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Crypto Downturn: Will It Recover?

Recently, cryptocurrencies as a whole have lost over $1 trillion in a few months and investors are facing a very difficult period. For instance, the graph shows that the value of Bitcoin stock has fallen tortuously from $47,465.73 on March 29th to $29,117.37 on June 11th, with a particularly strong drop of around 36.8% of its value. At the same time, other cryptocurrencies have also fallen to varying degrees.

Cryptocurrency is a digital currency and does not exist in physical form. Furthermore, cryptocurrencies are not dependent on any central authority such as governments or banks to maintain them. However, this feature of cryptocurrencies means that they do not have as much credibility as any country's national currency, just as the early money was widely used with credibility by the build of the Gold and silver standard. The weak credibility of cryptocurrencies can be seen in some events including China's declaration that all cryptocurrency transactions are illegal, and Musk's announcement that Tesla cannot pay in Bitcoin, which caused their prices to dive.

At the same time, cryptocurrencies have no monetary properties. Firstly, the price of cryptocurrencies moves too drastically and loses the characteristic of a price scale which is necessary for currency. For example, their prices can never be divorced from the traditional stock market and are often subject to investor sentiment and stock market turmoil. Secondly, the total number of cryptocurrencies is limited and leads to restricted circulation, making them to a large extent a collector's item. Finally, cryptocurrencies are maintained on servers or hard drives, and cannot be used or stored properly without internet and electricity support. In short, from these few characteristics, the existence of cryptocurrency as a currency is fraught with vulnerabilities.

Regarding the recent decline in cryptocurrencies, it cannot be separated from the changes in the stock market, the emergence of inflation, and the wider impact of the war between Russia and Ukraine. Graph 2 illustrates the value of Nasdaq Composite has fallen by approximately 28% and the stock market has been extremely volatile and depressed since the beginning of 2022. In addition, we can roughly see that the tendency of the price of Nasdaq Composite and Bitcoin are similar, and Bitcoin reacts more dramatically to changes than Nasdaq Composite. Therefore, the stock market affects cryptocurrencies to a large extent, so the failure of the stock market to recover could also lead to a negative outcome for the recovery of cryptocurrencies. Moreover, inflation will affect the attitude of investors towards risky cryptocurrencies. Policies such as the Federal Reserve and other central banks beginning to raise interest rates and ending quantitative easing have reduced the attractiveness of cryptocurrencies with the highly risky, and as a result that postpones the recovery of price. Lastly, the war between Russia and Ukraine has caused supply chain problems as well as soaring oil prices, which stimulates inflation even more and slows the recovery of cryptocurrencies.

Graph 2: Comparing the share price of NASDAQ Composite and Bitcoin

Source: Yahoo!finance

To conclude, there are too many factors affecting the price of cryptocurrencies and no one can accurately predict when the prices will recover, perhaps next month or next year. Besides, there have been a lot of debates about cryptocurrencies, especially the fact that they are vulnerable to theft by hackers and used by criminals for money laundering or illegal transactions. From my perspective, the price of cryptocurrencies may continue to fluctuate dramatically, and the existence of drawbacks of cryptocurrencies will eventually lead to them not being a feasible currency and eliminate in the future.


References/Wider Reading,_theft,_and_fraud

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