Cryptocurrency Has Become Too Big to Ignore
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Cryptocurrency has recently become one of the most popular and interesting markets in all of finance. It has enticed millions of new investors in the past couple of years and has become too big to ignore. Before 2020, only 1% of Americans were invested in crypto. Only a handful of investors saw what crypto was capable of and when it blew up in popularity, they profited while the world watched in disbelief. Crypto seems to have a pattern of surprising people due to its inherent unpredictable nature. While the world has started to gain some sense of familiarity with the crypto market, there is still so much to learn and understand.
What is Cryptocurrency?
Cryptocurrency, being unlike anything else the world has ever seen before, has proven to be a very challenging concept for many to grasp. Looking at the key factors that make crypto unique as well as its origin can help one gain an understanding for this complex system.
Cryptocurrency is best described as a peer-to-peer currency transaction system. Crypto removes governments, banks, or any other intermediaries in a monetary exchange process. This independence from third parties is achieved through the blockchain network that cryptocurrency is based in. The blockchain is a decentralized, public ledger that records and stores all prior transactions and activity, validating ownership of all units of the currency at any given point in time.
What is Bitcoin?
The first legitimate cryptocurrency was Bitcoin, which was created out of the turmoil of the 2008 recession. A person or a group under the alias “Satoshi Nakamoto” issued a white paper addressing the centralized control of money and the trust required in handling other people’s cash. This birthed the crypto movement and many other variations of Bitcoin, called “Altcoins”, would be created after this. Thus, the crypto movement was born, bringing us to where we are today.
Cryptocurrency and the Stock Markets
The crypto market has been on a steady decline this year, losing trillions of dollars between its various currencies. This crash was not what its investors had expected. Many assumed that the price of the different cryptocurrencies would be immune to the fluctuations of other markets. What we have seen in the past couple of years seems to contradict that presumption. In the past two years, we have seen extraordinary growth in the stock market, and, coincidentally or not, we saw the crypto market grow to shockingly new heights during the same time period. Recently, as the S&P 500, Nasdaq, and Dow Jones have all been crashing, we have seen the crypto market move in the same direction. There seems to be a positive correlation between the crypto market and the stock market. The difference worth noting here is that the crypto market fluctuates, both for highs and lows, at a more extreme rate. When the stock market jumps, crypto soars and when the stock market falls, crypto plummets.
It appears that crypto is just as, if not more, susceptible to market pessimism and anxiety as the other markets. The relative lack of historical data as well as the general unfamiliarity that most investors have with this emerging market could be the cause of this hypersensitivity to the psychological whims of investors. Intelligent investors can ride out market corrections and crashes because they have confidence in the stock market; they know the historical trend of overall positive growth and that nothing is down forever. Investors understand the nature of the stock market and it is that understanding that gives them the confidence needed to overcome panic. Crypto investors don’t share that luxury and, unfortunately, are flying blind through this bear market.
Bull and Bearish Arguments for Crypto
Regarding the uncertain future of crypto, there seem to be two opposing camps of doubters or believers. Those who doubt the legitimacy of crypto as an investment believe that the “gold-rush mentality” of its investors is the cause of its high valuations and that the crash was simply a correction of an overvalued market. They also fear the potential of new regulations on crypto which could limit and hinder its market power, keeping it from ever fully recovering.
Those who are more optimistic about crypto feel that its potential is yet to be realized. Bitcoin has bounced back from devastating crashes before; it is possible that it will do it again. The believers feel that crypto is the future and that it will eventually become more integrated with our economy and society. As the world develops a deeper understanding of crypto, it will find more and more ways to utilize and profit from it.
What makes crypto both exciting and frightening is its unforeseeable future. Whether this is just the beginning of an extensive market, the decline of a short-lived trend whose value will never fully recover, or something in-between; crypto is worth keeping an eye on. Schedule a call to discuss whether or not cryptocurrency might make a good addition to your portfolio.
Sources: CNBC, Morningstar, The New York Times, Forbes, Protocol, U.S. News