The cryptocurrency market has recently experienced a rollercoaster ride, with signs of recovery earlier in 2023 followed by another downturn. Just as optimism was returning after the FTX meltdown, a new crisis emerged in the form of Silvergate Capital's financial troubles and delayed annual report filing. This development has sparked concerns about the market's stability, leading to a potential protracted downturn or another chapter in the ongoing FTX saga.

As a result, the crypto rally that commenced in January is currently on pause. Bitcoin (BTC -0.23%) has seen a 10% decline over the past two weeks, while Ethereum (ETH -0.04%) has experienced an 8% loss during the same period. The highly volatile meme coins have been hit even harder, with Dogecoin down by 14% and Shiba Inu experiencing a significant 17% decrease within the same two-week timeframe.

Amidst the volatility of the current market, investors are grappling with the question of whether cryptocurrencies can regain stable and sustained long-term growth. As the unpredictable nature of the market persists, many are seeking insights into the future prospects of cryptocurrencies and their potential for lasting value.

Price of Bitcoin

Money plays a fundamental role in all financial transactions and is universally recognized as a valuable asset. In the early days of human civilization, money took the form of tangible goods like livestock, food, and other precious commodities, serving as a medium of exchange within communities. Fast forward to the present day, fiat money has become the dominant form of currency, with paper notes and coins being the primary means of exchange for many individuals.

However, money has a rich and evolving history, and we find ourselves in the midst of its next phase of transformation. The emergence of cryptocurrency and blockchain technology in the past decade has introduced a groundbreaking shift in global monetary and value systems, revolutionizing the way we perceive and transact with money.

Bitcoin, an innovative decentralized cryptocurrency introduced in 2009, has encountered substantial price volatility throughout its existence. The value of Bitcoin is susceptible to various factors that contribute to its price fluctuations, making it an intriguing and dynamic digital asset in the financial landscape.

The influence of external factors on cryptocurrency stems from its current state of limited adoption and integration within the global financial system. As a relatively new and emerging asset class, cryptocurrencies are more susceptible to market sentiment, news, and volatility compared to well-established assets. Regulatory changes and policy decisions by governments and financial institutions also play a significant role in shaping cryptocurrency value. News regarding potential regulations or crackdowns on cryptocurrencies can trigger price declines, making it crucial to stay informed about the evolving landscape.

Deteriorating buying power EUR, GBP, and USD

Following a remarkable bullish trend in the previous year, the broad dollar index experienced a notable decline of nearly 7% from November 2022 to January 2023. This dip reflects a natural correction from the dollar's exceptional gains in 2022.

During the course of 2022, the euro endured a significant depreciation of up to 17% against the dollar, reaching levels below parity for the first time in twenty years during July. However, the outlook for the euro in 2023 appears more favorable, with expectations of enhanced economic growth and reduced gas prices contributing to its potential recovery.

Similar to other major currencies in relation to the U.S. dollar, the pound has faced substantial challenges, hitting record lows in September 2022 subsequent to tax cut announcements by the Truss administration.

The intrinsic value of printed money is non-existent; rather, its value is derived from the economic performance of the government that issues it. As economies vary in their performance, the value of a particular country's fiat currency differs from that of others. When traveling abroad, you often encounter currency conversion rates as your currency may have a higher or lower value compared to the currency of the destination country.

In essence, fiat money holds value because it is designated as legal tender by the government, and lenders across the globe have confidence in the government's capacity to honor its debts. This universal acceptance and faith in the government's repayment ability establish the value of fiat money, making it a widely recognized and usable form of currency worldwide.

Interest rates going up to fight inflation

Inflation and interest rates often exhibit a parallel movement, as interest rates serve as the primary mechanism employed by the U.S. central bank to regulate inflation.

Guided by the Federal Reserve Act, the Federal Reserve is tasked with fostering stable prices and maximum employment. Since 2012, the Federal Reserve has pursued a target inflation rate of 2% annually, aligning with its objective of maintaining price stability as stipulated in its dual mandate.

When the Federal Reserve takes action to address heightened inflation concerns by raising its benchmark federal funds rate, it effectively boosts the amount of risk-free reserves within the financial system. As a result, the available money supply for investing in riskier assets becomes limited. On the other hand, when a central bank lowers its target interest rate, it effectively expands the money supply accessible for purchasing risky assets.

Heightened interest rates, by elevating borrowing expenses, discourage both consumer and business spending, particularly on significant purchases that are commonly financed, such as housing and capital equipment. Furthermore, rising interest rates exert downward pressure on asset prices, reversing the positive impact on wealth for individuals and prompting banks to exercise greater caution in lending decisions.

Lastly, increasing interest rates serve as an indication that the central bank is likely to continue its tightening of monetary policy, thereby dampening inflation expectations even further.

Cost of living vs. prices of goods and investments

The cost of living is a crucial factor tied to income that enables individuals to evaluate the affordability and livability of various cities. As prices fluctuate across different locations, the cost of living is a valuable metric for assessing the affordability of residing in a specific city or region.

In the year 2022, the overall cost of living has experienced a significant surge compared to previous years. Essential commodities like food and gasoline have witnessed substantial price hikes, necessitating individuals to allocate more financial resources to uphold their desired standard of living.

However, it's important to note that the cost of living can experience fluctuations at a different pace compared to inflation or changes in the Consumer Price Index (CPI). While inflation and CPI generally gauge changes at a national level, the cost of living is commonly assessed on a more localized scale, taking into account specific regional factors. This localized approach allows for a more accurate representation of how the cost of living may vary from one location to another.

It's an unexpected turn of events for the largest digital asset globally (Bitcoin), which has encountered some obstacles throughout the year. This positive quarter brings a significant shift for the cryptocurrency, as it begins to separate itself from the influence of other stocks. According to an analyst, the recent successes of crypto may be attributed to the ongoing cost of living crisis.

Final Thoughts

Bitcoin (BTC) and other leading cryptocurrencies experienced a retreat from their 2023 highs in May, prompted by increased scrutiny from the U.S. Securities and Exchange Commission (SEC) and other global regulatory bodies on digital assets.

During March and April, investors turned to Bitcoin and other cryptos due to concerns surrounding the U.S. banking crisis and its potential for contagion. However, as fears about the stability of the banking system quickly dissipated, the rally came to an abrupt end.

The world of cryptocurrencies remains closely focused on regulatory developments worldwide, as regulators work on establishing new guidelines for managing crypto trading. Furthermore, investors are eagerly anticipating the possibility of the Federal Reserve pausing interest rate hikes in June, or at least providing some indication of when the rate increases might cease.