Coinbase Report Blames Macroeconomic Factors & Skepticism for Current Market Situation
A recent report by Coinbase holds the worsening macroeconomic state and negative sentiments towards crypto responsible for the current market situation.
The report, published by Cesare Fracassi, the Chief Economist at Coinbase, explores the crypto prices and the overall market efficiency.
The report highlights important things like:
- Crypto investments have yielded large returns in the last 5 years due to high adoption by institutional and retail investors.
- The increasing adoption of cryptocurrencies by retailers has closed the gap between crypto markets and financial markets.
- Worsening macroeconomic conditions and weakening belief in crypto has led to the recent slump in the market.
“The recent decline in crypto markets can be attributed for ⅔ to worsening macro-factors, and for ⅓ to a weakening of the outlook for cryptocurrencies,” the report stated.
The article then went on to compare crypto markets’ risk profile to that of oil prices and technology stocks.
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Market Efficiency: How Future Prospects Affect Prices
As per the report, the fluctuations in crypto prices can be understood by looking at the market efficiency of digital assets. Simply put, the market’s assessment of digital assets’ future will determine their price in the present.
This argument is illustrated by the rise in crypto market cap over the last 5 years. Since 2017, the market cap surged by 860%. This surge was a result of adoption by institutional and retail investors and the rise of the web3.
Further, during and after the pandemic, the gap between financial markets and crypto markets has been closing. This exposes the crypto market to the same macroeconomic forces as the financial markets.
Additionally, banks across the globe have been increasing interest rates. This has resulted in a price drop for tech stocks and crypto.
Of Crypto, Oil Prices, and Tech Stocks
Systematic risk of financial assets is usually measured in beta. When beta is zero, it means the asset is not correlated to the market. If beta = 1, then the asset moves with the market.
A beta of 2 means that the asset doubles down on market movements. So if the stock market moves by 50%, the asset will move by 100%. And over years, BTC and ETH have developed a beta of 2.
In 2022, crypto has dipped by 57% YTD. During the same period, the stock market plunged 19%. With this, the report infers that macroeconomic factors affecting the stock market have also affected the crypto market.
These macroeconomic factors, along with a weakening outlook about crypto, have led to the recent decline.
Fracassi has noted that the market’s outlook towards crypto gets reflected in the prices.
“Thus, according to the market-efficiency view of crypto markets, only changes in the outlook of the crypto industry relative to what is already expected will bring changes to prices,” the report concludes.
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