Why are cryptocurrencies falling?
Digital gold, an independent alternative to official money and without intermediaries, refuge value, unlimited profits... are expressions that we have heard in recent years about cryptocurrencies or cryptocurrencies. But the current reality is far from these euphoria as they are sinking. In November 2021, bitcoin, which is the first and most popular cryptocurrency, was trading at 56,278 euros and now, at the beginning of June, it has fallen by 50% to 27,640 euros.
To understand what is happening, let us first remember that a currency or currency is a good that is used to exchange things that have a value. When we go to buy the newspaper and they give it to us in exchange for coins, it is because these have a value accepted by both parties. Gold is a physical asset, which has been valued for centuries for everyone.
The euro has a very low physical value as paper or currency, but since it is guaranteed by the European Central Bank, everyone recognizes its value. One of the characteristics of strong currencies, such as the euro or the dollar, is that their price, although it can fluctuate, is quite constant. Therefore, in addition to being used to exchange goods, currencies can also serve as a store of value.
Thus, in times of economic instability, many people put their wealth in gold or dollars, for example, since they are seen as safe haven values in case they are mishandled. In addition, these assets can also be used as an investment if it is believed that they will increase in value over time.
Cryptocurrencies do not have any physical value nor are they guaranteed by anyone, they are digital currencies. In the case of bitcoin, it has been created by an anonymous person, which does not help trust. But there are many people who believe that they have a value and that it will go up a lot over time. Therefore, in addition to being used for lamb trades, they are also seen as a safe haven and investment.
But what is happening in recent months calls into question the value of cryptocurrencies. It is not the first time that they sink. Bitcoin, for example, already did it in 2014 when it fell by 80%; in 2018, when it fell 84% and in 2020, with a drop of 61%.
The reasons that explain the current drop are diverse. First of all, the financial markets are very unstable because of inflation and the war in Ukraine. Inflation, which has broken the records of the last 30 years, is causing central banks to increase interest rates; and this always hurts the markets.
Secondly, contrary to what the defenders of cryptocurrencies say, they are not perceived as a refuge value, like gold, to turn to when there is instability in the markets. In fact, the exact opposite is happening. As cryptocurrencies are high risk investments, very volatile and speculative, with an unstable economy, many investors sell cryptocurrencies and invest in safer assets, such as the dollar, for example.
Thirdly, in recent times the perception of high risk has been aggravated by the frequent scams that have been taking place.
This is explained because they work digitally, without the guarantee of any central bank or government; with many legal loopholes and insufficient regulation. There have been many cases where hackers have wiped out all the cryptocurrencies on a platform and customers have lost everything. There are already tens of thousands of lawsuits around the world from people affected by cryptocurrencies. In many cases, some platforms that sell them are accused of pyramid scams.
Fourth, with the first drops at the end of 2021, the euphoria has turned into panic. Many investors have begun to doubt the future of cryptocurrencies and have sold them, driving prices down even further.
In summary, the poor performance of the economy, the high risk of cryptocurrencies, the mistrust they generate, and the panic explain these falls. And they seriously doubt that they are safe havens and good investments. In any case, it must be remembered that in previous years all the sinkings were later recovered. Personally, I do not trust cryptocurrencies at all, I think they are smoke, at least until today. I would believe if they were highly regulated, if some central bank, large company or country guaranteed them and if there weren't so many cases of fraud where customers lose everything. But as long as many think otherwise, cryptocurrencies will have some future. The important thing is that whoever invests understands how they work and is aware of the high risks involved. Very often, these products are invested in by people who do not understand them. So when the economy falters, bitcoin euphoria quickly turns to panic.
Posted Using LeoFinance Beta
