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Sunday, June 26, 2022

Cryptocurrency Crash: Market Volatility Is Testing Investor Will, But Crypto Enthusiasts Still See A Future For This Asset Class

Bitcoin, the original cryptocurrency, remains the leader for the sector. It reached an all-time high, surpassing $68,000 (£55,600) in November 2021, when the total value of the cryptocurrency market was close to $3 trillion. However, over the past months, the value of most major cryptocurrencies has fallen by more than 70%, with the value of bitcoin itself falling below $18,000.

Is this just another crash in the volatile cryptocurrency market or the beginning of the end for this alternative asset class?

When Bitcoin was first introduced in early 2009, it was a new type of asset. While trading was sluggish at first, in late 2017, rising prices pushed its value to nearly $20,000. This happened as more retail investors turned to cryptocurrencies as a perceived hedge or safe haven compared to other asset classes.

As the market grew, so did the range of investment opportunities. Futures and options – financial contracts to buy or sell an asset or security at a specific price or on a specific date – are a common hedging tool used in other markets such as oil or the stock market. In December 2017, the Chicago Board Options Exchange listed the first bitcoin futures on a regulated exchange. Bitcoin options followed on the Chicago Mercantile Exchange in January 2020. This period of expansion culminated in the launch of the first bitcoin exchange-traded fund (ETF) in October 2021, which gave investors access to bitcoin without having to buy it in crypto. exchange.

Growing Acceptance of Cryptocurrency

At the same time, the traditional financial sector has increasingly embraced cryptocurrencies as a legitimate asset class. A 2021 study of institutional investors found that seven out of ten are expected to buy or invest in digital assets in the future. However, this combination of maturity and acceptance has also increased the correlation between the stock market and cryptocurrencies, leading to a decline in their safe-haven properties.

Bitcoin was quite out of touch with traditional financial markets in its early days. But as it became “just another asset,” the sector began to be affected by the same macroeconomic factors that affect traditional markets. The decision by the US Federal Reserve to raise interest rates by 0.75% in June to combat rising inflation, the ongoing war in Ukraine, and the subsequent rise in oil prices in recent months has put a damper on cryptocurrencies. Actions to regulate the sector have also had an impact.

But not only macroeconomic factors caused this crypto recession. In May and June of this year, the value of stablecoins plummeted, major cryptocurrency exchange Binance suspended Bitcoin withdrawals due to a “pending transaction,” and lending platform Celsius Network froze withdrawals and transfers, citing “extreme” market conditions.

Amid this disruption, users of public blockchain platform Solana reportedly voted to temporarily take control of the so-called “whale” account – the largest on the platform at around $20 million – to prevent the account holder from liquidating their positions and further lower prices more. .

Together, these factors have led to a decrease in investor confidence in the sector. The Crypto Fear & Greed Index is near an all-time low of 9/100, indicating “extreme fear”. The index was at 75/100 when bitcoin reached its November 2021 high.

An electronic scoreboard shows a cryptocurrency plunge during a trading session in Seoul, South Korea on May 13, 2022.
YONHAP/EPA-EFE

Prospects for Cryptocurrency

So what is the future of this alternative asset class? As you would expect in the cryptocurrency ecosystem, the viewing range is extremely high. Some see this market correction as the perfect moment to “buy the dip”. Others believe that this is the end of the party for cryptocurrencies.

Determined bitcoiners can always find positive signs in the market, and many use on-chain metrics (trading signals based on data obtained from public blockchain transactions) to determine the right time to buy. Lately, popular metrics, including Market Value to Realized Value (MVRV – a ratio showing a coin’s current price compared to the average price) suggest that Bitcoin is about to start an accumulation period based on past history. On the other hand, it could be a sign of confirmation bias as investors look for signals that confirm their beliefs.

Others argue that this is just another example in a long line of bursting cryptocurrency bubbles — a typical cryptocurrency market cycle. Comparisons to the dot-com crash in 2000 are widespread in the market, but crypto enthusiasts argue that the basic premise of dot-com stocks was correct — that the internet was future. They believe the same is true for bitcoin, predicting that the sector will bounce back.

However, economists have studied bubbles for centuries, and the data shows that many assets never recover nominal price highs after a market bubble bursts. Some of these economists, including former U.S. Secretary of Labor Robert Reich, have equated cryptocurrencies with Ponzi schemes that, if left unregulated, will follow the path of all such schemes and eventually collapse.

Of course, the idea of ​​cryptocurrencies as a decentralized asset available on a peer-to-peer network without any barriers to entry is at odds with recent actions such as withdrawal freezes by some platforms. These steps will not be to the taste of crypto enthusiasts. In addition, the growing correlation of cryptocurrencies with other asset classes reduces their value as a diversification tool, while the growing interest in central bank digital currencies threatens to further undermine the attractiveness of cryptocurrencies for its mainstream investors.

Cryptocurrencies also face issues related to energy use, privacy and security. It is unclear whether these problems can be addressed without destroying the elements that made cryptocurrencies popular in the first place. The recent launch in the US of a short bitcoin ETF, which allows investors to profit from a decline in the price of bitcoin, will allow investors to hedge their positions and trade against bitcoin.

Investing in cryptocurrencies is like riding a rollercoaster: price spikes give way to sudden drops. Volatility is ubiquitous, bubbles and crashes are common, and there is controversy over environmental, ethical, and social benefits. A major correction in this market has tested the will of even the most avid crypto enthusiasts. Buckle up because this story isn’t over yet.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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