There is no denying the fact that the crypto market has faced an obscene amount of bearish pressure over the past eight odd months. in spite of, September was particularly turbulent for industry, with the price of bitcoin (BTC) will fall below the all-important psychological $20,000 level before a retracement occurs.
While these declines have called into question the asset’s status as digital gold and a hedge against inflation, a key question worth examining is how deeply connected the crypto market is to the global economy.
So far, historic inflation numbers have driven the price of everything under the sun – from fuel to food – to record highs. And despite the S&P 500, a stock index tracking the performance of 500 large US-listed companies, it is down year-to-date (YTD). performance it was better than the crypto market by a decent margin.
Charmyn Ho, head of crypto information for cryptocurrency exchange Bybit, pointed out to Cointelegraph that like any other market, the crypto industry is currently subject to volatility caused by macroeconomic factors, adding:
“It is certainly fair to say that the global financial environment has put pressure on Bitcoin prices. With continued pressure on liquidity due to quantitative tightening and uncertainty, investors tend to shy away from risky assets, which in turn limits any growth momentum in the crypto market.
On the recent rally above $20,000, Ho noted that whether this is a trend reversal – following a recent confluence of on-chain metrics hinting at a lower formation – or just a temporary attempt to flush out excessive leverage, it’s still too early to tell. Considering the historical data, he believes that the extended duration of BTC’s current inactivity may indicate the formation of a reliable price floor that can help pave the way for another bullish trend.
Is the connection of cryptocurrencies with the global economy now inseparable?
Ajay Dhingra, head of research and analyst at crypto exchange Unizen, told Cointelegraph that rising inflation has dramatically reduced investors’ risk appetite for cryptocurrencies and weakened the global economy to the point where Bitcoin was unable to live up to its safe-haven promise. against inflation. This is largely due to its high correlation with the stock market and unpleasant volatility.
He added that while the future remains as bright as ever for blockchain technology, there could be even more pain for investors in the near future due to the crypto market’s deepening connection with the broader economy. Noting that it is always consumer sentiment that dictates any market, Dhingra added:
“Right now the world is going through a massive crisis due to the Ukraine war, rising prices and weak economic activity which is upsetting the retail sector. However, in the long run, the innovation brought about by blockchain technology will inevitably disrupt the correlation.”
In Ho’s view, the existing correlation is likely to persist. However, it is difficult to predict its extent, as the recent economic downturn has had effects of unimaginable proportions on investors and traders around the world.
Similarly, she pointed out that the prevailing macroeconomic conditions have taken an unprecedented toll on market sentiment around risky and deferred investment, adding that if the economy experiences another downturn, investors will generally continue to shed assets. like crypto and move to fiat-centric offerings like government bonds. She added:
“I think as cryptocurrencies become more widely accepted, a connection can definitely be drawn between traditional finance and the crypto economy. However, the two still maintain a form of independence from each other because they have very different properties and uses.”
Frederic Fernandez, co-founder of DEXTools – a blockchain data aggregation platform – believes that while economic conditions in various markets affect Bitcoin quite strongly, when the dust finally settles, not only will people understand the benefits of cryptocurrencies as a refuge from the traditional financial sector, but the market as a whole would could see a solid upward trend. Added by:
“The big players are now also looking into cryptocurrencies and building their future portfolios, using this market to create good strategies for their funds and customers, but it will take time to see the consequences when the market is more mature.”
What will happen to the crypto market now?
Despite Bitcoin rising in recent days, many analysts believe it is highly unlikely that the currency – as well as the crypto market in general – will be able to gain the momentum it needs to get past this dull phase anytime soon. in the near future.
For example, Akeel Qureshi, chief marketing officer for decentralized finance (DeFi) protocol Hubble Protocol, told Cointelegraph: “According to maximum bitcoin, this is the environment in which the asset is meant to thrive. While this theory was formulated long before players like JPMorgan bought into it, there doesn’t seem to be much good news on the horizon at the moment,” he adds:
“Bitcoin is tied to Federal Reserve policy.”
He noted that while bitcoin has long been touted as an inflation-proof asset — a story that still holds true depending on when you bought the token — it’s currently seeing falling prices, especially as the job market continues to weaken.
However, Qureshi said that not all cryptocurrency prices are as inextricably linked to the global economy as Bitcoin. He believes that Ether (ETH) has already begun backing away from BTC ahead of its long-awaited merger with the proof-of-stake consensus model, which is set to take place next week, adding:
“This is potentially a harbinger of a so-called “flip”, where ETH growth begins to outpace Bitcoin growth. Meanwhile, active traders are finding good opportunities among altcoins and smaller cryptocurrencies on the vast number of blockchains and decentralized networks that now exist.”
Finally, he noted that the stablecoin market remains incredibly strong regardless of rising interest rates because it is still impossible to find a bank that is able to provide an interest rate on cash that is higher than prevailing inflation. “In decentralized finance, this is possible with stablecoins backed by US dollars. For those willing to explore, cryptocurrencies themselves have limitless possibilities.”
Would it be possible to reverse the trend for BTC?
According to According to some analysts, the recent decline in cryptocurrency prices was not caused by rising inflation, but by soaring interest rates that were raised to help wipe out excess liquidity in the market, curb inflation and strengthen the US dollar. Moreover, higher interest rates equate to better yields on government bonds and increased investment from foreign bond buyers. Therefore, a reversal of the trend in the near future may be difficult, although not impossible.
This means that over the past decade, Bitcoin has largely outperformed most stocks while gaining mainstream acceptance by many entities in traditional finance. Investment giant BlackRock has recently started pumping its client’s money into the digital asset, indicating a potential upside in the future of cryptocurrencies. It is also worth noting that when BTC last fell below $10,000, it quickly rose to an all-time high of $69,000.
Finally, some experts believe that Bitcoin could soon continue to lose its strong correlation with the stock market, pointing out that over the past 14 days, people have sold the S&P 500, while BTC has gained almost 10% in value. Another thing that appears to favor Bitcoin is that major fiat assets such as the Euro, British Pound and Japanese Yen are at record lows against the US Dollar.
In this context, Ben Caselin, Vice President of Global Marketing and Communications for AAX Cryptocurrency Exchange, he said Forbes said that there is currently a very strong relationship between the price movement of the US dollar and the exchange rate of Bitcoin, adding that while the dollar has shown decent strength in the second quarter of 2022, any drawdown could trigger a rally for Bitcoin in the near term.
So, as we head into a future fueled by financial uncertainty, it will be interesting to see how things play out in the crypto market, especially as it looks like there will be little respite from the traditional financial front any time soon.