The recent plunge in cryptocurrency values has many investors wondering “Is crypto dead?” Such concerns are valid, especially since investors now face a volatile stock market, inflation, and a geopolitical crisis, all of which have an impact on the cryptocurrency sector.
Unfortunately, there is no way to know for sure if the cryptocurrency sector is truly dead. However, there are important indicators that can help investors better understand the current state of cryptocurrency.
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Cryptocurrency 101
Simply put, cryptocurrency is a form of digital money that is decentralized and based on blockchain technology. Some of the more popular versions of cryptocurrency include Ethereum and Bitcoin, but there are more than 19,000 types in existence. Cryptocurrency, like traditional currency, functions as a medium of exchange, however, unlike the Euro or dollar, there is no central authority that maintains or manages cryptocurrency value.
Cryptocurrency can be used to purchase services and goods, but most people choose to invest their cryptocurrency instead, much like precious metals or stocks. A blockchain records cryptographically verified proof of transactions.
What are Blockchains?
To fully understand the nature of cryptocurrency, you must know what a blockchain is. A blockchain is a distributed, open ledger that keeps track of transactions in code. Transactions are recorded in the form of “blocks” which are linked together on a “chain” of former cryptocurrency transactions.
Everyone who utilizes cryptocurrency has their own record of this ledger to compose a unified transaction record. Each new transaction is logged as it happens, and every copy of the blockchain is instantaneously updated with the new data, ensuring all records are accurate and identical.
To combat fraud, a validation technique is used to check each transaction. Such techniques may include proof of stake or proof of work.
Proof of Work vs Proof of Stake
Proof of work and proof of stake are two commonly used mechanisms of consensus used to verify transactions before they are added to a blockchain. Efforts to verify transactions are rewarded with cryptocurrency for their efforts.
Proof of work is a way to verify blockchain transactions using an algorithm that provides a mathematical problem that is solved by a computer. Participating computers termed “miners,” solve mathematical problems that help verify groups of transactions known as blocks, which are in turn added to the blockchain ledger.
Computers race to solve these problems, and the first computer to do so is awarded a small amount of cryptocurrency. An immense amount of computing power is used to solve these problems.
Proof of stake is also used to verify transactions and lower the amount of power used to check them. The number of transactions each individual is allowed to verify depends on the amount of cryptocurrency they are willing to “stake,” or freeze in a communal safe so they can participate in the process.
In other words, the cryptocurrency staked serves as a form of collateral. Since less energy is used in the proof of stake, it solves equations more efficiently and allows for shorter verification times.
Why is Cryptocurrency Down Right Now?
Recently, the cryptocurrency market has experienced one of the worst selloffs in years, creating panic among investors and forcing some to wonder why crypto prices have become so sensitive to stock market fluctuations. Stablecoins in particular have been at the forefront of the panic.
As their name suggests, stablecoins are supposed to possess a stable value because they are attached to the value of a commodity (ex: gold) or a currency.
This attachment supposedly provides insulation from stock market volatility, but recently, even stablecoins have crashed. This has caused investors to wonder why is crypto down?
Economists and market experts believe there are two primary factors behind the recent slump in the cryptocurrency market. The Federal Reserve’s measures to rein in inflation and stabilize the market and the implosion of a type of stablecoin known as terraUSD.
1. From a macroeconomic perspective, the Federal Reserve reduced interest rates in an effort to manage the economic slump caused by the pandemic. They hoped such measures would pump more income into businesses and households. These measures were implemented in 2020, and unfortunately, they resulted in high levels of inflation later on. Excessive liquidity also increased prices across most asset classes, including cryptocurrency markets.
As prices rise, incomes for the majority of people do not. When prices rise, economic growth, in general, is threatened. To prevent further damage, the Federal Reserve increased interest rates, hoping to curb the money supply and reduce inflation.
Interest rate hikes are expected to continue in the future. The hike in interest rates has caused investors to become nervous.
2. Both TerraUSD and luna are stablecoins, so they were thought to provide more stability during times of market volatility. Since the value of the UST is tied to the U.S. dollar, the value of one UST should equal $1. If the value falls below a dollar, the coin could potentially be “burned” and exchanged for a dollar of luna. In 2022, the value of UST went lower than a dollar.
