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The Crypto Market has not yet passed the most important test
Bitcoin, the most popular cryptocurrency, has existed for over 9 years, although the cryptocurrency market has started to become the most popular in the last year. However, this period of time is not so long as to assess how the long-term cryptocurrency market will behave and whether it will grow, as its supporters expect. All this because the owners of cryptocurrency did not come into contact with the key factor that allows us to assess the durability of a given market: the financial crisis.
How do Bitcoins and other cryptocurrencies behave in the face of the financial crisis?
We can distinguish two extreme approaches to this problem. People counting on the fact that cryptocurrencies will replace FIAT currencies in the future and completely change the financial system believe that the global financial crisis will be a flowering period for cryptocurrencies. On the other hand, the skeptics believe that the crisis will be very acute for this market – there will be drastic falls and a large part of the projects may not survive. This latest group includes the American investor James Chanos, known for capturing assets that can be earned from short sales.
Chanos warns that people counting on the fact that the cryptocurrencies purchased by them will perform the function of preservation of value as the real estate market during the crisis will be very disappointed. According to him, the periods of turbulence on the markets are the worst time to keep cryptocurrencies. He also said it would be a much better idea to keep … the food.
"The last thing I would like to have when everything falls asleep is Bitcoin", Chanos said in an interview with the Institute for New Economic Thinking.
According to Chanos, the criptos are just a speculative game, hidden under the slogan of a revolution in the traditional financial system. It does not openly call Bitcoin fraud but underlines that some projects could be like that.
The bull market is the source of the success of cryptocurrencies
While the usability of cryptocurrencies is under discussion, Chanos draws attention to an important factor that has made investing in cryptocurrencies so popular. This is a certain repeatability of behavior, related to cycles on financial markets. It is all, of course, on increases and downturns and their impact on financial decisions.
Bear markets have one towards the other which significantly increases the level of risk aversion. During the bull market, this level of risk aversion decreases. The problem, however, is that this decline does not stop at reasonable levels. Long-term meetings make investors willing to take on more and more risks and even make investments that they would normally consider inappropriate. As a result, a prolonged bull market is an ideal environment for the development of speculative bubbles or dishonest investment schemes (eg financial pyramids or Ponzi schemes). This is also facilitated by levels of low interest rates, which discourage people from holding savings on safe deposits. Investors in these conditions are more likely to choose riskier investments in order to achieve a satisfactory return. The gambling industry thrives in these conditions with sites like Bitcasino that offers traditional games but with Bitcoin. This greatly increases the risks associated with gambling: when we play with FIAT currencies, we know that when we win $ 400 at blackjack, we will return home with $ 400 (minus the possible casino fees). But when do we play with encrypted? We can go home with our $ 400 BTC and wake up the next morning at $ 800 or $ 200. This is truly a silent revolution, and not only do betting and betting sites know it.
A repetition of the Internet boom?
Chanos reminds us that the bull market ended at the beginning of the 21st century with a dotcom bubble. Just as the dotcom boom has contributed to the proliferation of companies that connect to the Internet industry, so now, like mushrooms after the rain, new cryptocurrencies are emerging and companies are appearing on the stock market trying to get publicity thanks to the connection with blockchain technology. The bearish market of the beginning of the last decade ended with heavy discounts from the main entities of the dotcom sector and eliminated the market of small operators and entities that were claiming to be the Internet business.
Will the same fate await cryptocurrencies and ICOs? This scenario seems plausible. As in the case of grants, larger projects like Bitcoin or Ethereum may remain on the market, which on one hand will lose a general sale, but some of these losses will be offset by capital escaping from smaller projects.
WShould crypto owners lose money during the financial crisis?
If we consider the cryptocurrency market as other investment markets, the risk parameter should be a key parameter. During the financial crises, the maximum outflow of capital is recorded in high-risk markets. This is transferred in cash or in low-risk markets (so-called safe ports).
At present, cryptocurrency can not be considered a cash equivalent or a safe haven. Globally, traditional currencies are preferable to cryptocurrencies and this should not be expected to change until the next financial crisis. It should be recalled that the capital circulating on the financial markets is principally the institutional capital, which is still skeptical towards the criptos.
In other words, all this mainly concerns the aforementioned risk parameter: cryptocurrencies are characterized by a much higher investment risk than financial instruments that do not use leverage. On the one hand, it gives the possibility of obtaining high rates of return (as in the previous year), and on the other hand, represents a threat of significant slippage, as in this year. The financial crisis and the resulting economic collapse are drastically increasing risk aversion. Uncertain high profit in the future is no longer as attractive, especially when the spectrum of redundancies in companies and the difficulties in finding new jobs are presented.
