Crypto has come a long way since 2010 when Laszlo Hanyecz used 10,000 Bitcoins to purchase 2 Papa John’s Pizzas…so much so that studies are now being commissioned to recognise and understand the impact of macroeconomics on the crypto space.
Now some of you might be asking what are ‘macroeconomics’ and why is understanding the relationship between the two important?
In a nutshell macroeconomics is the study of whole economies and the issues that affect nations and the world economies.
It’s important to be aware of the macroeconomic factors at play to be able to make informed decisions in the long and short term for the Crypto Space.
By being aware of factors such as:
- Financial Stability (central authorities are concerned with ensuring financial stability as they are not able to set adjustable monetary policies with crypto).
- Perception of Equity (crypto can be an attractive option for those who feel they may be oppressed or hindered by the current financial system)
- Safety (by having transactions be traceable on the blockchain and having measures such as KYC and AML, this allows a greater sense of safety and transparency as it gives a sense of openness and accountability that the traditional financial system cannot offer to the same extent.)
- Innovation (they Crypto space is constantly evolving and is full of potential for individuals and industry leaders to capitalise on e.g. NFT’s and the metaverse)
- Environmental Sustainability (Crypto mining technologies can be energy intensive, which means rising energy costs can restrict growth)
- Economic Sentiment (by being able to gauge the current market sentiment you are better placed to predict investment behaviour.)
Governments and regulatory bodies are better able to understand and act to ensure that they are planning ahead to ensure that they and their citizens are better able to engage with cryptocurrencies and can minimise potential risks in the future and maximise potential gains.
In this same vein, by being able to understand what outside factors are at play investors are able to better strategize and act to ensure that they are taking advantage or profitable scenarios and minimising their losses by acting accordingly.
The health of the global economy is a guiding factor in pricing assets, as during times of economic prosperity and expansion there is more wealth to allocate to financial assets as well as a higher appetite for risk, and demand will usually increase.
Conversely, in times of economic down turn there is less wealth to allocate to financial assets and a lower appetite for risk, usually causing demand to decrease.
This scenario of economic sentiment impacting the cryptosphere was highlighted during the start of the Pandemic wherein holdings crashed at the beginning of the pandemic due to public uncertainty of what was to come, before growing to record heights, and now as we have seen over the last several months, course correcting as the global economy heads towards a recession due to inflationary measures being taken and market uncertainty due to a range of factors.
2023 will be an interesting time for everyone, and its best to keep a keen eye on macroeconomic factors to ensure that you are prepared.