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Friday, March 1, 2024

Crypto “safe haven”: is it real?

By Lado Okhotnikov

About the Author

Lado Okhotnikov is the founder and CEO of Meta Force decentralized platform. He is developer and key expert in blockchain technologies, cryptocurrency trading and digital business. Lado originated large-scale crypto-projects and knows how things work from inside.

Lado Okhotnikov is known as a reasonable critic of policies aimed at state regulation of the Crypto industry.

Economic crisis: investor’s behavior

The problems of the world economy are so serious, that a new economic crisis is becoming inevitable.

Periodic crises are the economic norm, but next one can be extremely devastating, as it affects the economic basis of our civilization.

We understand that it would be a time of threats and possibilities. Investors know how to work on crisis market, when all your assets fall. There are reliable strategies which are developed for falling and volatile markets. However, such strategies are intended for “normal” crisis and are not suitable for new economic reality.

In order to protect assets, investors go to so called “safe haven”.

“Safe haven” means class of assets which has a stable price and liquidity. Typical list of “safe haven” assets includes precious metals, reserve currencies, stock of some corporations.

However, new crisis differs from everything we’ve met before. All reserve currencies (USD, EUR, GBP, JPY), state and corporate securities will be affected by extraordinary debts level. Most probably financial markets will dramatically fall.

Also, we live in time of political changes which means additional risks. In would by quite difficult to find safe asset and “safe heavens”.

It would be first world crisis with the participation of Crypto assets. In theory Crypto has a chance to be some sort of “safe heaven”.

Such Crypto as bitcoin is characterized by liquidity, it well protected, safe and doesn’t depend on “real” economic system, so it will not directly be affected by crisis.

So, our question is: can cryptocurrency takes place a new digital “safe haven”?

Digital “safe haven”

From the point of view of the “traditional” fiat economy, the answer should be no. There are many arguments that cast doubt on this possibility. Let’s take a look at them and try to respond to the objections of critics.

At the moment, the capitalization of the entire cryptocurrency market is $1.3 trillion. At the same time, the capitalization of only one Apple company exceeds $3 trillion. Investors simply won't have enough cryptocurrency to place free assets. 

This statement is true; however, it reflects the current state, things can change in the future. No matter how great Apple is, the growth of its capitalization has fundamental limits related to production and sales volumes. Cryptocurrency has no such limits. Bitcoin could theoretically be worth both a million and a billion dollars. Therefore, once the cryptocurrency market is in demand by investors, its growth can be unlimited.

The cryptocurrency market is characterized by high volatility, which is too high a risk for conservative investors. 

This statement is also true; but it also applies to the current state and volume of the market. Now the use of cryptocurrencies is limited. But if investors perceive crypto as digital gold, this will make the market much more predictable and stable.

Cryptocurrencies in reality are backed by nothing (with the exception of individual stablecoins), it is a potentially dangerous asset. 

Well, yes, that’s right. The value of, for example, bitcoin is determined not even by the market, but by a certain consensus. Why did people suddenly think that bitcoin was worth something? It was just an agreement, first it was a limited group of participants, then of the entire global market. However, the same can be applied to almost all fiat currencies. What is the dollar backed by? Since the disappearance of the Bretton Woods system, nothing. In reality, this is the same arrangement as in the case of bitcoin.

Cryptocurrencies are at risk of legislative regulation. 

There is nothing to object to. Indeed, legislative risks can make the prospects for the cryptocurrency market very vague. It is possible that the actions of the regulator (US SEC) are aimed, among other things, at eliminating a currency competitor.

The decision to create a global asset from crypto must be political, this is the only way to eliminate the risk of legislative regulation. So, is it possible consider Crypto a new “safe haven”? We believe this is quite possible, although now the US SEC is actively opposing it. However, in worst case, especially in the process of crisis, crypto can effectively work outside the United States. This will limit the cryptocurrency market, but make it quite competitive and suitable for a safe haven.

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