In 2022 the entire world was on edge as the supply chains were grinding to a halt, economies were tanking, COVID lingers, and the Russia-Ukraine war rages on. 2022 inflation figures spiked to 8.6%, which threw the stock and crypto markets into a downward spiral. With the recession on the horizon for the next couple of months or years, will cryptocurrencies survive? Scratch that: could crypto come to an end? No one can be sure, but we should be prepared for how this could play out.
It’s All About Value
Bitcoin grew exponentially in value since its inception in 2009 with its all-time high touching $69,000 per coin in 2021. The growth was driven largely by its promise that it would make a difference and give power back to the people. Fast forward to today and Bitcoin is down to around $21,000 which is a low we haven’t seen since the last quarter of 2020. Could it go lower? Absolutely.
The problem with Bitcoin as a cryptocurrency is that it isn’t much of a currency. People HODL and barely use it as a medium of exchange. This is, by and large, the same for the rest of the alt-coins. Because micro and macro economies aren’t making sales or service transactions on the grand scale, there simply isn’t enough use cases for cryptocurrencies to replace or even augment fiat. Cryptocurrencies, if you really think about them, are only valuable because people think it is.
Cryptocurrencies aren’t backed by anything and they aren’t assets like real estate where you can rent it out and generate income. They aren’t like commodities such as oil where there’s a physical utility to generate power. Even gold has physical use cases when making jewelry or computer parts. You could say that the dollar also isn’t backed by anything but at least it is backed by debt and, most importantly, its position in the world economy.
The Crypto Bubble
Bubbles form when prices greatly exceed the intrinsic value of an asset or sector without the backing of fundamentals. Trying to accurately calculate the intrinsic value of any cryptocurrency will leave you sorely disappointed and frustrated because the truth is, it very difficult to do so, if not impossible. There’s an illusion that cryptocurrencies can one day augment fiat currency and this is driving the bubble to grow larger and larger year over year.
Industry sectors can rebound as we’ve learned from the past. The bursting of the dot-com and property bubbles are still fresh reminders of what could happen to any sector. Through patience and perseverance, both markets have recovered so you could argue that cryptocurrencies could as well. It’s possible if enough people remain faithful after a pop but a collective distrust exacerbated by external factors could keep it down for the count.
Warren Buffet said, “cryptocurrencies basically have no value.” He adds that “You can’t do anything with it except sell it to somebody else.” Once people collectively wake up and realize that cryptocurrencies don’t have true intrinsic value, the bubble will pop and the value of Bitcoin will free fall to zero.
Most People Don’t Use Cryptocurrencies As Intended
The markets are down and as savvy investors would say, right now is a great time to buy the dip. Most people aren’t transacting in cryptocurrencies for goods or services. They aren’t now, and they won’t in the future because the dollar has small price fluctuations compared to the vast majority of cryptocurrencies – why bother with the volatility? Instead, people are investing with hopes of making rich or looking to make a quick buck through trading. Bitcoin is the face of cryptocurrencies and even it is having a hard time being used as a currency.
When El Salvador became the first country to adopt Bitcoin as legal tender hopes were high but the euphoria waned as reality set in. Since the introduction of the Chivo Bitcoin wallet, only about 20% of survey respondents reported that they were using it. Additionally, only 20% of businesses reported accepting Bitcoin despite the laws requiring them to do so. Around 88% of businesses admitted to converting their Bitcoin into dollars instead of keeping a balance in the application.
Bottom line, Salvadorians still prefer to use cash and you can bet that the majority of the world shares the same sentiment. Can you name one person that you know that uses Bitcoin or any cryptocurrency for daily commerce? Yeah, I didn’t think so.
Crypto Is No Match Against Inflation
People are always looking for alternatives that can consistently outpace inflation and the eroding value of the dollar. Investors will park their money in gold and other asset classes as a hedge against inflation and cryptocurrencies are no exception. However, being the relatively new kid on the Wall Street block, Bitcoin’s price volatility and inability to pry itself from correlating with NASDAQ and the S&P 500 ensures that it will remain at the mercy of inflation.
U.S. inflation hit a 40-year high of 8.6% in May which caused Bitcoin to lose its average support level of $29,000 and plummet to around $22,000. Moves like these are not uncommon as we saw Bitcoin’s value significantly decrease in 2021 around the same time consumer prices started to boil. By the end of last year, we were seeing the same thing: inflation started rising as Bitcoin started losing steam.
The world economy doesn’t look promising for the foreseeable future. Since COVID began, inflation has increased around the world and at an alarming pace. In the past couple of years, the U.S. inflation rate has almost quadrupled. In other countries, inflation rates have exploded. As global inflation increases, so will U.S. inflation and that will also negatively affect Bitcoin’s price and the rest of the cryptocurrencies.
The Next Recession Will Test Crypto’s Strength
To combat inflation by slowing down the economy, the Fed just raised interest rates by 0.75% which is the largest move since 1994. Further rate hikes are expected for the rest of the year and that means goods and services will cost more. As a result, consumer spending is expected to decline which ultimately leads to a reduction in demand. Production output will reduce and businesses will be forced to lay off workers which leads to increases in unemployment.
