Crypto (Defi) isn’t Immune to Macroeconomic Realities After all! How is it Affecting Africans?
At the very least, it has become apparent that the much-touted Decentralized Finance, Defi, is not immune to the macroeconomic realities and its volatility as the world is again witnessing the cryptocurrency’s dramatic free fall in recent weeks. In those, hundreds of millions of dollars have been liquidated.
People frequently forget that volatility is as old as the hills, and the crypto market is as unpredictable as the word itself; therefore, underestimating it will have disastrous effects on investors.
So far, cryptocurrencies have fallen as much as 35% weekly as fears of a global economic downturn grew, with Bitcoin falling below $20,000 and Ethereum falling over $1,000.
On Sunday, the global market cap of cryptocurrencies fell below $850 billion as leading coins fell. The aggregate market worth of roughly 20000 cryptos has fallen below $1 trillion after reaching a record high of $3 trillion. That is $2 trillion down and $1 trillion to go.
Ethereum is now worth half what it was a month ago, having fallen below the $1,000 price barrier it had held since January 2021. This figure has dropped by about 80% since its all-time peak in November last year. Bitcoin, the most valuable cryptocurrency by market capitalization, fell below $20,000 on Saturday after a weeks-long decline and ratcheted the currency down again and again.
The current cryptocurrency fall occurs as investors get concerned about macroeconomic conditions and the Federal Reserve’s efforts to control inflation. In addition, several essential protocols and services have also been challenged by the rapid depreciation of assets. As a result, some are concerned that the interdependence of these various services could lead to cascading shutdowns.
Leading cryptocurrencies have been trading tight for weeks as crypto and stock markets struggle to recoup any significant upward momentum following a broader sell-off in May. Experts also point to the ongoing conflict in Ukraine and fears about the Fed tightening monetary policy as reasons for the drop in stock and cryptocurrency values.
The Bitcoin market has seen tremendous price fluctuation, particularly after the US central bank released the most extraordinary interest rate hike since 1994, resulting in $102 million in withdrawals from crypto funds due to investors’ predictions of harsher central bank policy. As a result, according to digital asset management firm CoinShares, the global crypto market is valued at less than $900 billion, down from a high of $2.97 trillion in November.
Bitcoin hasn’t surpassed $50,000 since December 25, 2021. Despite the ups and downs, Bitcoin’s price has dropped by half since its all-time high above $68,000 on November 10, hampered by increasing inflation, a sluggish job market recovery, and the Fed’s persistent signs that it will begin winding down the measures to support the economy.
Despite a poor start to the year, Bitcoin entered 2022 on a high note, with a strong November and early December that gave way to the recent downward trend. After beginning 2021 around the $30,000 level, Bitcoin rose throughout the year, reaching its current all-time high of $68,000 on November 10.
Despite decreasing dramatically from its most recent all-time high, many experts believe Bitcoin’s price will eventually rise above $100,000, describing it as a matter of when not if. Shortly after Bitcoin’s most recent all-time high in November, Ethereum set a new all-time high when its price surpassed $4,850. Following the recent high, Ethereum has experienced similar volatility.
Bitcoin reached its first high in 2021 when it surpassed $60,000 in April, and the price movement since then has highlighted the cryptocurrency’s volatility at a time when more and more individuals are looking to get in on the action. Bitcoin swung dramatically up and down in the weeks between a July low that brought it below $30,000 and its most recent peak in November. According to experts, the future of cryptocurrencies will almost certainly contain increased volatility.
AFRICA AND THE CRYPTO MARKET
Cryptocurrency transactions in Africa have witnessed a considerably increased over the last decade. By December 2021, the number of cryptocurrency users in Africa has grown to 32 million, representing 2.6% of the continent’s population. With Africa accounting for 60% of global mobile money transactions, the future of cryptocurrency transactions on the continent can only be brighter.
According to the 2021 research, the quick acceptance of cryptocurrency across the continent may be traced back to roughly 57 percent of the region’s inhabitants staying unbanked. Bitcoin networks are now more user-friendly than traditional banking and money-transfer methods. Furthermore, according to a Coinbase analysis, Africa has the world’s most significant percentage of retail-sized transfers in the cryptocurrency market, accounting for nearly 30% of all transactions, compared to other global areas, where retail-sized transfers are less than 20%. Most African countries have the highest proportion of cryptocurrency users in the world. For example, bitcoin users in Kenya, South Africa, and Nigeria account for 8.5 percent, 7.1 percent, and 6.3 percent of the population, respectively.
Cryptocurrency impacts micro-entities (firms) as well as the significant macroeconomic and financial indexes. For example, each 10% increase in the market cap of cryptocurrencies in Africa reduced the market value of African enterprises by 0.76 percent.
The cryptocurrency market substantially impacts Africa’s energy, financial, industrial, and consumer services sectors but has little effect on real estate and information technology.
The crypto-economic allows for all-inclusiveness, particularly for unbanked Africans, and acts as a payment gateway for the continent’s importers, who previously relied solely on the apex banks of their respective countries to obtain hard currencies for foreign trade. Therefore, it is expected that the continent’s over 32 million users will be affected by the recent crypto dip.
Apart from Africans who use cryptocurrency currency as a store of value and a secure, safe payment method, millions of Africans trade on the crypto market and make their living there; thus, the ongoing declining trend in crypto value is not only profoundly worrying but also negatively impacting Africans both directly and indirectly.