Cryptocurrency Rollercoaster: Opportunities and Challenges Amidst Market Turmoil

Cryptocurrency Rollercoaster: Opportunities and Challenges Amidst Market TurmoilBy Wu Bin, 21st Century Business Herald Reporter, ShanghaiAmidst global market turmoil, cryptocurrencies have also been on a roller coaster ride. Last week, Bitcoin plunged more than 13%, suffering its biggest weekly decline since the collapse of cryptocurrency trading platform FTX in 2022

Cryptocurrency Rollercoaster: Opportunities and Challenges Amidst Market Turmoil

By Wu Bin, 21st Century Business Herald Reporter, Shanghai

Amidst global market turmoil, cryptocurrencies have also been on a roller coaster ride. Last week, Bitcoin plunged more than 13%, suffering its biggest weekly decline since the collapse of cryptocurrency trading platform FTX in 2022. Hit by the "Black Monday" shock, Bitcoin plummeted over 10% on August 5th, breaking below the $50,000 mark and falling significantly from its all-time high.

OKX data shows that Bitcoin reached a record high of $73,787.1 in intraday trading in March this year. Liu Bin, director of the Financial Research Department of the China (Shanghai) Pilot Free Trade Zone Research Institute (Pudong Reform and Development Research Institute), told the 21st Century Business Herald that from the trend of Bitcoin in recent years, the correlation between digital assets, represented by Bitcoin, and traditional financial assets has become increasingly strong. The recent continuous decline in Bitcoin may be related to market expectations of a Fed rate cut, as well as the fact that US stocks have reached historical highs after a long period of rise, and there is a need for a correction under the current macro environment. Recent trends have shown that this has indeed happened, which has also triggered market selling of Bitcoin and other digital assets. Overall, Bitcoin and other digital assets are difficult to operate as independent financial assets and are more influenced by macro policies and the overall market trend.

On August 6th, Bitcoin, Ethereum, and other cryptocurrencies rebounded, with Bitcoin reaching above $55,000 and Ethereum surpassing $2,500. After the roller coaster ride, where will cryptocurrencies go next?

Bitcoin Rollercoaster

Amidst global market turmoil triggered by US economic concerns, narrowing US-Japan interest rate differentials, and other factors, Bitcoin plunged significantly on the 5th, leading to liquidation for hundreds of thousands of people, followed by a sharp rebound on the 6th.

Zhao Wei, Senior Researcher at OKX Research Institute, told the 21st Century Business Herald that Bitcoin prices have fluctuated sharply recently, and other cryptocurrencies like Ethereum have also experienced varying degrees of decline and volatility. Firstly, high volatility is one of the key characteristics of cryptocurrencies, like Bitcoin, and the recent fluctuations in Bitcoin have reflected the instability of the crypto market to some extent. Secondly, changes in the global economic environment have had a significant impact on the crypto market, and the performance of Bitcoin and the crypto market has shown a high correlation with the trend of traditional financial markets like global stock markets, which has had a certain impact on the sentiment and confidence of crypto market traders. In the current sluggish global economic environment, future trends in the crypto market still need to closely monitor changes in factors such as the Fed's rate cut expectations.

Bitcoin's recent performance is both part of the global financial market turmoil and has its own unique characteristics. Gao Chengshi, the Executive Committee member of the Blockchain Branch of the China Computer Society, told the reporters that virtual currencies like Bitcoin are different from commodities and other financial products on traditional financial markets. Traditional commodities and other financial products have their basic fundamentals that determine their prices, while virtual currencies like Bitcoin at least currently lack the fundamental support for their prices. Comparatively speaking, virtual cryptocurrencies like Bitcoin are still a market supported by narratives, investment, speculation, and a portion of dark web transactions, with a foundation that is not very stable. This is its unique characteristic.

Spot ETF Impact Weakening

In January this year, Gary Gensler, Chairman of the US Securities and Exchange Commission (SEC), announced that the SEC had approved the first Bitcoin ETFs to be listed in the US, including those applied by 11 companies such as BlackRock, Fidelity, Invesco, and VanEck. Then, in May, the SEC announced approval for the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE), and Nasdaq to submit trading plans related to Ethereum spot ETFs.

Gao Chengshi analyzes that Bitcoin spot ETFs and Ethereum spot ETFs simply add new financial trading targets, which, while expanding the influence of Bitcoin and Ethereum, also dilute some market liquidity. Bitcoin ETFs and Ethereum ETFs may not have much price support for virtual currencies themselves, and may even conversely affect or amplify spot price fluctuations.

