Bitcoin emerged in 2009 to make payments and transfers to any part of the world in a fast and decentralized way, without intermediaries and with low commissions, which is why it became an alternative asset that had its greatest boom during the pandemic, since cryptocurrencies they were seen as an option to hedge against inflation in times of economic uncertainty.
Cryptocurrencies are currently taking a hit as US Treasury yields soar and pessimism grows over a global economic slowdown.
The entire cryptoverse is vulnerable to rising borrowing costs and that risk remains in the short term. For now, the main catalyst will be the signal that the Fed sends to the market with its monetary policy and economic expectations.
Bitcoin is trading around $19,000, a 58% drop in value by 2022 and down 71% from its high in November last year, according to data from Bloomberg.
Eloisa Cadenas, CEO of Cryptofintech, mentioned that it is important to analyze what bitcoin is related to, since years ago the cryptocurrency responded to hedging factors and in the pandemic it was expected to fall, however, it was the opposite and served more as a reserve of value.
Why is bitcoin so volatile?
The volatility of bitcoin has a lot to do with the size of the market, despite the fact that it has already managed to reach a very considerable market capitalization.
One of the realities about the digital currency is that compared to the size of the stock market capitalization, that of bitcoin is low, so any sale or purchase movement has a greater impact on its price.
“The price volatility could be corrected when bitcoin reaches multi-trillion dollar market caps and you will see a much higher bitcoin price, that will be reached at some point. But for now, since it is still such a young asset, volatility will continue to be observed in the years to come,” said Guillermo Barba, chief strategist at Top Money Report.
Speculation is also part of the food of bitcoin. Mauricio de Medina, advisor in investment strategies certified by the AMIB, explained that there is no way to value bitcoin, since there is no support for its intrinsic value of the digital asset. The specialist said that the large capital administrators have had to take their resources as a result of various situations and therefore affect the “credit” money market.
“Cryptocurrencies are not of standardized use where they can be bought. So those conversions need to be made when problems begin to be seen ahead, so they take refuge in what is known or can be considered a refuge of value and bitcoin does not meet the characteristics of a reserve of value. With the current fluctuations it is impossible to call it a value safeguard and we cannot consider it as a hedge against inflation either”, added De Medina.
What’s next after the crypto winter?
Bitcoin may still hit lows as the pace of Fed interest rates will largely depend. Crypto assets are now highly tied to the speculative cycle of rate hikes and the limit of their price decline will be seen when give signs of a less restrictive monetary policy and the market begins to inject liquidity.
Throughout its history, the cryptocurrency has had several crashes. Taking this trend into account, different analysts have estimated that it is possible that it could reach a range of 10,000 and 12,000 dollars as a floor and from that point, resume the rise.
“Bitcoin is a very resilient asset and has proven to be very resistant to this type of very strong falls, it is part of a downward cycle of risk assets caused by rising interest rates and the massive withdrawal of liquidity from the US Federal Reserve,” explained Barba.
Macroeconomic warnings from Goldman Sachs point to the cryptocurrency being at risk of hitting lows of $12,000. On the other hand, the CEO of Cryptofintech believes that despite these estimates, the entry into bitcoin could be at a good time, since the demand is limited and that could boost the price in at least two years.
“What happens with bitcoin is that it is designed to have 21 million coins in its entire history, currently 19 million have been mined and the rest could be mined until the year 2140, it is a very long period and obviously the production and supply It is getting lower. If a supply and demand relationship is made, that could cause a new historical maximum in the next two years and reach a price close to 100,000 dollars, “he added.
De Medina stressed that it is very important to differentiate investment from speculation, since as investors it is an obligation to know what is being done and where the return on the asset comes from. He recommended investing wisely and making sure you follow a strategy within a diversified investment portfolio.
As an example of this, De Medina mentioned that the products or services that a company sells support investments in shares in the financial market. On the other hand, bitcoin has not yet created something that justifies that decision, so it would enter the merely speculative field. “If what I’m looking for is wealth growth, you can find endless options, but the detail is that within our nature we want returns to be fast,” explained the investment strategy advisor.
In recent years, banks have wanted to buy the idea of cryptocurrencies, so they invest part of their capital in them, which will eventually cause these entities to create a product that allows them to invest in digital currencies, mainly driven by a greater user demand.
