In a world where traditional banks and financial institutions are struggling to cope with the new wave of digital currencies, it is no surprise that many of them are exploring crypto. Many start-ups are already offering credit cards and loans in cryptocurrency, and governments are also getting involved. El Salvador recently said it would accept Bitcoin as legal tender, and the Federal Reserve has started evaluating launching its own digital currency. Whether traditional finance is breaking out of crypto is anyone’s guess.
As a matter of fact, traditional finance is gloating at the success of cryptocurrencies, but the future of our financial system lies with decentralized finance. This revolutionary form of financial systems could change the way we do business. Banks and other intermediaries rely on the idea of turning debt into more debt. The gap between rich and poor continues to widen year after year. DeFi could potentially replace this current system and bring financial equality to the masses.
Bitcoin is a digital asset, and its creator, Satoshi Nakamoto, introduced it via a white paper in 2008. Thousands of cryptocurrencies have since emerged, each claiming to fill a specific function. Ethereum’s ether, for instance, markets itself as a gas for a smart contract platform, while Ripple’s XRP is used by banks to facilitate transactions. Bitcoin was created as an alternative to traditional finance, and cryptocurrencies are a great step in that direction.
Traditional finance is finally starting to recognize the potential of cryptocurrency, and is actively lobbying regulators to adopt favorable regulations. Some banks have even started offering cryptocurrency investments to wealthy clients, and a few have even begun operating their own digital currency. But, despite these developments, traditional finance will have to wait a while longer to reap the benefits of decentralized finance. The new technology is undoubtedly disruptive, but it is crucial to maintain the advantages of decentralized finance.
Blockchain is one way to combat this problem. A blockchain-based system allows people to access money that is stored in a digital form. The blockchain provides access to funds without a central authority. The blockchain can also improve the financial system for people who can’t access banking services. It solves a problem that many traditional investors have: the lack of access to financial services. Families from overseas often lose 20% to commission charges.
While cryptocurrency isn’t a perfect substitute for traditional financial services, it is a growing market for investment. Fidelity has already entered the custodian market, while national banks have been given permission to custody digital assets. Today, one Bitcoin is worth more than $37,000, but it is still far from its all-time high and post-peak bottom in 2018 of under $3,000. However, as with all investments, there is risk involved. This is especially true of crypto.
For this reason, crypto platforms are highly vulnerable to contagion, deleveraging, and fire sales. These factors have caused account freezes, and some retail investors have suffered substantial losses. Additionally, some large crypto players have leveraged themselves and inflated their returns, which is why they’re missing margin calls and risk insolvency. Unlike traditional financial institutions, the crypto ecosystem is so tightly interconnected, that smaller players in the crypto space have concentrated exposure to the big players.