Cryptoassets delivered extraordinary gains in 2021. But when exchanging the view from the rearview mirror for the windshield, the scenario of this beginning of 2022 presents itself as challenging for these assets. The crisis in Kazakhstan, one of the main hubs for bitcoin mining, and the effects of inflation on global monetary policy undermine two important elements for the rise of these assets: positive publicity and an abundance of liquidity in the financial market.
Difficulties that do not need to be a reason to discourage new investors, but serve as a warning so that decisions on how and how much to invest are careful. Understanding the logic of this market is the first step to balancing the risks.
While a traditional currency can hypothetically be issued infinitely at the will of central banks or governments, major cryptocurrencies are programmed to be limited.
To issue this asset, programmers must decipher and string together blocks of code released on the internet by developers. That’s why this technology is called blockchain, a chain of blocks.
Mining is how this cryptoasset validation work became known. The activity requires the resolution of complex mathematical problems, which require the use of interconnected computers with high processing capacity.
Designed by different developers, these assets have their valuation affected by investors’ confidence in the quality of the programming that each one of them carries, in addition to their acceptance for carrying out transactions.
This explains why bitcoin is the most valuable. It is considered a currency, in fact, by experts of this market. “It’s a safe project, which is completely ready,” says Lucas Passarini, business analyst at Mercado Bitcoin.
The maturity of the project also justifies the lower valuation in relation to many of its peers. In 2021, the price of bitcoin in reais rose 69%, according to Bitcoin Market data.
The gain far exceeds that of traditional investments. But it doesn’t come close to the 448% rise of ethereum, whose project is considered robust, but at a lower degree of maturity than bitcoin.
Developed to work as a video game monetization unit, the Axie Infinity Shards —which is not a currency, but a crypto-asset with specific utility— had its price increased by 18,537% in 2021. It rose from R$2.81 to BRL 523 in the year.
Other cryptoassets have seen extraordinary appreciations over the past year. These are projects whose market capitalization started from low levels, but which gained visibility by receiving generous contributions for development, thus attracting the attention of investors, according to Passarini.
The condition for this was facilitated by the high level of liquidity in the financial market in 2021. Central banks around the world loosened monetary policy to keep the economy warm during the worst phases of the Covid-19 pandemic.
Interest rate cuts combined with market-traded asset purchase programs have provided stimulus and money for investors to invest in risky markets, according to Rodrigo Soeiro, founder of Monnos Cryptobank.
The times of plenty may be at an end. Monetary authorities around the world, such as the Fed (Federal Reserve, the American central bank), are ending these stimulus programs to try to stop a global inflation that has been gaining strength.
Currency tightness is considered by experts to be a more important obstacle to cryptocurrencies than crises in regions with significant mining participation, such as Kazakhstan.
The country is the second largest bitcoin miner in the world, behind only the United States, but it almost disappeared from the currency’s prospecting map last Wednesday (5).
President Kassim-Jomar Tokayev ordered the country’s internet and cell phones to be cut off. The measure tried to dismantle demonstrations against the price of fuel.
Faced with the instability, miners liquidated assets and caused a daily 5.21% devaluation of bitcoin. Pessimism contaminated the market and other cryptocurrencies also relented.
“The history of social and geopolitical tensions in mining concentration sites leads miners to liquidate positions to bear the costs of the stoppage, which they do not know how long it will last, and also the costs of transferring them to other countries”, says Passarini.
The problem in Kazakhstan is one-off. Mining farms can be transferred to other regions. Already the news about conflicts between governments and miners can sound discouraging to investors.
An example of conflict that gained prominence with the crisis in Kazakhstan is over energy consumption. According to a report by the Financial Times, cities in six regions of the country faced blackouts in the middle of winter in the country due to the overload on the system caused by mining. The local operator said it would ration the energy destined for the activity.
Unlike how 2022 is starting off, the year 2021 has offered a bundle of good news for cryptocurrencies. The most striking was El Salvador’s decision to become the first country to officially adopt bitcoin as a currency, although this has generated some protests in the country.
The country located in Central America, which is the size of the state of Sergipe, also announced the creation of a bitcoin mining city. The energy demand required in this activity would be supplied by the thermal generation provided by the Conchagua volcano.
The fact is that, like other equity investments, cryptocurrencies are subject to political, economic, social, geographic, and other conditions. In addition, there are aggravating factors for the risk, such as the absence of regulation, the lack of knowledge of most investors and the presence of scammers willing to take advantage of enthusiasts.
The rule is to apply little: between 1% and 5% of the portfolio, according to Rodrigo Monteiro, executive director of ABCripto (Brazilian Association of Cryptoeconomics).
“Start with a little to gain confidence. Test with R$10, with R$100, then with R$1,000. Buy, sell, turn it into money. Read about it and understand the logic in the first few months”, says Monteiro.
Established brokers with a good reputation in the market should be preferred by the novice investor. “It’s like any other investment. You should only invest in what you trust and believe in”, he says.
The newer and more unknown the asset, the lower the value applied, says Passarini, from Mercado Bitcoin. “For those who don’t know anything, it’s important to go for what we know is good. Bitcoin and Ethereum will no longer go up to 16,000%, but they certainly won’t go to zero in a short time”, he says.
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
