How have the global markets responded to the crypto bubble?
There’s no doubt that the global crypto market has been in free fall of late, ever since its leading token Bitcoin (BTC) saw its price peak at $68,789.63 in October 2021.
Since these halcyon days, BTC has shed more than 75% of its value, plunging to a little over $16,000 on New Years’ Day 2023. This has precipitated a similar decline in other crypto assets, while the sector’s total market cap has fallen from a little over $3 trillion to less than $1 trillion during the same period.
This is an example of a financial market bubble, but what does this mean and how have the markets reacted to crypto’s recent decline?
What is a financial bubble?
In technical terms, a bubble describes an economic cycle that’s characterised by the rapid escalation of market value, usually in the price of a particular asset.
This exponential growth is usually followed by a similarly rapid decrease in value (or contraction), with this seeing the price bubble burst and a potential market crash ensue.
Of course, such an instance can occur without a bubble forming, particularly in volatile marketplaces like forex and cryptocurrency. However, a bubble is usually defined by price movements that are driven by intangible and unsustainable factors, such as investor sentiment, speculation and exuberant market behaviour.
Such factors cause the price of affected assets to soar at a disproportionate rate to their intrinsic value, with this linked to both technology stocks (such as Apple) and cryptocurrency.
How have the markets reacted to the recent crypto bubble?
As we’ve already touched on, the recent crypto crash has been both pronounced and sustained through 2022, with BTC alone now 75% cheaper to buy than it was 14 months ago.
This decline has also had an impacted on the wider financial markets, particularly as BTC may no longer be seen as a viable hedge against inflation. Make no mistake; the crypto market as a whole has been moving in sync with the stock market for the past few months, with the precise correlation between BTC and the S&P 500 reaching a 17-month high in March 2022.
This unity means that BTC and similar crypto tokens are now likely to move more in sync with traditional markets such as stocks, which will impact on global demand during the current recession.
With inflation now impacting crypto tokens directly, it’s also fair to surmise that so-called “stablecoins” are no longer guaranteed to maintain their value in line with the US dollar (USD). This means that they can no longer offer added security to investors during a recession, while it also makes techniques such as copy trading increasingly effective.
These reactions have much to do with the way in which cryptocurrencies have become increasingly ingrained in the global economy of late, meaning that they no longer provide viable hedges against inflation or changing interest rates.
