Why do we see light at the end of the tunnel?
A few weeks ago we saw how our cryptocurrencies began to lose value, for example Bitcoin fell to 26.000 USD. Although there are currencies that have withstood the fall better than others, the general capitalization of cryptocurrencies has decreased from 2.3 trillion dollars to the current 1.18 approximately.
The most striking example is the price of Terra (LUNA). In one month, it has lost 100% of its value and its stablecoin UST has dropped by more than 90%. This is what has led to the strong domino effect suffered throughout the cryptocurrency ecosystem, where the stability of stablecoins has been questioned, since they offer less volatility than normal cryptocurrencies, more subject to the fluctuations of the market.
But… Why did the value of cryptocurrencies drop?
There is not just one reason to explain cryptocurrencies fall. As usually happens in the global economy, there are a series of factors that, combined with each other, caused this imbalance.
The interest of large investors to invest in crypto
In recent times, the cryptocurrency market no longer attracted only small investors: the interest of large institutions is increasing, for example Tesla and its investment in Bitcoin. This has meant that what happens in the traditional stock markets has a direct and correlative impact on what happens with cryptocurrencies.
The pandemic brought several unexpected economic decisions, one of the ones with the greatest impact was that the United States began to print more dollars, going from 4.000 billion in circulation in January 2020 to 20.000 billion at the end of 2021. Although this measure put in more money circulating, as usually happens when these measures are taken, led to an increase in inflation.
Interest rise in the US
Another factor that is speculated to have influenced cryptocurrencies loss of value is the increase in interest rates of the United States Federal Reserve, added to the situation of uncertainty that the current war between Ukraine and Russia can generate. The rise in interest rates has had a direct effect on the fall of “riskier” investments such as technology and crypto. The Nasdaq100 lost 13% in April 2022 alone, and the cumulative loss so far in 2022 is 21%. For this reason, many people have decided to withdraw the money they had in cryptocurrencies and technology companies to move it to more “safe” investments.
To get an idea of the magnitude of the impact of this measure, we must take into account that 10 of the largest technology companies in the world are also suffering a sharp drop in their market values. The fall goes from 14% of Samsung, who has better resisted these first months, to 43% of Nvidia.
And now that?
It is normal that when we are in a period of crisis, uncertainty is generated, more so in the young world of cryptocurrencies. The first thing we all want to know is how long it will last, and while it is not something we can be sure about, there are several reasons to believe in the recovery of the cryptocurrency crash.
It is not the first nor will it be the last time that a crisis will happen in the world economy. Bitcoin and certain cryptocurrencies with a solid reputation throughout their short history have been tested in different contexts, and have always resisted the difficulties they have faced, recovering faster than traditional markets.
We do not have to lose sight of the context, several companies in the technological world are being affected by this bullfight. We are entering a post-pandemic era with a lot of uncertainty where the economic effects of covid 19 are still surfacing, inflation, economies in recession, added to the war between Russia and Ukraine. While digital currencies are intangible, they are obviously no stranger to what goes on in the ground world.
It is clear that the situation on a global scale is compromised by everything that has happened in the last two years, but analysts seem to point to a correction rather than an explosion of the market bubble. Many speak that perhaps this scenario will enable the regulation of the cryptocurrency market.
Whatever the case, cryptocurrencies are here to stay. Despite the individual monetary losses, it is an episode for the market to learn from its mistakes and mature, coming out stronger.