The ups & downs of the crypto market, and why it’s not all bad

• A commentary by Niall Murray, Director — Global Business at SALAMANTEX

Nowadays, media and online platforms are filled with headlines about a crypto winter, a long stagnant low period of the crypto market that also decreases the overall trust in the industry. While some people feel like the crypto bubble has finally burst, the opposite might actually be the case.[1] It is indeed true that cryptocurrency is currently not in its strongest phase, simultaneously impacting the superordinate blockchain and FinTech industries negatively. But as so often, there is much more to the story:

1. Why ups & downs are important to mature the space

A defining characteristic of cryptocurrencies is their high volatility. Looking at the journey of Bitcoin since its creation in 2009, we witness a series of ups and downs with some stagnant periods and some extreme jumps upwards and downwards.[2] However, only few people talk about the fact that all markets need this cyclic character: “consolidation and capitulation cycles are healthy to create financial stability within the markets.” [3] Some people even go one step further and interpret the recessive phases as an opportunity to purify the market. Only the strong firms with actual added value and stamina are able to survive the hardship and prosper after the winter.

2. The bigger picture

It is true that the crypto market is currently facing harsh times, but so are other financial markets and asset categories. If we have learnt one thing from 2021, it is that the crypto market and the stock market are aligned, as a graph by Bloomberg Intelligence shows us:[4]

We have to understand that the current market evolution goes far beyond just a crash of the crypto market. It is a much wider phenomenon, stemming from the economical and political climate. The signs show that we are headed into a worldwide recession, forecasted to “happen this or next year or latest by 2024.”[2]

Why, oh why?!

Let’s take a deep dive into three of the factors, that have led us on this path to recession:

1. The late effects of the Covid-19 pandemic:

While it might feel like yesterday, we have battled the Covid pandemic for three years already and this crisis has left its mark, both on a personal and on a business level.

What helped in the moment to get us through the pandemic is now backfiring with significant late effects. Politics pumping fresh fiat money into the system to keep the economy afloat throughout Covid lows, is now leading to a major inflation with too much fiat money in circulation. Not only the UK are complaining about a record inflation[5], many countries in the EU are moving towards unprecedented double digit inflation figures.

Apart from fresh money flowing into the economy, households saw their savings increase, as they were confined to their homes reducing their usual spending. Naturally, they went on a buying spree for new furniture, redecorated their homes, and bought online, triggering a demand spike, just as factories were shut due to the lockdown. The increased demand combined with an actual goods shortage (computer chips, bicycles, toilet paper), has led to high inflation.

Additionally, late effects of buy-now-pay-later schemes that saw increased popularity during times of lockdown with heightened online shopping have amplified the issue. We are now facing the ‘pay later’ phase at the time of increasing prices for energy and daily goods. Together, these factors have led to an extreme drop in purchasing power of the population. Consumers are holding back in times of uncertainty, in order to cover their increasing costs of living. Consumption activity is slowly coming to a halt, hitting already weakened sectors like retail and hospitality. Markets, including cryptocurrency trading are taking these effects into account.

2. Ukraine invasion by Russia:

Along with the atrocities of war the Ukrainian and Russian populations are forced to suffer through, the Ukraine invasion by Russia has also brought higher oil and grocery prices as side effect. Populations all over the globe are struggling with the uncertainty of what the final outcome is going to be. In Europe and aligned markets especially, the sanctions against Russian goods and services are hitting hard at home as well as on Russia.

3. Summer blues:

Comes summer time, business slows down in the office world: the so-called ‘vacation ripple effect’.[6] Many office workers, especially in European countries, make use of the warmer summer months to go on a well-deserved break using up a high portion of their generous annual leave allowances. The same occurs in the Middle East, as the summer months in this part of the world are truly unbearable and substantially impact the mood and energy levels of its population.

What doesn’t kill you, makes you stronger

Now that we have seen that the crypto market is only one of many losers of the current harsh financial situation, let’s talk about how the crypto industry is actually a winner in some way. After taking this hit, the crypto industry will come back out the other end stronger as it has benefited from several factors in comparison to other markets. Many people search for protection and security in politically and economically unstable times and turn towards DeFi. They want to be their own custodians for their money rather than trusting governmental bodies and actions. This wave of new users gives the crypto market some uplift. What about the trading world? Believe it or not, but tough times actually act as catalyzer for many traders: the motto goes ‘buy the dip and hodl’ (hold on for dear life), expecting that the currencies will go back up again and bring major profits as they were purchased at their lowest.[7]

As mentioned, times of hardship help filter the blockchain sector, keeping only the most resistant and valuable innovations alive. In addition, some inventions pivot and discover completely new use cases. As example “Bitcoin is finding new utility in this moment of market madness. […] Whether it’s investors experimenting with crypto as a store of value, international banks and governments leveraging it in trade, or populations trying to protect their purchasing power, we are entering a new phase of adoption.”[8] And a fourth use case comes into play, being adopted by more and more retailers and service providers: cryptocurrency as a means of payment. “Sure, you don’t want to spend your cryptocurrencies when they have lost in value. People spend their crypto when prices are up and use the market downturns to restock their holdings,” states Nimiq ambassador Max Burger, further warning that so-called ‘bearish’ market phases can potentially also last longer than just a couple of days or weeks. That’s why it’s essential that people are well aware of the risks associated with strong market movements and price fluctuations. Everyone needs to learn about the forces and effects that drive the markets to be able to make informed decisions. In the crypto space, it’s called: DYOR — Do Your Own Research!

How FinTechs need to position themselves to stay clear market fluctuations

With the overall market pressure, FinTechs and other start-ups are fighting for survival. “We at SALAMANTEX have already gone through two crypto winters and while we have indeed faced setbacks, we came out the other end stronger and even more determined to make the payment revolution a reality, as demand for such solution after each crisis went up,” says Niall Murray, Director — Global Business at SALAMANTEX. As their recipe for success, he refers to a sustainable business concept that is set up for the long run, tackling the problem at its roots by working on setting up the needed payment infrastructure first. This work needs to be done regardless of fluctuating usage from the crypto community. To harvest the demand for crypto payment during bull market times, the work needs to be executed in bear market times. It is only a matter of time before one reaps the benefits of this strategy.

[1] Contrasting The 2022 Market Crash To 2018’s Crypto Winter — The Defiant

[2] Bitcoin Price History 2009–2022 | NextAdvisor with TIME

[3] 2022 Outlook: Global cryptocurrencies | Bloomberg Professional Services

[4] July 2022 Stock Market Outlook — Forbes Advisor

[5] UK inflation hits 40-year record, highest in G7 | Reuters

[6] The Summer Slowdown At Work: Myth Or Reality? | Monster.com

[7] Crypto Crash: Is Now The Time To Buy The Dip? — Forbes Advisor UK

[8] Why inflation — not the crypto crash — will define Bitcoin | VentureBeat