Why Crypto Prices Aren’t Higher

Late 2021. Facebook changes its name to Meta. FB had acquired Oculus as covered in a serious Zuckerberg, Gary Vee interview. Focus is shifting to Web 3 and metaverse projects.

Zuckerberg interviewed by Gary Vee

Twitter now supports NFT avatars. Apple to add crypto payments feature. Alphabet (Google) planning AR and Web 3 integration with Android. Salesforce revealed plans for an NFT, Web 3 cloud service.

Web 3 has a foundation in blockchain technology, and smart contracts. The most pervasive platform for these is Ethereum. Competing blockchain networks are Solana, Cardano, Algorand, Avalanche, BSC and so on. Each has its own crypto currency, some hosting L2 tokens.

Web 3 developer jobs are lucrative. Gaming experiences. Everywhere we look, excitement over crypto, metaverse, NFTs and Web 3.

Crypto prices should be going up then, but they aren’t. Instead there have been three significant dips in recent history shown in the graphed image.

Some key factors contribute.

graph
info / graph from ethereumprice.org)

Bitcoin Leadership

Bitcoin leads the crypto space. Whatever happens to Bitcoin has a parallel impact on all of crypto. In an earlier post, I described Bitcoin has having a store of value use case. It’s called digital gold for that reason. Why do people buy Bitcoin? To have it, to hold onto it. Maybe a hedge against inflation. It’s held as wealth and savings (although it can be used to purchase goods and services).

More have Bitcoin than all other cryptocurrencies. While Avalanche may have the most robust tech and Solana the fastest speed, it doesn’t matter. If Bitcoin goes down, so do most of all things crypto.

DeFi in a World of Centralization

Cryptocurrencies while decentralized internally, live in a world of centralization.

A lot of energy is required for the Proof of Work needed in mining. Again, that others besides BTC use POS doesn’t matter. So an energy crisis in Kazakhstan for example sends the price down.

Russia recognizing BTC as legal tender affects the price. Biden announcing coming regulations through executive order affects the price. Elon tweets, etc. In theory, Bitcoin exists on peer-to-peer networks (not subject to large data centers), tamper-proof. Designed to be location independent, free from outside control. The people who use it aren’t though.

While there’s huge interest in Web 3 — most associated with Ethereum, Solana and others — that doesn’t matter when it’s all about Bitcoin and people are fearful for other reasons.

Stock Market Correlation

Investors buy and sell cryptocurrencies. They look at risk vs reward, take bets, change positions throughout the day just like with stocks. These investors view Bitcoin (and others) through the lens of a new technology commodity. Because of that, investment behavior correlates to what’s going on in the market for tech stocks.

With a decentralized framework, US Federal Reserve interest rates shouldn’t impact Bitcoin value — but they do because of Bitcoin’s relationship to the market for other assets like stocks from the POV of investors.

Influencer-Youtuber Crypto Casey explains how these investors are driving crypto prices as 70% of crypto trading is done by institutional investors. (Video below.)

Exchanges, Fractional Reserve Lending

Bitcoin has a maximum supply. Everyday people can buy Bitcoin directly, store the keys and info in their crypto wallet. This scenario adheres to a sound money mentality like getting actual gold bars and putting them under a mattress somewhere.

However, with crypto exchanges there’s the introduction of financial intermediaries. Gemini, Celsius and Crypto.com are examples. These offer interest just for holding crypto through them. Fractional Reserve Lending, just like with traditional banks and fiat, facilitates this. (In part, this is due to the introduction of crypto ETFs, better explained elsewhere!)

Influencer-Youtuber Crypto Casey expertly describes how practices from financial intermediaries create an artificial supply of Bitcoin.

Whereas buying and selling directly would reflect actual supply, fractional reserve lending (i.e. exchange holds a percentage and lends the rest) in effect creates additional supply on the market, which then intersects with real demand at lower prices.

Crypto Casey says crypto prices are being suppressed through the processes used by these intermediaries. (Video below.)

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