Cryptocurrency in the Event of a Market Meltdown
Cryptocurrency’s popularity has surged in recent years, and with good reason. Its decentralized nature makes it an attractive alternative to fiat currency; its international reach means that businesses can engage with people all over the world; and of course, there’s the potential for big profits.
As per TechJury, Bitcoin garnered a market capitalization of $1072.21 billion in February 2021. Moreover, the market size of cryptocurrency is to reach $1087.7 million by 2026.
However, cryptocurrency’s price is notoriously volatile, so what would happen if it faces global market turmoil? How would cryptocurrencies react if markets worldwide fell apart?
Here are some of the ways cryptocurrency could face the downturns of a market meltdown:
1. Fiat Currency Influences
To understand how cryptocurrency would react to a global market meltdown, you must first understand fiat currency. Fiat money is backed by government regulation or law, which makes it different from commodity money, such as gold/silver coins. So if all countries decided at once that fiat currency was no longer legal tender, what would happen?
Well, in short, there could be massive volatility in cryptocurrencies if that were to happen. It may not cause them to fail altogether, though. How bad an economic situation is worldwide will determine whether people everywhere can switch over en masse onto crypto-currencies or not because many are still very much dependent on third-party banking systems.
If a crisis occurs, it may take years before cryptocurrency can find its way into mass adoption, and by then, it might already be too late. Countries also differ vastly economically, with one suffering more than another depending on size and industry sectors that drive their economy.
An economic crisis isn’t uniform across regions, and neither is its impact. A financial crash doesn’t instantly send every country’s economy spiraling downward toward collapse — though it’s certainly conceivable should things get desperate without enough help from other nation-states to bail out those suffering dire consequences.
2. Stock Market Influences
Cryptocurrencies are based on blockchains that use decentralized systems to verify transactions. As such, cryptocurrency is influenced by public confidence; if consumers don’t feel confident about an asset or think they will lose value, demand for it goes down, and prices go down with it.
When examining cryptocurrencies, we need to look for factors like liquidity (how much can you sell at any given time?) and volume (how many people are buying?); these two factors influence price because supply and demand constantly adjust to each other.
Cryptocurrency markets are incredibly volatile right now, which means prices could go up or down at any moment — and there’s not much you can do about it.
3. Assets Influences
Cryptocurrencies are known for having large price swings. Some cryptocurrencies have lost over 90% of their value since being added to exchanges. Famous examples include bitConnect (BCC), which gained immense popularity in no time and then failed miserably just after three months of its launch.
Many fail to survive the market and suffer a similar fate. The worldwide renowned cryptocurrency, Bitcoin, had faced a downfall as high as 68% in 2018. These fluctuations can be unnerving for potential investors, so it is crucial to understand how each asset influences market conditions.
Before you invest in any one asset, be sure to consider all available information about its risk factors. For example, several different tools can help you monitor price volatility by cryptocurrency or asset type. Knowing these influencers will help you manage risk and better position your portfolio for future profits.
Many exchanges provide real-time updates on current pricing information across multiple asset classes, allowing investors to make informed decisions when choosing where to allocate their funds among coins or tokens available on an exchange platform.
When approaching digital currency investment strategies, many newbie investors seek out aggressive investment strategies in hopes of maximizing profit; however, research suggests that seeking out methods with low volatility may prove more profitable over time.
Low-volatility strategies are often characterized by broad diversification across cryptocurrency types, meaning long positions are often balanced with short positions to minimize exposure during times of price decline.
Many scenarios could potentially influence cryptocurrency prices into decline; therefore, having balanced investments will allow you to respond quickly if market trends change unexpectedly.
Low-volatility investment portfolios include equal investments across at least ten top cryptocurrencies. Low-volatility portfolios offer consistency throughout market cycles while providing higher expected returns than traditional stocks during bull markets without significantly increasing associated risks.
4. Technology Influences
Cryptocurrencies are digital currencies that get coded through advanced encryption techniques. These techniques make cryptocurrencies potentially anonymous, decentralized, and secure. All users on that cryptocurrency’s network have to approve each transaction before being verified as legitimate.
Cryptocurrencies have been heavily traded since their creation in 2009, with hundreds of different coins being created over time. However, there are around 5840 different cryptocurrencies currently available on various exchanges worldwide. Many crypto coins have unique features that appeal to users looking for specific functionality.
It gets considered that these altcoins now represent an entire market cap of over 1000 billion dollars globally, with many expecting future growth to increase exponentially as more people start to trade them over fiat currencies such as U.S. dollars or Euros. With every technological advance comes both opportunities and challenges to overcome.
While global stock markets continue to grow at record rates, many are beginning to worry about what would happen if an economic crisis were to occur, what effect it would have on cryptocurrency prices?
Global stock markets did drop substantially during 2011 compared with how they did just prior. Still, for cryptocurrencies, they continued growing steadily throughout, then stabilizing once again later that year at around $3 per coin.
It then begs the question, how would other traditional markets react while cryptocurrency prices continue to surge further upwards if another global financial crisis were to occur? How could you make money from using crypto coins? The answer isn’t simple because while some hold value today, others don’t appear promising at all.
5. Impact of Correlations
Cryptocurrency could survive if it maintains its correlation to other markets or even becomes more correlated to them. That’s because while cryptocurrency isn’t attached to any central bank or government, it does rise and fall based on demand — so there is still some link between it and fiat currency.
Suppose it hits a global meltdown like what we saw in 2008. In that case, investors may turn away from stocks & other holdings toward cryptocurrencies as an alternative, at least until they see their crypto investments are falling too and so on down a slippery slope.
But either way, being less reliant on traditional financial institutions will likely benefit cryptocurrency in most crises. The world might not need another Lehman Brothers event.
According to a 90-day correlation matrix developed by the analytics team of Sifr, bitcoin’s correlation with the S&P 500 index of the United States equities is at minus-0.14. It’s a statistically neutral position since 1 is a symbol of a perfect positive correlation. On the other hand, -1 is a perfectly negative relationship.
The correlation between the top cryptocurrencies — including ethereum, litecoin, and ripple — and equities was slightly more robust, sitting at minus-0.20 for most of the period, but noticeable fluctuations are visible.
Note: Sifr provides risk monitoring services for financial institutions around central clearing and settlement for cash securities globally.
Any fixed central authority does not regulate cryptocurrencies. It is both their biggest strength and biggest weakness. No centralized management controls cryptocurrency prices or sets binding policies for exchanges, which means that wild price swings can happen.
Cryptocurrencies are ideal for people who want to be their bank because you don’t have to answer any third party about your money. On the other hand, without regulatory oversight, there is potential for market manipulation.
With no regulations or central authority setting prices, cryptocurrency markets are incredibly volatile and make it easy for unscrupulous actions to manipulate them.
The Mt Gox scandal remains one of crypto’s most significant failings as an industry because millions were lost due to hacking and fraudulence on the part of exchange owners and employees.
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