Cryptocurrencies are not assets in a parallel world but somewhat “real” assets and, as such, are affected by what happens in the global economy.
Numerous examples could be given in this regard, but two are perhaps just the most fitting:
- The March 2020 market crash;
- The Fed’s inflationary policies.
The Covid Panic
In March 2020, the world took note that there was an enemy as devious as it was dangerous: Covid-19. When the Coronavirus spread to China, then Italy and consequently Europe, and finally the United States, markets experienced days of terror. The panic that swept through the stock exchanges did not leave cryptocurrencies untouched either. Suffice it to say that on March 14, 2020, Bitcoin lost 20% in just 24 hours.
In those days, investors were liquidating everything to profit wherever possible and get to break-even portfolios. Cryptocurrencies and stock markets showed an unusual but, in some ways, also obvious correlation.
The policies of quantitative easing and helicopter money
The global economy came to a screeching halt due to lockdowns and border closures. This lockdown has led central banks to intervene either by printing money (helicopter money) or buying government bonds (quantitative easing).
In particular, the policies of the Fed in the United States, which has printed trillions of dollars to cope with the stalling of the American economy, have resulted in a widely announced consequence. Rising inflation.
Against this backdrop, it is no coincidence that cryptocurrency purchases and trading have increased. Bitcoin, like gold, has been seen as a protection against inflation. For these reasons, the price of BTC just in 2021 hit its all-time high, first at $66,000 in April and then at $69,000 in November.
How the global economy influences cryptocurrency: concrete cases
So, does the global economy influence cryptocurrencies? Yes, and very much so. The opposite is also true: cryptocurrencies, Bitcoin in the lead, can also influence global markets.
When Tesla invested $1.5 billion in Bitcoin last February, the economic world opened its eyes wide, taking note definitively that Bitcoin is not the currency of the dark web but an investment tool in its own right.
Tesla does not go unnoticed: it is the car company of the richest man in the world, Elon Musk. And even his tweets have indeed shaken the market (of cryptocurrencies) and determined pumps and dumps of Bitcoin and Dogecoin.
Just as an app was enough to rewrite the financial market rules
Robinhood was how a large group of retail investors banded together against hedge funds, buying en masse the shares of GameStop so far in crisis. They also did it for Dogecoin, producing a result: meme-stocks were born on the stock markets, and thousands of meme-coins were born in the cryptocurrency sector.
If this is not influence.
The regulatory factor
In any case, it is not only economic scenarios that influence the fate of cryptocurrencies but also the behavior of regulators. When China banned Bitcoin last May, the sector suffered a slump, then recovered.
Now the eyes are on the United States. Cryptocurrency regulation has been talked about for some time, but there is little concrete yet. When a serious regulation arrives that doesn’t limit itself to looking at cryptocurrency only as a good to be taxed, the sector will be able to choose whether to grow or to sink. The rest could probably be done by the European Union, which is also at the window.
Probably stablecoins will be the cryptocurrencies that risk the biggest setbacks. The attention on their reserves is at the highest levels, and it is not excluded to impose to the companies that issue them to turn into real banks.
It is recognized by all, however, that regulation can only do good to the sector, avoiding that cryptocurrency projects can then find themselves in a courtroom, as happened to Ripple.
We just have to wait and see if 2022 can be the year of the turning point in this sense.