The Reasons Behind the Crashing Crypto Market

the story So Far: Bitcoin and many other cryptocurrencies have crashed since reaching all-time highs late last year. Bitcoin has lost more than two-thirds of its value since peaking around $69,000 in November last year and is currently trading at around $22,000. Ethereum, another cryptocurrency popular among investors, has lost nearly 80% since its peak. As a result, the total market capitalization of cryptocurrencies fell below $1 trillion for the first time since January 2021. The crash, which shows no signs of reversal yet, seems to have dampened investor enthusiasm with trading volumes in Indian cryptocurrencies. Exchanges are falling 90% from their peak.

Why is cryptocurrency crashing?

It may not be possible to pin down the exact reason why investors are running away from cryptocurrencies at the moment. Most analysts agree that the fall in the price of cryptocurrencies is in line with the decline in the prices of stocks and other assets as central banks such as the US Federal Reserve tighten monetary policy to combat price increases. As central banks withdraw liquidity from the market, there is less money to chase assets, which in turn causes a drop in asset prices. Others believe that the crash may also mark the bursting of the bubble that has propelled cryptocurrency prices to stratospheric levels.

Skeptics have long argued that the price of cryptocurrencies is driven more by speculative enthusiasm driven by easy monetary policy than by any fundamental factor. For example, extreme volatility in the price of cryptocurrencies was seen by many as a feature that rejected the use of cryptocurrencies as money. Such extreme volatility simply reflects investor behavior that is based on gambling. These skeptics also pointed to the fact that the use of cryptocurrencies for real-life transactions was low, even though the price of cryptocurrency was rising aggressively. So, in short, there was little reason to believe that the rally in cryptocurrencies was driven by their widespread acceptance as an alternative to fiat currencies.

How do governments view cryptocurrencies?

Some skeptics have also argued that even though private cryptocurrencies may rise to the status of an alternative to fiat currencies over time, governments and central banks cannot allow this to happen. Several countries have taken a number of steps to discourage the widespread use of cryptocurrency. While countries such as China and Russia have opted to ban cryptocurrencies outright, other countries such as India have attempted to heavily tax and regulate them. In India, while the government has not banned cryptocurrencies outright, the Reserve Bank of India has been quite vocal about the need to ban them completely. It should come as no surprise that central banks are wary of private cryptocurrencies because they challenge the monopoly that central banks currently enjoy over the economy’s money supply. If cryptocurrencies become widely accepted, it will affect central banks’ control over the economy’s money supply. It will also affect the ability of governments to fund their spending by creating new money as citizens can choose to switch to alternative currencies.

Will cryptocurrencies rise again?

Cryptocurrency enthusiasts argue that cryptocurrencies like bitcoin have always been subject to extreme price swings and that the current crash is a good time to buy these virtual currencies at tremendous bargains. To be fair, many crypto-enthusiasts have been rewarded well in the past when they bought cryptocurrencies during panic sales. He argues that cryptocurrencies, like gold, protect investors from the risk of price inflation. It should be noted that, unlike fiat currencies issued by central banks, the supply of various cryptocurrencies is limited by design. By holding their money in cryptocurrencies, which either retain their value or even appreciate in value over time, investors can protect themselves from devaluation of their funds by central banks.

However, skeptics believe that the current crash could be the end of the road for cryptocurrencies. Even if cryptocurrencies manage to recover from the current crash, they may still not manage to maintain their gains, as cryptocurrencies have no fundamental value in the form of money. In fact, some have argued that the true value of cryptocurrencies is somewhere close to zero. They point out that the most popular cryptocurrencies like bitcoin are still not heavily used in the daily buying and selling of goods and services in the real economy. It should be noted that investors generally believe that the price of an asset tends to move towards its intrinsic or fundamental value in the long run, even though it may diverge from its fundamental value in the short term.

Crypto-enthusiasts, however, argue that cryptocurrencies may not be widely accepted as currency, yet they represent an independent asset class like gold that allows investors to protect their wealth from central banks. can help to. The argument still suffers criticism that cryptocurrencies have no independent value of their own compared to gold and silver, and thus cannot provide any money security over the long term.

Precious metals like gold and silver are far more acceptable than cryptocurrencies, which gives them their intrinsic value. In fact, precious metals have served as currencies for centuries and are widely used for industrial and other purposes.

No cryptocurrency has such a record. The fact that the supply of precious metals is limited certainly helped boost their value. But limited supply alone cannot make cryptocurrencies like bitcoin a valuable asset like gold and silver.