The change in the investment landscape after the rate hike catches some in free fall. The crypto world has lost favor: so far this year the bitcoin king is down 65% -75% from highs- and the same is true of the rest of the main alternatives. With the risk and volatility that comes with it, why risk your savings there if safer options such as fixed income are already becoming attractive?
Crashes come from several fronts. Cryptocurrencies soared in the heat of cheap money and excess liquidity, hitting records just a year ago. Today financing is more expensive, private investment has dried up and the volatility that they entail is not so attractive: “The rise in rates harms future growth assets and new businesses,” reviews Joaquín Robles, XTB analyst.
In addition, while in the pandemic there was unexpected savings that many poured into the cryptocurrency market, inflation has left many others without margin. “In a slowdown phase, people prefer to be more cautious, with less propensity to take risk. And many, seeing the falls, think twice before entering, ”he continues.
Then there are all the peculiarities that have affected the crypto world. One, the disappointment of individuals who entered highs, with the promise of great returns, and have picked up candles to stop the bleeding. Some sales that have been knocking down the value. The hook of high yields has been left behind. Another, that the alternative to the traditional financial system has ended up suffering the same ills. Failure of large-scale adoption in El Salvador, cybercrime, crashes of stablecoins (TerraUSD, Luna), of platforms (Celsius), corralitos (2gether) and bank panic similes.
Adding to mistrust, the latter has accelerated the drop in prices this week. The FTX platform, an exchange that allows you to buy and exchange currencies and cryptocurrencies, has gone bankrupt after unleashing distrust a withdrawal of funds by Binance and recognizing difficulties in covering operations. Seeing the panorama, users began to try to empty their portfolios, accelerating the collapse: they ran out of liquidity for the withdrawals of money from those who closed their investments. It has also been uncovered that their deposits were used for high-risk investments…
“A case of bank panic of a lifetime, with a very high risk of contagion,” says Luis Garvía, finance professor at Icade Business School. “It seemed that the bottom had already been reached and the fall of FTX has had a contagious effect, many want to reduce their position,” says Robles.
To break a spear in favor of the crypto world, these types of falls are nothing new: eleven times bitcoin has fallen more than 40% after hitting a maximum. It usually comes back strong, but perhaps this is the definitive one… “The crypto winter usually lasts two or three years. We have to wait for the next halving – a technical process that reduces the remuneration of miners by half, so fewer coins are generated – in 2024 to see increases. If the demand increases, we will probably see it shoot up there, but not as much as before”, predicts Garvía.
For Robles, an improvement will depend on whether there is regulation and recognition and whether it is more accepted as a means of payment. In that greater acceptance, natural barriers may arise. “They are not intended for the general public, nor designed to buy bread or interact with the real economy. Yes for the internet, and the internet has a future”, says Garvía.
Looking back, “it has neither protected against inflation nor has it acted as a refuge value. It is difficult to speak of a solid market, in which one can be calm”, concludes Robles. This is why Garvía asks to separate the grain from the chaff. “The industry behind it has more and more body.” Regardless of falls, the promise of decentralized finance (DeFi) still stands. The key, perhaps, is more to invest in these companies than in cryptocurrencies guided by speculation.
