Virtual currency known as cryptocurrency has become extremely popular for investors in the past couple of years. It may still seem like a scam or like an inane economy for the computer geeks, but it is much more valuable and complicated than that.
Though there are scams in the world of crypto, big names such as Bitcoin and Ethereum are being thrown left and right, and their value underlines their validity as well.
With recent economic developments, the price of most goods and services has inflated or dropped precipitously, but what does that mean for cryptocurrencies?
In the cusp of the pandemic first erupting across the globe, cryptocurrency was also following parallel to the virus, and the value of currencies such as Bitcoin skyrocketed into the tens of thousands.
One thing to remember is that cryptocurrency is volatile, meaning it can rapidly fluctuate thanks to mainly supply and demand the same as commodities and assets.
Crypto can easily be seen as an asset or an investment, which is also why speculation plays a key role in its constant value. All the parties involved in cryptocurrencies create investor concerns which then also fluctuate prices.
Though it isn’t technically an online paying job, investing in assets such as these is preached by many as a sound investment, which is where the argument of crypto versus gold comes in. We will be talking about the differences between the two later.
The current drop of crypto and its relation to inflation.
Let’s first talk about inflation.
As you may know, inflation provides a rise in prices and a decrease in the overall purchasing value of a currency or money. The consumer price index has risen globally in various amounts, with most Americans perceiving a 7.5% increase in everyday items.
Current surges in inflation are the highest we’ve seen for around forty years, and we’re especially perceiving this inflation on utilities, food, gasoline, and housing. This bout of inflation is due to the pandemic that started at the end of 2019 and is still quite ongoing, but then why did crypto’s value increase?
The uncertainty the global economy showed for investors during the pandemic paired with people staying home more birthed a situation where interest in investing in cryptocurrencies increased drastically.
The reason investors started hounding these assets was due to its volatility, which has managed to mostly escape traditional market forces trying to influence it. What influences crypto is network effects, speculation, and overall popularity across media.
There is a cap of 21 million coins for cryptocurrencies, so the closer we get to this supply limit, the more the value or the prices of crypto will rise. Once the limit is reached, the profit from mining currencies such as Bitcoin will disperse and will be handled by those who have ownership of these coins.
Why did the crypto market fall?
The assumption was that the cryptocurrency market wouldn’t be affected by fluctuations within the traditional market since it is decentralized from any government, but the reality is that it is closely connected to the economy.
This reality especially makes sense when looking at how demand and supply affect the prices, showcasing how the same laws as those of the global economy apply to crypto.
Some governments that are frowning upon cryptocurrencies such as Bitcoin are being rumored to want to develop regulatory strategies for cryptocurrencies to address the security and economic challenges they may face in their countries.
This obviously led to a lot of crypto investors selling their holdings. The premise of crypto is that it isn’t run by any government or central authority, thus people thought (and hoped) that these digital currencies would be immune to such disruptions.
Thanks to this influx of selling, the prices of Bitcoin, for example, dropped from $68,000 to $37,000, meaning Bitcoin lost almost half its value. It is estimated that Bitcoin will see its next bull market no sooner than 2024 after another halving occurs.
Miners who validate crypto transactions through specialized computers are also rewarded in Bitcoin. The process of halving occurs every couple of years and means the reward these miners get will be cut in half. This process is coded into the cryptography of cryptocurrencies.
Factors that can easily affect crypto prices aren’t just these coded processes though, as we have seen with the pandemic and the rising inflation encountered globally thanks to the collapse of supply chains worldwide.
Geopolitical factors affect crypto prices, such as war.
The conflicts between Russia and Ukraine have so far resulted in stocks and risk assets falling thanks to tension and nervousness found throughout markets. This was a large factor in why Bitcoin prices fell, and many other cryptos followed.
This is where the argument of gold versus crypto comes up, and this situation provides a prime example for it too. Gold remained pretty stagnant in its value, seemingly unaffected by the cold sentiment surrounding markets currently.
Gold has always been a hedge against market downturns and is now showing it too. The previously dubbed “digital gold” values plummeted, whereas gold remained in its original value range.
This is not to say cryptocurrency isn’t a great asset to have as an investor. This situation will truly test how crypto holds up against gold, and how well everyone will be able to maintain their professional poise during any downfalls.
