With multiple exchanges going bust, we ask the question. Is crypto dead?
FTX, Voyager, Celsius and 3 Arrows Capital, are just a few of the cryptocurrency companies that have gone under in this harshest of crypto winters. If you are unaware of the FTX debacle you can read more about that here.
But does this mean crypto lies face down in the snow? The answer is probably no. Although the decimation of crypto is likely to continue in the short term, long-term prospects remain favourable, especially for established players like Bitcoin (BTC). Here’s why:
We’ve seen it before
Bear markets have happened numerous times since the launch of Bitcoin way back in 2009. In 2011 the price of Bitcoin fell from $32 to an astonishing $0.01. This dramatic fall could be attributed to the collapse of a cryptocurrency exchange called Mount Gox. The similarities are obvious. Of course, with hindsight, we know crypto rebounded dramatically following this first bear market crash.
Bitcoin has subsequently been faced with four further bear markets the most recent has seen Bitcoin plunge from all-time highs of $68,000 to under $17,000 in 2022. All other coins or altcoins tend to follow the rise and fall of Bitcoin, so if Bitcoin falls, all altcoins will fall too.
The macroeconomic climate
Interest rate rises, wars and global recessions have a contracting effect on world markets. As a result, fewer funds are sloshing around to invest in stocks and other asset classes like Bitcoin. Investors tend to gravitate towards security in recessions. The net effect is that most asset classes like Bitcoin will fall during times of recession.
Assets classes like property, gold or even fine art may rise in uncertain markets as investors flock to less risky bets. However, once the market recovers, investors will again be looking for higher returns on their investment capital.
The supply of Bitcoin is limited
Bitcoin is limited to 21 million Bitcoins. This means that in theory, as more people buy into the coin the coin becomes more scarce leading to an increase in price. Bitcoin’s creator, the mysterious Satoshi Nakamoto built this into the network deliberately to ensure that Bitcoin would be an appreciating asset. As we discussed earlier other coins are also likely to rise if Bitcoin reaches new highs.
The Bitcoin halving
Miners use powerful computers to complete cryptographic puzzles that verify transactions on the blockchain. Miners are rewarded in Bitcoin for completing such puzzles.
The Bitcoin blockchain incorporates an event called the halving. Halving effectively means that the rewards that Bitcoin miners receive for mining Bitcoin will be halved in value. The halving event occurs roughly every four years with the next occurring in 2024.
Halving has the effect of reducing the amount of new Bitcoin being produced and therefore has the effect of pushing the price of Bitcoin upwards. The final halving will be in 2140 when the maximum 21 million Bitcoins will have been produced by the blockchain.
As we can see cryptocurrencies like Bitcoin have processes ‘baked in’ that should ensure the price appreciates over time. However, we should be careful to not assume that this will automatically result in an increased price. Following the recent collapse of numerous centralised exchanges, regulation may be put in place to limit the progress of crypto. Also, consumer confidence in crypto may wane for several months or even years due to the much-publicised bankruptcies. As always, care should be taken when investing in crypto and you should never invest more than you are prepared to lose. As always, do your own research and ensure you do not hold your crypto on a centralised exchange.
Please note this article is not financial advice and is for information and educational purposes only. As always, you should carry out your own research when considering investing in cryptocurrency. Prices can go down as well as up.
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