Zhao Wei stated that although Bitcoin spot ETFs and Ethereum spot ETFs have brought more positive impacts on the crypto market and industry in terms of compliance and capital inflow, pushing Bitcoin to a new high of $73,787.1 and allowing Ethereum to return to the $4,000 peak, the positive expectations and capital absorption effect have gradually been digested by the crypto market, so it is necessary to focus on the impact of the event on the crypto market and traditional financial markets from a longer-term perspective.

For example, traditional brokers have provided Bitcoin and Ethereum trading exposure for individuals and institutions in traditional finance, which has enhanced the flow of funds between the crypto market and traditional financial markets, increasing their correlation and making the impact of the global economic environment on the crypto market more direct. At the same time, the SEC's determination to classify Bitcoin and Ethereum as commodities rather than securities may provide a model effect for other countries and regions globally, accelerating the global adoption of crypto assets like Bitcoin. Additionally, crypto assets like Bitcoin may promote innovation in traditional finance and inject new vitality into it.

A Long Road Ahead

Although cryptocurrencies remain controversial, their acceptance has increased in recent years, and their influence is also growing. Cryptocurrencies have long been considered a high-risk industry, facing stringent scrutiny from regulators, but this situation has changed recently, with Wall Street institutions paying increasing attention to cryptocurrencies, US regulators approving cryptocurrency funds, enhancing their appeal, and both Republicans and Democrats beginning to acknowledge the growing influence of the industry.

Republican presidential candidate Donald Trump said that if he returns to the White House, he will ensure that the government retains 100% of the Bitcoin it owns and will list Bitcoin as a strategic reserve asset for the US. Kamala Harris, US Vice President and Democratic presidential candidate, advisors have also reached out to top cryptocurrency companies to improve relations between the two sides. Brian Armstrong, CEO of Coinbase, the largest cryptocurrency exchange in the US, predicts that the next US government will take a constructive attitude towards cryptocurrencies.

However, Liu Bin reminds that the impact brought by the US election is unlikely to change the development process of digital assets such as Bitcoin and Ethereum. In the long run, the US election is just an intermediate node in the evolution of digital assets, and its significance should not be overstated. The most fundamental thing is that digital assets like Bitcoin and Ethereum need to truly play a role, under the premise of legality and compliance, to make up for the shortcomings and deficiencies in the traditional financial system, and to promote the continuous development and improvement of the financial system.

Looking Ahead

As the acceptance of cryptocurrencies continues to grow globally, Zhao Wei believes that their long-term impact and role will be multifaceted. Firstly, cryptocurrencies have become an emerging trading asset class, and with the participation of more individuals and institutions, the crypto market is expected to gradually mature and stabilize, and this diversification of asset classes will have a profound impact on the global financial market.

Moreover, cryptocurrencies may transform and optimize the traditional financial system through more efficient, transparent, and decentralized blockchain technology, providing innovative solutions for traditional financial services like payments and lending. The current development of blockchain and smart contract technologies, the rise of RWA (real-world asset tokenization), and DePIN (decentralized physical infrastructure networks), will also drive innovation and transformation in industries such as supply chain management.

In Gao Chengshi's opinion, virtual currencies, as a self-developed financial product with a strong decentralized narrative, are gaining increasing narrative influence, and recent international political and military conflicts have further strengthened this point. Additionally, virtual currencies have now become an important part of investment allocation by various professional institutions, and even some countries, due to various considerations, are increasing their central bank reserve accordingly. This trend has become increasingly obvious.

Furthermore, from a technical perspective, Bitcoin, as well as other blockchain and WEB3 systems, have become increasingly important underlying infrastructure for non-trusting entities to conduct digital transactions in a decentralized context. Whether it's Bitcoin, a type of homogeneous token, or digital collectibles, a type of non-homogeneous token, as well as decentralized identity (DID), they will all play an increasingly fundamental and important role in the future metaverse digital world. Gao Chengshi believes that this will also provide support for the application and price of major existing cryptocurrencies from another perspective.

Although cryptocurrencies have multiple use cases and application advantages, they also face tests like regulation, just like other new things. Overall, Zhao Wei believes that the future development of cryptocurrencies will depend on technological advancements, market maturity, the evolution of the regulatory environment, and changes in social acceptance, filled with opportunities and challenges.

Looking forward, Liu Bin tells reporters that cryptocurrencies are expected to become a component of the global financial system, but their degree of importance to the financial system remains to be seen. Currently, cryptocurrencies have not truly integrated into the global financial system, which has its own reasons, as well as reasons related to regulation, governance, and cognition. The development of cryptocurrencies will be a long-term process, and the current cryptocurrencies may only be an intermediate stage. As technology and ecosystems evolve, the crypto space may also witness changes.