Interest rate hikes work to slow down the economy to reduce demand for goods and services which has the effect of lowering prices. However, with global supply chains at a crawl and the rising cost of oil, prices will likely continue to increase as we enter into a recession. No one knows how far prices will climb or for how long but you can be sure that during these difficult times, available cash will become a priority. This could very well mean liquidating your crypto to pay for rent, food, fuel, and so on.
As everything becomes more and more expensive, people will turn to the dollar because in a recession no one will want your volatile cryptocurrency and as we all know less demand equals a decrease in value. After all, what grocery store, gas station, or landlord accepts Bitcoin or any cryptocurrency?
Governments Will Protect Their Fiat At All Costs
As cryptocurrencies gain popularity, governments are trying to stay ahead and take control. Though largely reactionary, they are taking notes and imposing regulations and taxes when and where they can. At the end of the day, it isn’t so much blockchain technology that they’re worried about but it is how cryptocurrencies can impact monetary control. It’s about retaining control of monetary policy and some level of dominance in the global financial and economic market.
Some countries are taking a progressive stance on cryptocurrencies while others are outright banning them. Taxation on crypto gains is indicative of a neutral or progressive stance as exhibited in global economic heavyweights such as the United States, United Kingdom, Japan, Germany, etc. This is good news for HODLers but what happens when there is too much tax or too much regulation?
India charges a 30% tax on any income generated from crypto transactions. In Japan, it can get as high as 55% while in Germany 45% is possible. Don’t forget that you’ll need to pay transaction fees depending on which company your digital wallet is connected to. We all know we have to pay to use crypto and this isn’t something new but who is to say that these rates will stay the same in the future? When using cryptocurrencies as payments, trading, and investing, sure governments are happy to get paid via taxes but in the back of their minds, they know that they need to keep activities at a minimum so that it doesn’t affect fiat spending or risk devaluing their national currency.
Regulations Are Coming
Taxation is only the beginning and regulations will continue to mount to the point where crypto investing, trading, and transacting simply won’t make sense.
Terra’s recent collapse was a big blow to the crypto industry. You can bet stablecoin regulations are around the corner. DeFi, crypto’s bread and butter, is largely unregulated and because of this, it is a haven for non-taxed transactions. We are already seeing KYC requirements for all exchanges operating in the U.S. and you can be sure DEXs are on every government’s radar. This means more regulations, less privacy, control, and freedom with your crypto assets – all of which puts a hamper on the work that cryptocurrencies have established thus far.
With mounting evidence that suggests Celsius is insolvent the dismal fate of centralized earning and lending for retail investors could already be underway. Regulators already intervened in April to force Celsius to remove their earn program to all but wealthy accredited investors. Since most of the value in crypto is generated from DeFi, these regulations will likely prevent new on-ramps to the crypto industry as a whole. When it becomes difficult to sign up to a crypto platform or if incentives are low, the much-needed user base from the mainstream won’t follow and that affects demand and ultimately value. With all of the recent and ongoing hacks, scams, rug-pulls, and poor business decisions the crypto industry doesn’t have a great look and you can be sure more regulation is coming our way as a result.
Governments Have The Final Say
Can decentralized currencies really work? Can you imagine a world where the majority of people in the world are using cryptocurrencies for payments and daily financial transactions? Sure, it looks and sounds like a great idea but ask yourself this: Why on Earth will any of the top economies allow cryptocurrencies to become more valuable than their fiat? Doing so would reduce fiat purchasing power and negatively impact economic influence.
China effectively banned crypto while introducing its central bank digital currency (CBDC) to select cities as a pilot run. They get it and they understand that giving financial power and freedom to the people will be disastrous to their monetary policy, money supply, and overall economic control of its goods, services, and citizens. The ability to turn the money printer on or off is critically important in any government as it helps to keep the economy at a steady state. Cryptocurrencies are in the way of this so countless countries are working on releasing their own CBDCs and it is only a matter of time before the rest of the world catches up.
The Perfect Storm Is Brewing
No one knows if or how cryptocurrencies will crash and be gone for good but the way to get there is by massively decreasing market sentiment and public perception to the point where value goes to zero. This can happen in a relatively short period or through a series of events that pan out over years. Inflation, recession, taxation, and regulation are already crippling cryptocurrencies. Governments will eventually convert fiat to CBDCs and make it harder for people to use crypto. As the world realizes that it’s too much work to sign up on platforms, too expensive to pay taxes, and too cumbersome to use for daily commerce, the bubble will pop, and… poof! Game over!
This post was written by Ironsung on Fiverr. We hire Fiverr writers to write on topics they are involved in, this way we can all learn more. Subscribe for more investing posts. Have a lovely day.
Disclaimer
I want to make it unequivocally clear that I do not promote any cryptocurrency, nor do I endorse any crypto investments. This website is dedicated to providing information and insights into the world of cryptocurrencies to help you better understand what crypto is. If you ever find yourself in a position where you need to explain your decision not to invest in cryptocurrencies to friends or acquaintances, you can use the content on this site as a guide to discourage people from falling victim to scams or making hasty financial decisions. My ultimate goal is to empower individuals with knowledge and awareness so that fewer people become financial victims. Life is already challenging with its inherent obstacles; we don’t need the added burden of unscrupulous individuals looking to exploit our hard-earned money. Stay vigilant, stay informed, and make financial decisions with caution. Your financial well-being is of paramount importance, and it is my sincere hope that the information here can assist you in making prudent choices.
