How is the Global Market Downturn Affecting Cryptocurrencies?


The year 2022 represented one of the biggest blows that cryptocurrencies have received recently: from the ban on their use in China to the increase in interest rates at the U.S. Federal Reserve.

As a result of global production declines, various armed conflicts, and situations of political tension, it is not surprising that the economy found itself in an unstable moment. This, in turn, led to a massive drop in the cryptocurrency market causing bitcoin to fall below $20,000 USD.

Quite a few users had decided to invest in cryptos: Some had decided to buy Solana with credit card, while others had opted for options such as Ethereum or Bitcoin. However, the question remains the same for all these investors: will cryptos recover from the market’s dizzying fall?

This article will seek to analyze how the global market affects cryptos and what situations cause the price of these currencies to vary.

Cryptos Ban: Do They Negatively Affect Cryptocurrencies?

Although several countries have sought to solidify their economies through cryptos (such as El Salvador and the Central African Republic), many others see virtual currencies as a destabilizing aspect of their economies.

After all, being currencies that do not work through intermediaries and are much more difficult to trace, it is much more complicated to find out who is trading with them or how to establish a tax payment appropriately. Therefore, countries such as Algeria, Bangladesh, and Indonesia each seek to safeguard their own country’s revenues by banning their use. However, the real blow comes when a giant of the world economy also decides to issue bans on their use, China being an example of this.

These types of restrictions end up distancing different countries from the possibility of negotiating for goods and services, in addition to closing cryptocurrency mining markets or making transactions difficult for those who were already trading with cryptocurrencies. This generates massive sales at a regional level and with it, the price of cryptocurrencies falls.

Since these are small nations, the situation does not usually get out of control and can be managed by investors. But when countries with a population as large as China’s are forced to sell for fear of future repercussions, it is normal for prices to drop massively.

Finally, this fall in prices ends up generating doubt among potential investors who need to become more familiar with the subject, preventing a rapid recovery in the value of the different crypto coins.

Inflation, World Conflicts, and Stock Market Crashes

One of the characteristics of cryptocurrencies is that, despite being a demand-based asset, they do not withstand periods of inflation very well. While gold or silver maintain or increase their value in the face of stock market falls or currency depreciations, cryptos do not behave in the same way.

This is primarily due to the lack of confidence still found in the market and their non-tangibility.  When there are inflationary periods or currency devaluations, people prefer to buy other assets, lowering the purchase of cryptos. The more cryptocurrency purchases go down, the more the price starts to fall gradually, causing cryptocurrency prices to drop.

Unlike gold or silver, cryptocurrencies are too unstable in price to be considered safe-haven assets. Their erratic behavior in the face of economic crises makes them much less appreciable, which is why they do not appreciate in strong economic periods.

A clear example of this can be seen today in the so-called “war economy” that several countries in the European Union, the Middle East, and Asia, in general, are experiencing. The markets have fallen thanks to the lack of production of several commodities, however, different investors take advantage of the crisis to buy tangible goods leaving aside crypto assets.

Can Cryptocurrencies Return to Their Previous Price?

Bitcoin is considered a revolution, and now several other coins are copying it. Functioning as virtual assets, cryptocurrencies have multiple advantages such as free transactions, security, and speed of payment, as well as no need for intermediaries. However, they also have several disadvantages, and it is these same disadvantages that are currently preventing them from recovering their price.

The first reason is that they are a highly speculative asset, making it possible for several strong investors to raise prices by buying, and selling when the rest of the market starts to buy. Following this, being an asset that works in a demanding market but does not maintain its price means that few will risk investing in them.

The general distrust of the investment community, the volatility in the market, and the time investment required to work with cryptocurrencies are also some of the reasons that delay their return to the market. This, added to the many restrictions that some countries place on cryptocurrencies makes it not worth taking the risk for the profit that will be obtained.

Finally, cryptocurrencies will revalue over time. However, everything will depend on whether the cryptocurrency market remains stable and is not affected by additional negative situations in recent years.

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