Much more than a bump / Analysis by Ricardo Avila – Economy

At the beginning of May, residents of the American hemisphere were warned of a lunar eclipse, scheduled for the night of May 15-16. – Several were taken in Colombia – and led to enthusiastic comments circulating across social networks.

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However, for those in the investment sector, the ring had a double meaning. A few days ago, the markets were shaken by the collapse of Luna, a cryptocurrency that traded at $116 in April, and its value collapsed to zero a few weeks later, as the $40 billion represented by this asset disappeared.

But the real impact of this financial eclipse goes much further than that, as the repercussions of the aforementioned collapse are still being felt. Overall, the entire cryptocurrency and derivatives segment has seen major setbacks, which translates to pretty big numbers, with a market value of $3.2 trillion at the end of last year reaching $1.3 billion.

The case for bitcoin is eloquent. After trading at $67,000 in November, it fell to $26,000 in mid-May. Although it has shown an increase of just over 10 percent since then, that partly offsets the losses its holders have recorded.

In response, there is no shortage of confirmation in the sense that this is a temporary thing, as strong ups and downs have already occurred at other times. By this logic, the storm will eventually pass, so it’s best not to sell and even take the opportunity to get in when the various options are “cheap”.

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with the wind against

In this regard, many experts emphasize that the most balanced analysis should include additional elements. The main factor is the change in global economic conditions, because apart from the hint of recession, a jump in inflation and higher interest rates is certain.

From the war in Ukraine to geopolitical tensions between Washington and Beijing, through populism present on four continents, threats are growing. Experts’ forecasts are darker now, with no light at the end of the tunnel.

In both the northern and southern hemispheres, central banks have tightened foreign exchange pegs to contain price increases. Even if the tuning speeds are different, no one doubts that the era of cheap money is over, which is why some alternatives are now more attractive than before, while others are stagnant.

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For this reason, bonds came out of their idleness, even realizing, not long ago, negative returns due to excess liquidity. To speak specifically, debt paper issued by a developed country attracts a lot of attention, not only because it is a haven against uncertainty, but also because its returns are higher.

With that relative calm at hand, everything tech-related becomes a little less flashy. If it is a startup, then the willingness to bet on fast-growing initiatives, but with an inaccurate profit scenario, is much lower. Reports of low capital inflows to new ventures are plentiful, adding to an even more foolish view of those already in place.

In this way, the New York Nasdaq Composite Index, where stocks of companies associated with what is known as the new economy in general are listed, is showing a decline of more than 23 percent so far this year. By comparison, the Dow, which measures a broader range of companies from various sectors, lost 9.5 percent.

In a different context than it was a year ago, the trajectory of cryptocurrency is much more difficult. Instability and volatility are two adjectives used to describe the reality of Bitcoin and many other adjectives, only when risk aversion begins to become noticeable.

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Although there will always be individuals willing to risk everything in a market characterized by its lack of transparency, everyone who is drawn to the siren songs of extraordinary profits should be aware of the greater risks by now. Even if the fight against inflation succeeds, the belief that a return to previous conditions is imminent is wholly unrealistic.

free fall

Also, it’s important to note that things in the crypto space don’t always work as advertised. What was called into question in last month’s disaster was the concept of stablecoins, designed to eliminate the volatility that keeps so many people away from virtual assets.

Without going into technical depths, the Luna cryptocurrency was the backing for Terra USD, which was advertised as a tool that maintains parity with the dollar. Now that it is clear that this structure did not work, eyes are on similar options, such as the Tether, which in principle have a different basis.

Although its promoters insist they have enough backing to maintain parity with the US currency, the final verdict is still pending. Few would argue that if the dam burst in this case, the damage would be much broader and have repercussions on a market that appears to be much less attractive.

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Whoever doubts it, they just have to look at what happened with Coinbase, the platform that allows trading of crypto-assets, which just reported a decrease in the number of users, trading volumes and assets registered. That is why the latter’s shares have fallen by about 74 percent so far this year.

Given what happened, comments on potential victims are growing in size. And newly inaugurated New York Mayor Eric Adams is well known, who, upon taking office in January, said his first three weekly — $9,925 each — would be transferred to bitcoin and ethereum. When asked, the mayor confirmed that he had no regrets about his decision to promote the city he runs as a global crypto capital.

Still more complicated is the case of El Salvador, whose president, Neb Böckel, last September issued the rule that one of the Central American country’s official currencies is Bitcoin. Immediately after that, he invested $100 million in official money in this option, something that on paper generated losses of $40 million.

Given the high public debt and the possibility that the Salvadoran treasury will not be able to meet its debt obligations on time, criticism is growing in size. Despite this, the president bought about an additional $15 million on May 9, when the unrest neared its peak.

look in the distance

While it is completely irresponsible to dictate the fate of the economy to the fluctuations of assets whose price formation is not transparent, those who deviate from what is happening on a daily basis point to something that may seem paradoxical in light of what has been observed in the past 30 days: cryptocurrencies are here to stay. A symbolic sign of its acceptance is the inclusion of the topic in recent summits such as Davos, which were attended by representatives of traditional capitalism.

Namely, that the primary argument is based on the fact that it is desirable to have an alternative that reduces transaction costs and at the same time is impervious, from a security point of view. Back in El Salvador, which last year received 7.517 million in family transfers sent by those who left to find their fortune elsewhere, abolishing commissions that could easily exceed 10 percent is a strong argument.

And a portion of those transfers — $57 million — came from digital wallets, which isn’t a small amount considering the option has been in place for less than four months. Reducing payments to third parties increases the disposable income for families and proves that there is a gold mine here worth exploring. The fundamental question is how the case will develop.

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While there are those who believe that the concept of decentralized finance (those who are not dependent on any government) will end up prevailing in a globalized world to connect those with surplus funds to those who need it, others are more cautious.

A large number of academics believe that cryptocurrencies issued by the central banks of many countries will eventually become the norm, and in this regard they point to successful experiments conducted in Sweden or China, among many other countries. If so, the obstacles that today account for the suspicion of many will be resolved, such as who backs an asset that travels through cyberspace and who ensures adequate oversight to prevent abuse.

In addition, the inviolability of the blockchain that protects information will be preserved and brokerage costs will be significantly reduced. But above all, the focus will be on the use of an alternative that pays for goods or services at any latitude, eliminating in the process the significant ups and downs in value we observe today.

Something in between is also possible. In this scenario, different types of cryptocurrencies will continue to exist because the reasons for their existence are not the same. Millions of people are drawn to a scheme that no country can hold its nose in and guarantee anonymity.

But for that to happen, the system needs to work better. Far from their validity from a conceptual point of view and the advancement involved in the existence of technological tools, everyone who has been affected in recent weeks has discovered the hard way that they are practically unprotected.

Moving forward, the same person must understand that he is experiencing significant losses, among other things, because the macroeconomic environment is less favorable. High inflation and high interest rates are not part of the ideal environment for stocks.

Of course, there will always be the tale of the person who managed to get rich by stepping into the wave in full swing and getting off of it before it broke. But this also happens in casinos, where, after the dealer collects chips on the canvas, he gives his bonus to the person who left against the winning number and makes the wise decision to withdraw with the money in his pocket.

Ricardo Avila

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