Recently, there have been negative comments about the US banking sector, with the withdrawal of several prominent market participants, and the subsequent repercussions in Europe have caused an increase in mistrust in the global financial markets. After the events, the US stock market circles looked for the next potential “weakers” and found them, which resulted in a stormy sell-off of the shares of the Swiss bank “Credit Suisse”. Also, “ugly” hints were sent in the direction of the German “Deutsche Bank”. Since the start of the hype in the US at the beginning of March, the share price of this bank has fallen by an impressive 20%. This is nowhere close to the approximately 70% decline in the share price experienced by Credit Suisse.
Crowd reaction
As soon as some turning points begin to emerge in the financial markets, especially if they are negative, the general reaction of seemingly well-educated investors tends not to differ much from the general crowd, without much discernment of what is good and what is bad. Knowing this, even the most rational part of investors often closes their positions, either hoping that they will get back their investments cheaper, or simply fearing that with the general panic, they may end up with hard-to-recover losses. However, the same “money movement” can be observed in the opposite direction as well. As concerns about the weakness of the global financial system spread, people are trying to save themselves with the help of alternative financial instruments, and the faster the price starts to rise, the greater the interest of investors can become. Currently, a lot of attention is paid to cryptocurrencies, and on the afternoon of March 30, the most popular of them, “bitcoin”, paid about 40% more than on March 10, with the price of one “bitcoin” fluctuating around 28.5-28.7 thousand US dollars. On the other hand, the value of another cryptocurrency “Ethereum” had increased by 30% in the mentioned time period, to about 1.80 US dollars a piece. In the “piece” it is said conditionally, because unlike ordinary currencies, the products of the crypto segment do not actually exist in nature, just as they do not have any cover, which would be formed by the reserves of other currencies, gold or debt securities. The last of the facts is also decisive, why cryptocurrencies do not have any economic cover, their value fluctuates rapidly, therefore they cannot serve as a comprehensive and stable means of payment in the national economy.
What to expect next?
Although it has no economic cover, the cryptocurrency market is not isolated from the trends of the rest of the financial market. Looking at history, it is quite clear that the prosperity of the cryptocurrency market depends on how generous the monetary policy of central banks is. Namely, the looser the reins have been released and the more active the quantitative stimulation of the economy, or, in simple language, money printing, the better the cryptocurrency market feels and the value of the products there increases. It can even be said that phenomena such as bitcoin, which has managed to gain widespread resonance and increase in value since its value was less than 100 dollars ten years ago, have gained their viability not because the dollar is as valuable as “paper”. what it is printed on, but because there are a lot of these dollars in the financial market. It is a legitimate means of payment for which bitcoins and other currencies of this type are bought and sold as soon as there is a sense of impending problems in the real economy. Therefore, the real reason why these currencies were bought so strongly last week probably has less to do with fears of a collapse of the global financial system than with hopes that central banks will hit the money-printing machine again as banking problems widen. with a financial flood to put out the potential fire.
The reason why buying has not been so pronounced in recent days could be largely related to the fact that no new and shocking ones have been added to the negatives that have already been heard. If the banking problem does not spread in the near future, then it can be predicted that as fast as prices rose, they will fall just as fast, because the expectations that money will be printed more than before will decrease. Here it should be taken into account that cryptocurrencies are considered a typical high-risk asset (this is also proven by quite drastic fluctuations within one day), whose value increase depends only on whether buyers do not lose interest. It is not even close to being equivalent to the shares of companies that belong to the risky investment segment, the buying activity of which is determined both by the financial performance of the company and the dividends to be paid to the shareholders. In the case of cryptocurrencies, they themselves do not earn anything and do not generate any financial returns, unlike gold, which itself does not generate anything financially either, but at least is used as a security for investment, a precious metal and a raw material for production. Therefore, the value of cryptocurrencies is also subject to greater fluctuations.
Among other things, it should be remembered: the riskier the financial asset, the faster investors will flee from it as soon as the storm front closes in the economic sky. A good example was the winter of 2020, when the value of bitcoin fell faster than the stock market indices when the spread of Covid-19 began. It was similar at the end of 2021 and 2017, when signals began to appear on the horizon that the sale of risky financial assets is more desirable than keeping the investment in the portfolio. It is very likely that the value of cryptocurrencies could still increase, but this is most likely possible in a scenario where the global investment microclimate is not shaken too much and at the same time central banks announce new injections of money. On the other hand, if such announcements do not follow and at the same time the global economic activity shows a tendency to decrease, the crypto segment may also experience another sell-off and price drop.