As the price of UST plunged, many luna holders cashed out, resulting in an excess supply of luna tokens. This excess influx of tokens caused the price of luna to crash and lose the majority of its value.
According to many sources, such as Bloomberg Intelligence, this significant decline in value was the worst day for any financial product ever. Its loss of value convinced the cryptocurrency exchanges to delist the token since there was no longer any liquidity in the market.
Like the stock market, the cryptocurrency market has been in decline for months. Unfortunately, with the aggressive Federal Reserve measures, asset markets have been corrected. This correlation between cryptocurrency and traditional markets is currently at an all-time high. In other words, if one falls, the other will typically follow suit.
Market experts have also noticed a strong correlation between tech and cryptocurrency stocks, both of which were hit hard by the recent slump in the market.
How Low Could Crypto Go?
Some analysts believe that Bitcoin, the market’s leading cryptocurrency, could fall as low as $20,000. Opinions on how low cryptocurrency values could go vary among analysts, with some believing they will rise in the future and others believing they will fall to nothing.
Despite this variation in beliefs, most analysts suggest investors should prepare themselves for more market volatility.
To predict whether cryptocurrency values will continue to drop, many traders utilize tools and patterns in an attempt to forecast various possibilities. Since Bitcoin is the market leader in cryptocurrency, where it goes the rest of the market tends to follow.
Some optimistic analysts recognize the short-term decline in cryptocurrency values but predict the market will level out and values will rise in the future.
Many Bitcoin enthusiasts emphasize the currency’s increased adoption and its potential to become one of the leading currencies in the future. Some of the most die-hard enthusiasts predict Bitcoin will be valued at more than $1 million by 2030.
The majority of short-term price predictions come from traders as opposed to investors. Most traders prefer to utilize a short-term approach in an attempt to profit from fluctuations in price. Conversely, investors strive to build wealth by maintaining assets for the long term. Fortunately, if you are an investor, there may be ways to weather the cryptocurrency storm by:
- Only investing money you can afford to lose
- Attempting to mitigate any risks associated with crypto investing
- Ensuring cryptocurrency only represents a small percentage of your portfolio
Ideally, cryptocurrency investors should position themselves so they can survive any short-term dips. By doing this, they can ensure they can still reach their financial goals, even if the cryptocurrency market tanks completely.
Will Prices Rise Again?
Within a matter of months, the cryptocurrency sector has lost more than $1 trillion. This makes it hard to be an investor at the moment, and if you are invested in crypto, you may be wondering if prices will ever recover. Unfortunately, there is no way to know for sure, primarily because cryptocurrency is unlike other types of investments. Cryptocurrency is speculative and relatively new.
Bitcoin, the first cryptocurrency, was only created in 2009, so the sector has never had to weather a crash. This makes it difficult to predict if the crypto sector will continue to decline in the future.
It is important to note, however, that some individual cryptocurrencies have managed to survive extreme market volatility in the past. Both Bitcoin and Ethereum have been able to rebound from previous drops.
When to Buy the Dip
“Buying the dip” refers to the act of buying an investment, such as cryptocurrency, at a discounted rate. During a market “dip” you hold on to it until the market rebounds and its value increases. Many market analysts advise against doing this, primarily since the Federal Reserve is likely to continue raising interest rates. This will impact the cryptocurrency market negatively.
Since there is no concrete way to predict if cryptocurrency values will increase in the future, the same analysts warn investors to avoid buying the dip altogether.
On the other hand, many Bitcoin enthusiasts are sure prices will go back up in the future. They point to the fact that some cryptocurrencies have survived dips in the past. Unfortunately, these enthusiasts tend to be in the minority.
Is a Rebound on the Horizon?
As implied above, there is no surefire way to know the state of cryptocurrency in the future. The recent market slump has revealed weaknesses in the cryptocurrency sector, but a rebound may be on the horizon. In other words, if you are wondering if Bitcoin is dead, you will have to wait and see.
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