Behind the scenes of the cryptocurrency crisis, there is absolute certainty about its recovery
As they gain more space in everyday life, cryptocurrencies arouse both passion and hatred from people. There are those who defend these assets tooth and nail, but there are also detractors who take advantage of every situation to question their importance and validity.
The problem is that the scenario faced by this segment in 2022 is only favorable for the second group.
Cryptoassets are facing consecutive drops in their prices, scaring companies and investors in recent months. Bitcoin alone, for example, has lost nearly $50,000 from November 2021 to here—it went from $67,000 at the time to less than $19,000 in September 2022.
But what explains this gigantic retreat? There are four truths behind this, but there is also a certainty about recovery.
1. Toss the Moon token
Undoubtedly one of the main causes of the cryptocurrency crash throughout 2022 was the sudden devaluation of the Luna token, from the Terra (UST) blockchain.
It was a sort of stable coin, in theory safer because it was linked to some indicator (in this case, the change in the US currency). For this reason it was one of the most popular options among cryptoassets, but saw its value plummet from $120 to zero in just two days in May.
This event triggered a series of reactions across the market, resulting in billions of dollars in losses among investors. After all, there has been a rise in mistrust around the capacity of this market and other crypto assets, such as Bitcoin itself, have had to readjust their quotes.
2. Disputes, speculation and bans
One of the problems related to cryptocurrencies is the great volatility surrounding controversy and speculation by companies and professionals operating in the sector.
A classic example was when Elon Musk, CEO of Tesla, announced that he would no longer accept Bitcoin as a form of payment in his companies: the currency depreciated by more than 10% that day alone.
The restrictions imposed by countries on cryptocurrencies also contribute to the negative scenario. China recently banned digital currency services at institutions operating in the country.
The US Securities and Exchange Commission has rejected two Bitcoin index funds from Grayscale Investimentos. These are movements that contribute to reducing the price of the main assets.
3. External economic influences
In 2022, armed conflict broke out between Ukraine and Russia, triggering an energy crisis in Europe. In parallel, the economic effects of the Covid-19 pandemic are still being felt in several countries. Proof of this is the raising of interest rates in nations like the United States to control inflation.
The problem is that when interest rates rise, safer investments (like Treasury bills) are much more attractive – and profitable – than bolder investments, like cryptocurrencies. Therefore, more experienced investors prefer to reduce their holdings in this category.
4. The well-known “herd effect”
All this scenario leads to an old acquaintance of economic crises: the “herd effect”, the main fuel of speculative bubbles. The concept is so old that it has been in economic history since the 17th century, with the tulip crisis in the Netherlands – and history is now repeating itself with cryptocurrencies.
Essentially, when many investors reduce their holdings or withdraw money from cryptocurrencies, the vast majority of people decide to follow in their footsteps, triggering a sharp decline in prices.
This is motivated by the insecurity many have about cryptoassets and a lack of knowledge about the segment.
A certainty of recovery: crises are part of the game
Experts differ on the coming months: while some are betting on a rapid recovery of cryptocurrencies, others believe in a further decline in the following months until they return to growth.
In any case, there is one certainty: the sector will recover, sooner or later, because currency devaluation crises are part of the game. It’s like that old saying: after the storm, there’s always calm.
Bitcoin itself has already shown signs of this ability. In 2018, when it hit an all-time high of $20,000, it fell to just over $3,000 in one year. Subsequently there was an appreciation of over 1,160% in three years until a new decline was recorded in 2022.
Furthermore, we must recognize the influence of digital transformation in all aspects of our lives, which totally changes our relationship with money. Cryptoassets are the basis of proposals that should gain strength in the coming years, such as Metaverse.
Therefore, it is natural to expect your quotes to increase in value over time. The secret of success is knowing how to balance on that rope to reap all the fruits.
Rubens Neistein is business manager atCoinPayments
a cryptocurrency payment processor.🇧🇷
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Source: Terra
Camila Luna is a writer at Gossipify, where she covers the latest movies and television series. With a passion for all things entertainment, Camila brings her unique perspective to her writing and offers readers an inside look at the industry. Camila is a graduate from the University of California, Los Angeles (UCLA) with a degree in English and is also a avid movie watcher.
