The market is oversaturated with thousands of cryptocurrencies, and we see many of them end up sinking, while others are catapulted to success. However, why?
The cryptocurrency sector is currently suffering from thousands of them, some more successful than others, as we are already seeing. Some collapse soon after leaving and eventually disappear, while others, such as Bitcoin, for example, have remained in the top 1 since 2008.
It should be noted, as we already entered with ComputerHoy, that they are more or less easy to create, and tokens are the easiest to generate. In fact, you can now create a cryptocurrency in minutes.
Now, knowing all this, why do some cryptocurrencies succeed and others fail? One of the most important factors is oversaturation. Although the cryptocurrency market is relatively young, it is already saturated with too many investors and cryptocurrencies. That’s why this market, being so competitive, is almost impossible to succeed in.
On the other hand, it is well known by now that volatility is one of the main characteristics of these digital currencies. Their price will depend on the law of supply and demand . The big problem is that the demand for the asset changes regularly, and in relation to new assets, the interest rate both rises like a foam and falls.
As with cryptocurrency failures, there are a number of factors that contribute to the success of a coin or token. The state of the market at the time of launching a particular asset can be particularly determinant of its success. It is better to wait for a moment of confidence and plenty of investors.
Using a coin or token can also help your success. If it is of any use to an investor for his projects, he will definitely invest. In addition to these factors, there is another very important thing to consider: marketing. Good marketing is almost a sure thing.
Of course, even knowing all this, the cryptocurrency market is very unpredictable and we think that they will not succeed, they end up inflating their prices and vice versa.
When bitcoin was conceived more than a decade ago, many speculated that it could become “digital gold,” a long-term savings vehicle that would withstand broader economic trends and provide protection against inflation. But not only did it fail to pass the litmus test of the inflationary spiral in which the U.S. and other Western economies found themselves, but investors fled in horror.
One of the main arguments that has been repeated more often in recent years in favor of Bitcoin (and other cryptocurrencies) is that it can be a hedge against inflation , meaning that its value will be maintained over time. The rationale is that the supply of the popular digital currency is limited to 21 million, which creates a deficit as demand increases.
However, because of the inflationary spiral that has caused prices to soar to highs not seen since the 1980s, the cryptocurrency has not been more useful than any other risky asset. The fall in the prices of bitcoins and other cryptocurrencies this year shows that the notion that they can serve as insurance against inflation is far from reality today . Instead, the truth is that traders view crypto-assets as just another speculative investment in technology, with crashes like those seen in some Nasdaq stocks.
In fact, since the beginning of this year, Bitcoin’s market movement has been close to that of the Nasdaq, a stock index that is heavily weighted toward tech stocks, as analysis by Arcane Research shows. That means that when Bitcoin’s price fell more than 25 percent in just one month, to below $30,000 (less than half of its peak since last November), the drop occurred at almost the same time that tech stocks collapsed . at a time when investors were running in confusion in the face of a difficult economic scenario caused by a war in Ukraine, China’s zero Covid-19 policy and a rise in interest rates in the United States.
Strong volatility is not new when it comes to Bitcoin and cryptocurrencies, but the truth is that the similarity of its behavior to that of tech companies in the stock market shows that today its promise of becoming a transformative asset remains unfulfilled. “This delegitimizes the argument that Bitcoin is like gold,” explains Wetle Lunde, an analyst at Arcane. “The evidence points to the fact that Bitcoin is just a risky asset.”
Arcane Research assigns a numerical score of 1 to -1 in its study to capture the price correlation between Bitcoin and the Nasdaq. A score of 1 indicates an exact correlation, meaning prices are moving in tandem, while a score of -1 indicates an exact divergence.
The 30-day bitcoin-Nasdaq average has approached 1 since Jan. 1, reaching 0.82 last May, the closest it has ever gotten to an exact 1:1 correlation.
