The damage balance after the crypto crash

The damage balance after the crypto crash

The crypto world is being shaken by severe price slumps. How big is the damage with Bitcoin & Co?

Not only Bitcoin is in a deep crisis, but the entire crypto world. According to the ideas of its fans and advocates, the digital money with the revolutionary and anarchic image should be considered an alternative to state currencies, which are under the influence of governments and central banks. But the latter are now tightening monetary policy and raising interest rates because of the strong inflation. Rising interest rates make dollars, euros or francs attractive to investors again, so they withdraw a large part of their money from the crypto market. This turnaround in interest rates is the main reason for the slump in digital currencies – as can be seen, for example, from the horrendous price losses of the leading digital currency Bitcoin. The rise and fall of bitcoin is staggering.

It is currently worth less than a third of what it cost at the height of the boom in 2021, measured in the dollar, the key international currency. Because the central banks have not yet got inflation under control and further interest rate hikes are therefore likely, Bitcoin fell to almost $18,000 last week – the lowest level since June. This is a dread for short-term speculators as well as longer-term crypto investors looking for a store of value for their wealth. At the moment you only have the vague hope of exponential price increases in the future. After all, Bitcoin has maintained its position as the leading cryptocurrency despite the price slump. Because its competitors have also fallen deeply or even much deeper, such as the Solana coin. Bitcoin continues to have by far the largest market value of all cryptocurrencies. This results from the stock market price multiplied by the number of coins, i.e. the currency units.

At around 360 billion dollars, the market value of Bitcoin is more than twice as high as the market value of the second largest cryptocurrency, Ethereum. So, the pecking order in the crypto world is unchanged. The public’s gaze falls primarily on the 10 largest cryptocurrencies anyway, but there are countless others. With the boom of the past few years, the number of crypto alternatives has literally exploded. But recently the number of cryptocurrencies has peaked. The barely manageable crowd of exotics in the huge crypto zoo has been reduced from more than 10,000 to less than 9500, which speaks for a certain adjustment.

Consolidation doesn’t have to mean that the technology itself has failed. At least that is what a comparison with other technological cycles suggests. So in the middle of the 19th century there were countless railroad companies and countless oil companies. Then a merciless market concentration and wave of mergers set in in both sectors, which swept away all the small suppliers. At the same time, however, rail transport and petroleum products have established themselves as everyday phenomena. No one can predict whether cryptocurrencies will follow such a historical path or hit a dead end. In any case, cryptography as a digital encryption technology is considered promising. It enables electronic transactions of all kinds to be processed without the help of central platforms because the data is stored on the users’ computers. This technology can not only be used for payment transactions, but also for digital securities or completely other applications that nobody thinks of today. Crypto skeptics, on the other hand, liken the phenomenon to the tulip mania of the 16th-century Netherlands. At that time, nouveau riche citizens invested enormous sums in rare tulip bulbs, whereupon the bubble burst. Many merchant families were ruined. The jokes on the Internet about Lamborghini-driving crypto millionaires who now have to hire help at McDonalds are a reminder of this. A look at the number of visitors to the German bitcoin exchange bitcoin.de shows that irrational herd behavior plays a role in the hunt for bitcoin and co. These peaked at 3.7 million in January 2021, but interest from German investors has plummeted.

From this it can be concluded that cryptocurrencies were only in demand because of the rapid price increases and that the mass of investors turned their backs on the crypto market disappointed because of the painful corrections. The number of bitcoin transactions is still growing. In addition, more and more coins are being circulated. The high pressure on the Bitcoin price is not only due to rising interest rates.

The exploding energy prices also hit Bitcoin in particular on its Achilles heel – namely the high energy requirements for mining. This means the creation of new coins for which expensive data centers are operated. The high energy requirement for the creation of new coins is part of the Bitcoin principle. The cost of production is supposed to serve as a kind of built-in protection against inflation. This prevents bitcoin from being created out of thin air like central bank money. Bitcoin is a real power guzzler. Especially since not only the mining but also the subsequent transactions cost a lot of energy. The Bitcoin network consumes more energy than Finland and critics even compare the energy requirements of Bitcoin to those of the international banking system or gold mining.

Accordingly, Bitcoin consumes almost half as much electricity as the 100 largest bank data centers. The Bitcoin competitor Ethereum exploits this weakness. Resourceful programmers have now released an Ethereum version that only needs a very small fraction of the electricity required for the original version to create. The example shows that the competition in the crypto world is intact and investors can therefore still hope for many surprises in the future.

Samuel Edwards
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