So far in 2022, the entire crypto market has been impacted by wider economic and political uncertainties, led by Bitcoin, with prices down more than 50% over the past six months and the price heading for the ninth consecutive red weekly candle. The market sentiment continues to be bearish, with the Fear and Greed Index remaining in the doldrums.
Despite the pessimism, Banking giant JPMorgan said recently that despite the crypto crash, its estimate of Bitcoin’s fair value is $38,000. “The past month’s crypto market correction looks more like capitulation relative to last January/February and going forward we see upside for bitcoin and crypto markets more generally,” the bank’s strategists said. “Historically, buying into extreme fear levels in bitcoin has been a profitable strategy,” Sam Kopelman, a manager at the cryptocurrency wallet Luno, reported in Yahoo Finance. “That said, bitcoin has also seen continued sell-offs following a fearful market sentiment. Investors must remember that past performance is not indicative of future price movements. Therefore, as investors begin to re-enter the market, they must remain wary.”
One way to avoid panic selling when the price of cryptocurrencies drop significantly is to remind yourself of the fundamentals. Of course, that’s not so easy to say when you’ve lost money in Luna and seen your Bitcoin investments go down in value. “When the market is topping out, the stories are about internet-age Horatio Algers.
When the market is bottoming, it’s about how the repo man took Mr. Alger’s Lambo so he could pay back loans he took out to run a carry trade on the Anchor protocol,” quipped Arthur Hayes, Co-Founder of 100x in a recent blog.
It’s only relatively recently that Bitcoin has become correlated to the wider financial markets as more institutional money came flooding in with the easy money doled out by the Fed to alleviate COVID. “With the Fed in a difficult place, at least here in the United States, it’s very difficult for a lot of these institutional shops not to treat it like a risk asset,” said Anthony Pompliano. “That’s exactly what they’re doing right there. It’s trading downward with stocks, it’s trading down with other risk assets are selling across,” he added.
The Mass Adoption of Crypto Assets
Cryptocurrencies led by Bitcoin reached a tipping point in 2021 as they evolved from what many consider a niche investment to be a global, established asset class as venture capitalists poured money into the cryptocurrency market. Overall, VCs invested more than $30 billion in crypto-assets and blockchain startups, with more than $10.5 billion invested in the fourth quarter of 2021 alone. With an estimated $10 globally in the first quarter of 2022, reportedly the largest amount to date, double the level for the same quarter in 2021.
Looking at 2021 Galaxy Digital’s Head of Firmwide Research Alex Thorn said: “This was mainstreaming of crypto VC investing in a way we haven’t seen before. You also have a real diversification in the space. Yes, a lot went to trading and investing in the space, but you have other big categories that didn’t even exist in 2020 or 2019. That added a lot to the total capital invested,” he noted. Investment levels have continued despite Bitcoin price decline – as well as during another decline last summer. “This decoupling is demonstrative of investors’ disbelief that a prolonged bear market in digital assets is forthcoming, as well as the significant amount of dry powder held by funds seeking to allocate to the sector,” he concluded.
Bitcoin is the Cryptocurrency of the Future
One of the appeals of Bitcoin and other cryptocurrencies is that it removes friction in terms of costs and transaction speeds from payments, especially international transfers. Indeed, according to Ark Invest, cumulative Bitcoin transfers have grown by more than 463% in the last year. ARK analyst Yassine Elmandjra wrote in the report ‘Big Ideas 2022’ that Bitcoin will settle $13.1 trillion in 2021, a figure that even exceeds Visa’s payment volume.
Ark Invest’s research also highlighted several areas where Bitcoin could take market share from traditional activities. These include international remittances, emerging market currencies, institutional investment and acting as a form of digital gold.
Source: ARK Invest’s Yassine Elmandjra tweet, Jan 25, 2022
Innovation drives Bitcoin
Although Bitcoin is not run by a centralized organization, it continues to grow along decentralized lines. There is a small core group of developers working on improving the network, fixing bugs and security issues, and improving functionality.
For example, last year Bitcoin implemented a major upgrade called Taproot to improve privacy, scalability, and security. Another potentially significant move is the development of the Lightning Network, a layer 2 solution to Bitcoin that reduces costs and increases speed. As reported in Cointelegraph on May 30, “Bitcoin Lightning Network capacity attained an all-time high of 3915.776 BTC, as evidenced by data from Bitcoin Visuals, displaying a commitment to the cause of improving BTC transaction speeds and reducing fees over the layer-2 protocol.” This follows news from the CEO of Strike, Jack Mallers, at the Bitcoin 2022 conference, that the company plans to collaborate with point-of-sale behemoths Shopify, NCR, and Blackhawk Network to revolutionize the payments industry.
While there are good reasons to remain optimistic about Bitcoin, there are also still many things that investors and traders need to be careful about when investing in Bitcoin and cryptocurrencies. Cryptocurrencies are still a relatively new sector compared to traditional investments like stocks and funds, and while we don’t have certainty exactly how it will develop in the long term the potential is clear to see.
“I believe Bitcoin is a viable long-term investment as a store of value looking to the future, especially with the price trending significantly upwards after each halving event,” said BigONE Chairman Anndy Lian. “It’s important for investors to recognize the fundamentals that it remains a hedge against inflation in the short term and a long-term asset that will continue to beat traditional financial assets.”