Bank of America analysts Alkesh Shah and Andrew Moss also reached a very similar conclusion, noting that bitcoin has been trading as a risky asset since at least July 2021, which has a strong correlation with Wall Street. According to these experts, you don’t have to wait for a strong correction in the last few months to see this phenomenon: On January 31, the correlation between Bitcoin and the S&P 500 reached an all-time high, based on its movement over the previous 180 days. Bitcoin’s correlation with the Nasdaq 100 has also been close to historic highs.
Additionally, bitcoin is often compared to gold as an effective savings vehicle. But the correlation between bitcoin and gold (XAU) has been close to zero since June 21 and, according to a Bank of America report, has become more negative over the past two months, meaning that the price of bitcoin has not moved in tandem with gold , far from it.
A currency is successful if it is widely accepted and used. Without these two prerequisites, currencies have no future. Today there is still a great deal of uncertainty about regulation, and while it is increasing, few organizations accept these currencies as a means of payment.
On the other hand, governments will not be very supportive of the proliferation of currencies that they cannot control, legislate and, above all, monitor. Let us remember that anonymity is a characteristic of the new currencies and allows all kinds of transactions to be directed and concealed. While from a liberal perspective the emergence of this type of currency is great news, central banks will not easily accept the loss of their ability to influence monetary policy and thereby interfere with economic growth, price controls, etc. The emergence of such a currency is a risk for the current financial sector, since its role as intermediary and guarantor would be completely marginal (and its lobbying power is undeniable).
The proliferation of multiple currencies would not help its acceptance and diffusion (there are only a few basic currencies in today’s economy). If it survives, only the few that inspire the most trust; the rest will disappear or remain as subsidiaries. On the other hand, a currency must have some stability in its valuation in order to be widely used. High volatility, such as that of cryptocurrencies, undermines their credibility. Storage security will be key to its spread and success. Finally, although regulation and intermediation are contrary to the nature of these currencies, some legal certainty would allow their use to become widespread.
One of the side aspects of the cryptocurrency invasion is the blockchain methodology in its accounting. This method is indeed a great innovation that will supposedly cause changes in the world economy in the coming years, similar to those envisioned by the Internet at the time, as its application will go beyond the monetary system.
The idea on which cryptocurrencies are based is to verify all transactions in a distributed registry based on a chain of blocks that gradually incorporate information and make it impossible to change previous information, which must be validated by the entire community, without the need for third-party intervention. mediate or certify. This methodology ensures security, speed, no intermediaries, efficiency and confidentiality. This represents an undeniable improvement that this type of currency brings to the financial system, and that governments and central banks will have a hard time stopping it. But more than that, with blockchain methodology, relationships can be established between different parties, where the rules of the game are set for agreements, transactions, contracts, everything is set up and codified from the start, and without the need for third-party mediation. and validate them. These are so-called smart contracts.
Where does all this end up? Cryptocurrency revaluation is basically speculation. There is no fundamental rationale supporting it other than improved expectations. Its revaluation is nothing more than demand exceeding supply, because there are more and more agents willing to participate in the game, attracted by spectacular revaluations, as more and more funds and funds appear, making it possible, so its revaluation is more about that than about confirming that they are actually becoming proven and usable currencies.
Keep in mind that a lot of capital hasn’t come into play yet, and unless investor confidence is completely undermined by security or regulatory concerns, revaluation and ease of access can increase that growth more, much more … Although, like any process in which speculation has acted, it will correct itself, but when, from what level and where? Who knows … New currencies with new calculation methodologies, more advanced than the current ones (which provide more speed, flexibility and security) are bound to appear, some of them will probably be issued by governments and central banks or even by traditional commercial banks. And that will increase competition and make many disappear. But what will not happen is that the economy will give up the advantages offered by these new currencies.
In short, we are in a process similar to the one at the time, so we must be careful to distinguish between technology and future possibilities and what is pure speculation, and act accordingly.