Cryptocurrencies were created for mainly one purpose: decentralization. The idea of having control of your own money and which record is immutable have successfully attracted so many people from across political views. The earliest adopters of cryptocurrencies like Bitcoin and Litecoin firmly believed that having an immutable and decentralized blockchain would help the people to have some type of leverage against fiat currencies and the central banks.
However, as time has proven over and over again, it’s not easy to remain decentralized. When I said decentralized, I was not just talking about having varied hash power all over the globe. I mean, the amount of BTC and altcoins that are currently centralized in the hands of the few.
So, how did we get here, and is there any hope for more decentralization in this aspect?
So, many traders in the crypto space often look down on other traders who like to sell early in panic mode. They often said phrases like “weak hands”. And if you look at the past 5-6 years, there have been many more “weak hands” occurring in the crypto space. The problem is that these weak hands might not always sell because prices go down and they didn’t want to hold anymore, but rather because they expected to make a quick profit in a certain time period.
Think of it like this. When you buy Bitcoin at $9,000, and you expect to make a quick 10% within the next three weeks because you want to pay your bills, whatever happens, 3-4 weeks later, you would have to dump your Bitcoin for your bills, right? Now imagine the scenario where the same person actually makes 20% profit from his $9,000/BTC purchase. He could have paid the bill from that 20% profit and keep the rest in crypto. This scenario is unplayable if the price actually drops (he would have to take some of his capital to do the same thing).
So, yes, short-term traders often have weak hands because they are limited in both money and time. And because of their “weak hands”, the whales could easily accumulate and buy back from them when BTC price drops. This is why the year like 2018 (when crypto prices kept dropping heavily) was often deemed as the year where whales accumulated.
The Consequence Of Centralization
While cryptocurrencies are decentralized by nature, human nature is often predictable and “centralized”. Yes, just like in any market, typically the ones who want to sell fast are the kind of people who don’t have the privilege to hold their crypto assets for many months or years. They are limited in time because they have to keep paying their bills or other stuff.
The consequence is that whales can accumulate more crypto assets and this narrative of “decentralization” is slowly becoming less true. Not only that, the fact that many traders almost always go to the same CEX-es (centralized exchanges) generates a lot of long-term issues. Take a look at Binance where almost everybody trade altcoin for altcoin on that platform. When Binance goes down or gets hacked, everybody panics because that’s where they store their assets or even stablecoins.
Even though many veteran traders try to influence everybody to store crypto assets within their own wallets because of “not your keys, not your crypto” mindset, most casuals don’t always listen to such idea. They already feel safe and comfortable putting their coins in CEX-es where they don’t need to waste their time with high gas fees and all that.
The consequence of centralization is that when an unexpected thing happens, price can easily by manipulated by the same whales that previously accumulated and slowly gained power in the blockchain space.
Is The Future Decentralized?
However, the future of crypto has been slowly changing in the past few months. The rise of DeFi and yield farming tokens actually created a mass exodus of crypto assets from Binance and other centralized exchanges. AMM DEX-es like Uniswap and others have enjoyed the privilege of absorbing the market from traditional exchanges.
The future of DEX-es, though, remains uncertain. Nobody truly knows what’s going to happen to AMM DEX-es, especially when big regulators try to chase them and ban the frontend of these protocols. To see DEX-es grow in a time of uncertainty like 2020 is still a good thing, that being said. If the future of cryptocurrencies is decentralized with less whales and more commoners that are able to hold, that would be even better.