3 Reasons to Ditch Bitcoin…or Not

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The market lost $200 million in a week

After surging at the end of the year, Bitcoin is struggling again. Down 25% over one month, including 8.8% over the week, it is now trading at around €34,000. As a reminder, last November it peaked at nearly €60,000.

In the crypto market, Bitcoin is the benchmark. Its fall therefore led to that of other electronic devices, such as Ethereum (-13.7%), Polkadot (-18.2%), Tezos (-16.2%) or Solana (-17.5%). Overall, the cryptocurrency market saw $200 million in capitalization evaporate in a week, and even $1 trillion since November according to CoinMarketCap.

>> READ: How to buy Bitcoin or cryptocurrencies?

An investment still risky but less profitable with rising rates

Cryptocurrencies are nowhere near a turnaround. The tremors in the market are legion. But this time around, investors have several real reasons to shy away from cryptos, and that’s not a good sign.

We must not forget that in this market, it is mainly the “whales”, in other words the big investors, who make the rises and falls. Or, they are on the lookout for all opportunities in all financial markets. And an announcement, coming from the United States, will change a lot of things.

The US Federal Reserve (the FED)*which generally has in its hands the financial trends of a good part of the planet, has just announced the next increase in its key rates* in an attempt to stem inflation* in the United States (+7% in December, a record for 40 years). In other words, the rates that serve as the basis for the financial markets will increase.

When these rates rise, investors’ appetite for speculative securities is reduced since the spread between risky and non-risky investments is less attractive. The markets have obviously started to react to this news, which they had anticipated for a long time: the NASDAQ, an index of technological stocks, has lost almost 8% since Monday. The fall in cryptocurrencies comes in the same wake.

>> READ: Bitcoin: despite its records, crypto is not a “currency”

After China, Russia will ban cryptocurrencies

One of the phenomena that characterizes the crypto market is its lack of regulation in many countries. If the traditional financial products are rather well edged, cryptocurrencies give a hard time to the authorities and no harmony has yet been found at the global level.

The price of Bitcoin and other cryptos therefore also depends on the decisions of different states in terms of law. And in this area, things are changing very quickly.

Thursday, January 20, the Central Bank* Russian has announced that it wants to ban cryptocurrencies on its soil. A decision in favor of the “parts” had however been taken by the authorities a year earlier. Now, Moscow favors fraud and the financing of terrorism (as well as, according to Bloomberg, the financing of political opponents of the regime) and wishes to ban them. Details of a new law could be presented as early as March.

For the cryptocurrency market, this statement is far from trivial. Russia alone accounts for around 10% of global mining activity and would be the 2nd country in the world to use cryptocurrencies behind Ukraine, according to a study by Chainalysis dated September 2020.

It is not impossible that equivalent decisions will be taken in the countries of the Russian zone of influence, made up of the former countries of the Soviet bloc.

In 2021, the Chinese central bank had declared a ban on cryptocurrencies in the country, which had already caused a fall in the price. To date, only El Salvador has adopted Bitcoin as one of its official currencies, despite the reluctance of its population.

>> READ: An insurance company buys $100 million worth of Bitcoins

The European Union is considering a Bitcoin mining ban

On the European side, the authorities have thought reasonably about banning the method of mining Bitcoins, known as “proof of work”. This technique has been denounced for months because it is very energy intensive. According to a study published in Nature, by 2024 Bitcoin mining alone could cause more greenhouse gas emissions than a country like Italy.
This is a stain on the energy transition.

Erik Thedéen, vice-president of the European Securities and Markets Authority (ESMA), believes that the process should be banned in order to encourage the industry to switch the system to a proof-of-stake model. “), more virtuous.

Such a ban could have two effects: promote the development of cryptocurrencies that already use this process (Cardano, Polkadot, Tezos or even Ethereum which is undergoing its transformation), and reduce the number of issues of new Bitcoins. Which, in turn, could help push the price of existing Bitcoins up…

>> READ: Bitcoin, cryptocurrencies, digital assets: what taxation?

Is it time to invest?

These elements show the considerable uncertainties that surround the field of cryptos today. All those who predict savers of certain enrichment thanks to cryptocurrencies are therefore only guessing. The environment is much too fluid, both legally and economically, to predict a dark or bright future for them.

The Swiss bank UBS is rather pessimistic about the future of cryptocurrencies. In a note, she speaks of a probable entry into a ” crypto winter marked by the recent fall of Bitcoin. According to her, this market suffers from many shortcomings that cancel out the ability of coins to become stores of value: weaknesses in technology, ecological footprint, slow transactions… She advises her clients to avoid direct investments in cryptocurrencies. as such.

On the other hand, the sector taken as a whole is promising. The technological challenges of blockchains* bring about a real renewal for the financial sector. The technological promise of DeFi (decentralized finance) is prompting UBS to invite investors to take a close look at companies with projects in this sector, rather than cryptocurrency tokens.

Investing in cryptocurrencies remains purely speculative to date: it is a real bet on the future. As in the casino, it is a question of betting on red or on black. In the long term, this risk-taking can make it possible to earn a lot of money, like losing everything. For those who want to try the adventure, the key is to invest with reason.

The current price decline could be a good time to start investing or increasing your positions. Tours is it not necessary put all one’s eggs in one basket “. Always diversify your investments, by distributing your savings between non-risky supports and others intended to produce a return. On the latter, invest only money whose possible loss would not cause you problems.

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Better understand the article

Words marked with * or underlined in the article are specifically defined here.


Central bank :
The central bank executes the currency of a country (or an area such as the euro zone) and the monetary policy set.

Blockchain:
Blockchain is an information storage and transmission technology activated without a central control body. It is a shared database that contains the history of all transactions made between its users since its origin. It is deemed secure because its large-scale sharing makes it tamper-proof.

FED, US Federal Reserve:
The FED, or Federal Reserve System (American Federal Reserve in French), is the central bank of the United States. Its role is to promote economic dynamics and growth by acting on the currency. Its areas of work are the promotion of full employment, price stability and the control of interest rates over the long term.

Inflation :
Inflation can be defined as the continuous rise in the general level of prices.

One of the consequences of inflation is the loss of purchasing power of money. When the price increases, the same amount of money is no longer enough to buy the same products.

For example, with an inflation of 1.8% per year, a product that would cost €100 in 2022 could cost €101.8 in 2023. The amount of currency needed to buy the product would therefore have to be increased.

Policy rate:
Principals are interest rates set by a central bank. They make it possible to regulate economic activity by acting on 3 levers: the interest rate on bank deposits, their refinancing rate and the discount rate.

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