What are the reasons for the volatility of digital currencies recently? And how can it be handled? | Economy

It will take two or three years before the world adjusts to the end of “free money” and after that it will become clear whether or not cryptocurrencies have a future.

The cryptocurrency markets have experienced huge fluctuations in recent weeks as the value of most major and major currencies has declined, influenced by the US Federal Reserve’s decisions to raise interest rates, which in turn was the result of the wave of recession and inflation. which the world is witnessing.

In a report to The Independent, author Hamish McCray said the past few weeks have been tough for anyone who owns the bitcoin, which traded above $ 30,000 on June 9, but has dropped to less than $ 18 thousand and then achieved a partial recovery It has now reached more than 19 thousand.

The author pointed out that the best thing that can be done in such turbulent times is to think calmly, and look for the best sources of new information that will help to make appropriate judgment.

He suggested that we could draw 5 key lessons from this bumpy period, and one area of ​​total uncertainty that would last at least two years..

  • Dealing with extreme volatility

According to the author, the first lesson stems from the extreme volatility of the past few days, as the Bitcoin market is very tight given its massive market capitalization. At about $ 19,500, the market capitalization of this digital currency is $ 370 billion, surpassing the oil giant Shell, which is worth about $ 200 billion.

With an asset of this size, it is expected that there will be many short-term traders who want to buy when the cryptocurrency falls and sell when the cryptocurrency rises, which helps to balance the market price, so big price movements only happen when new information comes in.

In contrast, this does not happen with Bitcoin; It is traded 24 hours a day, 7 days a week, and the big fluctuation in prices seems to be around midnight European and American time, but it remains an illiquid security, and if you try to buy a large amount of this currency sell or buy it can cause you With a large loss, and since it applies to Bitcoin, it also applies more to other cryptocurrencies that are more volatile.

  • Know the truth about cryptocurrency

The author added that the second lesson focuses on the fact that cryptocurrencies are not useful as a medium of transactions, as they can be held as an asset, but their use is limited only if you want to buy something, and it can often not even be used for money laundering.

Bitcoin is legal in two countries, El Salvador and the Central African Republic, but reports last month showed that the value of El Salvador’s holdings had dropped by 50%, and its use in stores appeared to be limited.

The author mentioned that the third lesson is the fact that cryptocurrencies will need time to return to the rise. For example, Mike Novogratz, founder and CEO of Galaxy Digital Holdings, predicts that it will take a while for Bitcoin and Ethereum to return to a bullish phase.

  • interest rates

Lesson four revolves around the fundamental issue of interest rate policy taken up by the Federal Reserve, when it decided last June to make a 0.75% increase in an effort to suppress inflation, even if it led to a recession in led the US. In this regard, this decision has revealed that the transition to a tighter monetary policy undermines the most difficult categories of speculative investment, such as cryptocurrencies.

  • Nobody knows the truth of the situation

The fifth lesson extracted, according to the author, reveals that experts do not know the reality of the situation, as the report of “PricewaterhouseCoopers” (PwC) for audit, insurance, consulting and tax services “indicates that the majority of cryptocurrency fund managers believe that the value of Bitcoin will reach $ 100,000 by the end of the year.

While US entrepreneur and programmer Bill Gates has stated that he will never use cryptocurrencies, Canadian businessman Elon Musk says his company will accept “SpaceX” payments in Dogecoin, and this statement has increased the price of his shares by 10% , which proves the chaos. which permeated this field.

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In fact, normal benchmarks do not apply to this type of asset and therefore cannot be valued, which increases the uncertainty.

The author suggests in this regard that it will take two years to adopt “normal” interest rates before we can make a judgment on these assets, Bitcoin was officially launched in 2009, so it was mostly in the cheap money period, and there was no This low interest rate before.

The author concludes that the process of returning to normal life has just begun, as the US Federal Reserve expects rates to be between 3.2% and 3.4% by the end of this year. However, it will take two or three years before the world adjusts to the end of “free money” and after that it will be clear whether or not cryptocurrencies have a future.

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