Near the closure of the previous decade, cryptocurrencies were all the rage, with people diving into investments and reaping returns. The heyday of cryptocurrency started in late 2017, and coincided with a meteoric rise in the price of the most notable one – Bitcoin. During the peak, it was predicted that cryptocurrencies would take over the world, judging by their hype and potential. However, in May and June 2022, things took a turn for the worse. The prices of cryptocurrencies plummeted, including Bitcoin, which saw a 60% drop in value. Ethereum also suffered a blow, losing 66% of its worth. Although there have been some signs of stability in the market, recent developments have caused cryptocurrency prices to nosedive again.
Cryptocurrency: an introduction
Cryptocurrency is a digital or virtual currency that uses cryptography to ensure security. Unlike physical currencies, they are not issued by any central authority. Instead, cryptocurrencies use decentralized control through distributed ledger technology, usually a blockchain. A blockchain is a public transaction database secured by cryptography, where each block contains various transactions. The first and most well-known cryptocurrency is Bitcoin, invented in 2009. Since then, over 4,000 alternative cryptocurrencies have been created.
The rise of cryptocurrencies has been influenced by several factors, including the fact that they are not subject to government control and the security and anonymity of transactions. However, cryptocurrencies also have some disadvantages, such as their volatility, which played a crucial role in the crash of 2022 and 2023.
Cryptocurrency crashes down
In May 2022, a massive crash in the price of cryptocurrencies occurred and became the first significant event in the market of cryptocurrencies. The crash caused a decrease in the value of cryptocurrencies that continued until June of that year. Although the market stabilized after that, it never fully recovered to the heights it had reached before the crash. Bitcoin, for example, had been valued at $68,780 in November 2021, but it fell to just $17,592 in June 2022. Some other cryptocurrencies, like Ethereum, dropped from $4868 to $881, and Binance Coin plummeted from $690 to just $223. The causes of the crash were very complex and remain a topic of debate worldwide.
One of the most evident reasons for the crash was the Ukraine-Russia war, which, along with the COVID-19 pandemic, caused a surge in inflation around the world. Although cryptocurrencies were previously thought to be inflation-proof, like gold, nervous investors sold off their crypto assets due to the inflationary pressure. This was a key reason for the significant price reduction mentioned above. Additionally, the US Federal Reserve raised interest rates to fight inflation, which made borrowing money more expensive. This, in turn, slowed down economic growth and decreased the demand for cryptocurrencies. Lastly, TerraUSD, a cryptocurrency designed to hold a constant value, lost its value to the US dollar in May 2022. This led to a panic in which people sold off their crypto assets, resulting in a massive reduction in the value of cryptocurrencies.
Second crash in 2023
After the crash of 2022, the cryptocurrency market stabilized and seemed to be on the rise again. However, another crash occurred in August 2023, causing many cryptocurrencies, including Bitcoin, Ethereum, and Binance Coin, to lose value again. Bitcoin, for example, went from a high of $31,000 in July 2023 to $24,963 in September 2023. Ethereum and Binance Coin also experienced significant losses, dropping from $2,048 to $1,560 and $340 to $245, respectively. This crash had a hefty impact on the market, resulting in a loss of billions of dollars in value. Numerous cryptocurrency businesses closed down due to the consecutive years of crashes, and thousands of people lost their jobs.
One of the leading causes of the 2023 crash was the bankruptcy of FTX, a major cryptocurrency exchange that filed for bankruptcy in August of that year. This bankruptcy caused a significant loss of confidence in the market, leading to a sell-off and a decline in the value of cryptocurrencies. The US Federal Reserve also raised interest rates again, which had a similar effect as the previous year. Furthermore, governments worldwide impose stricter regulations on cryptocurrencies, making it difficult for people to invest in them and leading to a decline in demand.
The cryptocurrency market is still recovering from the crash. Although there are some indications that the market may stabilize, it is still too early to draw definite conclusions.
What does the future hold?
Cryptocurrencies have experienced a recent decline in prices, which could either be a temporary setback or a sign of the end of an era. The market’s future is highly dependent on regulatory actions taken by governments worldwide, as they tend to impose harsh regulations on cryptocurrencies. The need of the hour is for governments to ease these restrictions and allow the market to grow. The market’s rebound is also dependent on other factors, such as mainstream adoption by financial institutions and the development of new technologies.
Unfortunately, major financial institutions have not fully embraced cryptocurrencies, hindering their widespread adoption as a legitimate currency. If these institutions start to adopt them, it could increase demand and access a wider pool of investors. Moreover, developing new technologies, such as Decentralized Finance (DeFi) and Non-Fungible Tokens (NFT), may increase the demand for cryptocurrencies. However, it remains unclear how these technologies will impact cryptocurrencies in the long run, as there is still a long way to go in their development.
Parting Thoughts
Cryptocurrencies had a promising start, but they are currently facing significant setbacks. However, if the regulations are eased, and mainstream financial institutions adopt them for transactions, they still have a vast potential to rebound.