Reasons for the decline in the value of digital currencies
More than a decade after innovation Cryptocurrencies منذ 2009، ازدهرت هذه العملات خلال أزمة فيروس كورونا وما بعد، حتى انطلقت أسهمها لتقفز إلى عشرات آلاف الدولارات، ومنذ نوفمبر 2021 يتابع العالم الانزلاق المستمر لقيمة العملات المشفرة حيث تتأرجح قيمة “بيتكوين” العملة الأقوى بين 20 ألف دولار وما دون، محققة بذلك خسارة أكثر من 70% من أعلى قيمة لها (بعد أن اقتربت من 69 ألف دولار في 10 نوفمبر 2021). فما هو سبب تدهور سوق هذه العملات للمستوى الذي لا يمكن ضبطه أو إيقافه بعد بلوغ منتصف العام 2022, كما فقدت بعض العملات %99 من قيمتها كما يحدث مع عملة ” لونا” حالياً وغيرها من العملات المشفرة!
Read also: What are the methods and costs of Bitcoin mining?
The growth of cryptocurrencies depends on the stability of the global financing network and the monetary policy of the US Federal Reserve.
Given the reasons for the boom in cryptocurrency prices since the spring of 2020 and their value doubling until the end of 2021, this was only a result of the pumping of large amounts of liquidity by the US Federal Reserve into the financial markets, which helped direct a portion of this liquidity to invest in the cryptocurrency market until it appeared. Thousands of crypto projects by 2021.
By the end of 2021, excess liquidity was withdrawn in response to inflation in the markets by the US Federal Reserve, which led investors to move away from risky and speculative assets, led by cryptocurrencies, and a state of depletion in their value began until today.
The US Federal Reserve acts as the central bank in the United States of America. It is the largest and most influential financial institution in the global financial system. Its most important function is to supervise the financial system and limit the negative effects of economic crises.
What are the reasons for the decline of cryptocurrencies to this day?
Well, the deterioration in the value of cryptocurrencies can be considered the result of many reasons related to each other and to the global financial system, which stopped the growth of these currencies to the point where some cryptocurrencies approached zero. What are those reasons?
- The Russian-Ukrainian conflict has destabilized the global financial system.
The global economic system had barely recovered from the negative effects of the Corona virus crisis, which affected global supply chains, causing a state of inflation, until the Russian-Ukrainian war began, which directly affected one of the pillars of the global financial system, which is the trade in global energy sources and agricultural crops, which caused a rise in... With its prices and the obstruction of its supply network as a result of the sanctions, this led to global inflation, and inflation in turn leads to an exponential rise in prices, which led to an increase in interest rates and a decrease in the value of major currencies, as happened with the dollar, which leads to entering into a vicious circle that raises the fear of a global recession.
- Investors abandon risky assets
This is in response to the continuing rise in inflation, the decline in liquidity globally, and the rise in interest rates, which prompted investors to replace risky assets that are based on speculation, most notably cryptocurrencies, for investment with safer assets, such as investors investing their liquidity in the form of deposits with banks to benefit from the rise in interest rates.
The decision to raise interest rates is adopted by central banks such as the US Federal Reserve, the Bank of England, and soon the European Central Bank, with the aim of confronting inflation by increasing the burden of borrowing with the aim of reducing liquidity in the markets, which in turn leads to borrowers canceling or postponing borrowing until its cost (i.e. the interest rate) falls and directing A portion of liquidity to banks in the form of deposits.
- Celsius announced:“Celsius Its decision to temporarily stop withdrawals and all transfers, exchanges or lending of cryptocurrencies
This step played a role in the exponential decline in the value of cryptocurrencies, as it is the largest company in the field of loans for cryptocurrencies, as Celsius and similar companies do work similar to the basic idea of traditional banks, but with digital currencies, that is, they lend cryptocurrencies in exchange for obtaining interest, and receiving deposits. Cryptocurrencies in exchange for paying interest, away from any government or central bank supervision.
Cryptocurrency lending companies deal in higher interest rates than interest rates in traditional currency lending, which may reach more than 18%. This is what prompted legislative bodies to call for regulating the field of cryptocurrencies and developing laws and a constitution for legal dealing in them.
- Cryptocurrencies are fragile and unproductive
Digital currencies are not linked to physical assets or intellectual property, do not generate cash flows or produce profits, and their price is linked only to supply and demand for them, which is sharply affected by the saturation state of liquidity among investors, whether up or down, which makes it difficult to evaluate their basic value, and this is what Dr. Fadi Amroush wrote about American businessman Warren Buffett’s statement about Bitcoin:
- It is not possible to understand the meaning of any statement or opinion without understanding its general context and the strategy of its speaker. For example, Warren Buffett’s refusal to invest in Bitcoin was reported as if it was strange, reprehensible, or even wonderful. To understand that statement, you must know Warren Buffett’s opinion and investment strategy. Basically, it is investing in productive assets with a periodic return for companies that manufacture products. For example, he does not invest in losing startup companies that increase their market value, for example. He is against gold as a form of investment because he does not consider it an investment at all (and he is right, of course), and he says of gold that it is an “unproductive” asset. “Gold is an asset that will never produce anything, but is bought in the hope that someone else - who also knows that this asset will forever remain unproductive - will buy it at a higher price in the future.”
- Within this context and vision, his statement is understandable and correct. There is no sane person who considers “Bitcoin” to be an investment, as investment means buying and selling and making a profit from sales. Even Tesla does not consider its possession of “Bitcoin” worth more than a billion and a half dollars to be an investment, but rather considers it a form of One of the forms of distributing cash in different ways to preserve the value.
- In this context, we understand how Warren Buffett does not buy Bitcoin, of course, because he does not believe that it is a form of investment and has the right to do so. Rather, he invested in the Brazilian bank “Nonbank” with more than $1.25 billion, which is one of the largest financial technology banks in Brazil that focuses on cryptocurrencies. And Bitcoin.
Is it an opportunity to own cryptocurrencies at a low price?
Perhaps you should follow the rule of Wall Street experts, which is:
“Never try to catch a falling knife” That is, do not ever try to catch the knife when it falls, as it will inevitably be hurtful and will end painfully, although the stock market is based on speculation and the expectation of profit resulting from the permanent change in the prices of stocks and assets, but the rapid movement of ups and downs in the prices of cryptocurrencies makes it difficult to study or predict. This keeps a large segment of investors away from digital currencies because it does not suit their level of acceptable risk for speculation.
Experts also advise investors in cryptocurrencies to proceed with their investments with extreme caution in light of expectations that the prices of cryptocurrencies will continue to deteriorate, at least in the near term.
Finally, there is no doubt that the field of investment in controversial digital currencies has become a red circle, oscillating between the state of overwhelming and rapid profit that attracted many to invest in it, or the state of rapid, resounding deterioration, causing losses at all levels, whether for small investors or large partners. Will these recent events in the cryptocurrency market, or digital gold, as it was previously called, lead to the first steps towards subjecting it to constitutions and legislation, in order to protect the market from these collapses and losses? Will it return to prosperity again, or at least to a state of relative stability in its prices in the long term?
