Market volatility is testing investors’ will, but crypto enthusiasts still see a future for the asset class

In the months that followed, however, most major cryptocurrencies fell more than 70%, and bitcoin itself fell below $18,000. Is this just another crash in the volatile cryptocurrency market, or is this 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 initially weak, price appreciation took its value to nearly $20,000 by the end of 2017. This happened as more retail investors were drawn to crypto. -currencies as a supposed hedge or safe haven against other asset classes.

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 bitcoin futures contracts on a regulated exchange were listed by the Chicago Board Options Exchange.

Bitcoin options followed on the Chicago Mercantile Exchange in January 2020.

This period of expansion was capped off by the launch of the first bitcoin exchange-traded fund (ETF) in October 2021, giving investors exposure to bitcoin without having to buy it on a crypto exchange.

Growing acceptance of crypto

At the same time, the mainstream financial industry was increasingly accepting cryptocurrencies as a legitimate asset class. A 2021 study of institutional investors found that seven out of 10 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, driving down their safe-haven properties.

Bitcoin was quite disconnected from 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 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 all acted as a drag to cryptocurrencies in recent months.

Measures to regulate the sector have also had an impact.

But it is not just macroeconomic factors that have caused this crypto downturn. In May and June this year, stablecoin values ​​plummeted, major cryptocurrency exchange Binance suspended bitcoin withdrawals due to a “stuck 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 a so-called “whale” account – the platform’s largest at around $20 million – to prevent the account owner to liquidate his positions and drive prices down even further.

Together, these factors have led to a loss of investor confidence in the sector. The crypto fear and greed index is almost at an all-time low of 9/100, indicating “extreme fear”. The index was at 75/100 when bitcoin hit its November 2021 high.

The Crypto Outlook

What future for this alternative asset class?

As you would expect in the cryptocurrency ecosystem, the range of views is extreme. Some see this market correction as the perfect time to “buy the dip”. Others think it’s the end of the party for cryptocurrencies.

Resolute bitcoiners can always find positive signs in the market and many use on-chain metrics (trading signals based on data gleaned from public blockchain transactions) to determine good times to buy. Recently, popular metrics including Market Value over Realized Value (MVRV) – a ratio showing current coin prices relative to average prices – suggest that bitcoin is about to begin a period of accumulation based on market value. ‘historical.

On the other hand, it may be an indication of confirmation bias, as investors look for signals that confirm their beliefs.

Others say this is just one more example in a long line of bursting cryptocurrency bubbles – a typical crypto market cycle.

Comparisons to the dotcom crash of 2000 have been plentiful in the market, but crypto enthusiasts argue that the basic premise of dotcom stocks was correct – in that the internet has been the future. They believe the same is true for bitcoin, predicting that the sector will recover. Economists have studied bubbles for centuries, however, and evidence shows that many assets never return to high nominal prices after the market bubble bursts.

Some of these economists, including former US 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.

Admittedly, the view of cryptocurrencies as a decentralized asset available on a peer-to-peer network with no barriers to entry runs counter to recent actions such as the freezing of withdrawals by some platforms. These moves will not appeal to crypto enthusiasts.

Furthermore, the increased correlation of cryptocurrencies with other asset classes diminishes their value as a tool for diversification, while the growing interest in central bank digital currencies threatens to further erode the attractiveness. crypto for its main investors.

Cryptocurrencies also face challenges related to power consumption, 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 launch in the United States of a short Bitcoin ETF, which allows investors to take advantage of the falling price of bitcoin, will allow investors to hedge their positions and trade against bitcoin.

Investing in cryptocurrencies is like riding a roller coaster with sharp appreciations followed by sudden declines. Volatility is endemic, bubbles and crashes are commonplace, and opinions differ on the environmental, ethical, and social benefits.

The major correction in this market has tested the will of even the most avid crypto enthusiasts. Buckle up because this story is not over yet.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Market volatility is testing investors’ will, but crypto enthusiasts still see a future for the asset class

Source link Market volatility is testing investors’ will, but crypto enthusiasts still see a future for the asset class

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