Even after the great crypto crash, enthusiasts see a bright future ahead

Bitcoin, the original cryptocurrency, remains a benchmark for the industry. It reached an all-time high of more than US $ 68,000 (£ 55,600) in November 2021, when the global value of the cryptocurrency market was close to US $ 3 trillion. In the following months, however, most major cryptocurrencies fell by more than 70% and bitcoin itself fell below US $ 18,000.

Is it just another crash in the volatile cryptocurrency market, or is this the beginning of the end for this class of alternative assets?

When bitcoin was first introduced in early 2009, it was a new type of asset. Although trade was initially scarce, price appreciation brought its value to nearly $ 20,000 at the end of 2017. This occurred when more retail investors were attracted to cryptocurrencies as a supposed hedge or refuge from other asset classes.

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And 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 date) are a common hedging tool used in other markets such as oil or the stock market. In December 2017, the first bitcoins futures on a regulated exchange were listed by the Chicago Board Options Exchange. Bitcoin options continued on the Chicago Stock Exchange in January 2020. This period of expansion was completed by the launch of the first bitcoin exchange traded fund (ETF) in October 2021, which provided investors with exposure to bitcoins without having to buy them. in a cryptocurrency. exchange.

Growing acceptance of cryptography

At the same time, the traditional financial sector was increasingly accepting cryptocurrencies as a legitimate asset class. A 2021 study of institutional investors found that seven out of 10 expected to buy or invest in digital assets in the future. This combination of maturity and acceptance, however, has also increased the correlation between the stock market and cryptocurrencies, leading to a decline in their refuge properties.

Bitcoin was quite disconnected from traditional financial markets in its early days. But by becoming “just one more asset,” the sector began to be affected by the same macroeconomic factors that influence traditional markets. The US Federal Reserve’s decision 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 have acted as a burden on cryptocurrencies in recent months . Movements to regulate the sector also affected.

But it is not just macroeconomic factors that have caused this cryptographic crisis. In May and June this year, stablecoin values ​​plummeted, major cryptocurrency exchange Binance halted bitcoin withdrawals due to a “stuck transaction” and the Celsius Network loan platform froze withdrawals and transfers citing market conditions “extreme”.

In the midst of this disruption, users of the public blockchain platform Solana voted in favor of temporarily taking control of an account called “whale” – the largest of the platform with about $ 20 million – to prevent the account owner from liquidating his positions and further lower prices. .

Taken together, these factors have caused investors to lose confidence in the sector. The Crypto Fear & Greed index is almost at an all-time low of 9/100, indicating “extreme fear.” The index was at 75/100 when bitcoin reached its November 2021 high.

The cryptographic perspective

So what does the future hold for this class of alternative assets? As can only be expected in the cryptocurrency ecosystem, the range of views is extreme. Some see this market fix as a great time to “buy the dive.” Others believe this is the end of the cryptocurrency festival.

Resolved Bitcoiners can always find positive signs in the market and many use chain metrics (trading signals based on data obtained from public blockchain transactions) to determine good times to buy. Recently, popular metrics that include market value and realized value (MVRV – a ratio that shows current versus average currency prices) suggest that bitcoin is about to begin a period of accumulation based on past history. On the other hand, this may be an indication of confirmation bias as investors look for signs that confirm their beliefs.

Others argue that this is just one more example of a long line of bursting cryptocurrency bubbles: a typical cycle of the cryptocurrency market. Comparisons with the collapse of the 2000 dot com were abundant in the market, but cryptocurrency enthusiasts argue that the basic premise of dot com stocks was correct, as the internet he was the future. They believe the same is true of bitcoin, and predict that the industry will recover.

However, economists have been studying bubbles for centuries, and evidence shows that many assets never regain higher nominal prices after the market bubble bursts. Some of these economists, including former U.S. Secretary of Labor Robert Reich, have equated cryptocurrencies with Ponzi schemes that, unless regulated, will follow the path of all such schemes and eventually collapse.

Certainly, the view of cryptocurrencies as a decentralized asset available on a peer-to-peer network with no barriers to entry goes against recent actions such as the freezing of withdrawals by some platforms. These moves will not go down well with cryptocurrency enthusiasts. In addition, the increased correlation of cryptocurrencies with other asset classes is diminishing their value as a diversification tool, while the Central Bank’s growing interest in digital currencies threatens to further erode the attractiveness of cryptocurrencies to its major investors.

Cryptocurrencies also face challenges around energy use, privacy, and security. It is unclear whether these issues can be resolved without eroding the elements that made cryptocurrencies popular in the first place. The recent US launch of a short Bitcoin ETF, which allows investors to win with the price drops of bitcoin, will allow investors to fill their positions and trade against bitcoin.

Investing in cryptocurrencies is like riding a roller coaster with great appreciations followed by sudden falls. Volatility is endemic, bubbles and shocks are common, and there are divisive views on environmental, ethical, and social benefits. The great correction in this market has tested the will of even the most avid cryptography enthusiast. Buckle up because this story isn’t over yet.

This article by Andrew Urquhart, Professor of Finance and Financial Technology, ICMA Center, Henley Business School, University of Reading, and Brian Lucey, Professor of International Finance and Commodities, Trinity College Dublin, is published from The Conversation under a Creative Commons license. Read the original article.

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