MVIS CryptoCompare Digital Assets 100 Index skews positive—the opposite of the other highlighted market indexes—indicates that it experiences more below-average returns than above-average returns, but the positive outliers are more extreme and pull up the cumulative return over the period.

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