With the market capitalisation of crypto now down about 50%, and the spectacular failure of Terra, a so-called ‘stablecoin’ (cryptocurrencies that are supposed to be pegged to fiat currencies like the GBP), it seems the crypto critics have good reason to feel smug.
Even the bastion of respectability and stability, Bitcoin, has seen its value fall by around 30% in recent times. The underlying reasons for the plummeting values of crypto are, however, quite predictable and, in some cases, prosaic.
Crypto is just one part of the technology sector that has seen some spectacular falls in recent months, with tech giants including Amazon, Netflix and Slack by no means immune to the jitters in the market.
Tech stocks have been hammered by a slew of macroeconomic events, not least the war in Ukraine, COVID-19, supply-chain issues, inflation and the slowing economic growth. At the same time, the lifting of lockdown restrictions has pushed people back to in-person activities, tempting them away from the technology they were relying on. For crypto, there is an element of being tarnished with the same brush going on here.
But, cryptocurrency seems to inspire extraordinary levels of trading contagion and ripple effects compared to other markets. This helps ensure that bad news stories such as the high-profile Terra collapse, and Tesla’s dithering over the acceptance of Bitcoin, are quickly translated into price falls.
This contagion can be attributed to the behaviour of crypto traders, the majority of whom are speculators who receive their tips and information from fellow traders, influencers and advisers on social media-based platforms. They can easily become spooked once gloom and doom stories hit the platforms and sell their positions en masse, which results in precipitous price falls. Time will tell as to whether these falls are simply an overreaction and, if so, they are soon corrected.
It is now becoming clear that crypto, unlike gold, is no safe haven; in times of inflation and impending recession, it is more likely to experience investor flight rather than flocking. It seems to have no significant immunity to global economic eddies.
Sticking with basic economics, crypto suffers from a lack of asset backing, unlike more traditional investments such as property. Its price is therefore predominantly influenced by changes in supply and demand; when investors are spooked, which is the case now, wild downward swings are inevitable.
And, as pointed out by Bill Gates, crypto comes with limited price support. In his words: “The value of crypto is just what some other person decides someone else will pay for it, not adding to society like other investments.”
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