Since 2020, the cryptocurrency market has undergone its most significant downturn in history with the toughest phase persisting through 2022 (coindesk). Bitcoin, which reached an all-time high of nearly $69,000 in November 2021, is now trading at around $20,000, having made some recent gains after weeks of hovering below that mark. Ethereum has also seen a drop from an all-time high of almost $5,000 to about $1,500. The story is even worse for alternative cryptocurrencies and non-fungible tokens (NFTs), which are primarily priced in cryptocurrency.
$2.2 trillion. That was the global cryptocurrency market cap when 2022 started. Twelve months later, the market cap is around $1 trillion.
This prolonged downtrend has raised questions about whether the entire cryptocurrency frenzy is a bubble after all. However, the specific challenges faced by the industry do not warrant an uncritical dismissal.
Why the Dip?
The recent crypto market downturn can be attributed to various factors. Firstly, the challenge of high inflation, which the Federal Reserve has been unable to curb despite raising interest rates. The latest increase, to 3.9%, came on November 3, and further raises are predicted, with experts suggesting it might go as high as 5% by March 2024. Many retail investors who saw crypto as a hedge against inflation are realizing that crypto behavior is similar to traditional asset classes, especially stocks.
Furthermore, the recent escalation of the Russia-Ukraine conflict introduced a new dimension of geopolitical tension in Europe, destabilizing the market. The war has also highlighted the vulnerability of cryptocurrencies to government regulation. While bitcoin was created to wrestle monetary control from governments and traditional financial institutions, the recent restrictions on Russian crypto holders have undermined public faith in crypto and contributed to a decrease in its value.
Other factors contributing to the dip include incidents like the collapse of the Terra and LUNA ecosystem and the liquidation of Three Arrows Capital (3AC), which have directly impacted investor confidence in the crypto market. Additionally, the general obstacles faced by the crypto market, such as high volatility, stringent regulations, lack of clarity, and market manipulation by whales, continue to pose challenges.
Market Stability and Resilience
Despite the challenges, there is a ray of hope as bitcoin has shown some stability in recent months, with its price and market cap remaining within a certain range since June. However, whether bitcoin will experience a significant rally before the end of the year remains uncertain, with upcoming events like midterm elections, Federal Reserve meetings, and Consumer Price Indices reports set to influence the short-term direction of the cryptocurrency market.
Deutsche Bank has projected a potential rise to $28,000 by the end of the year, with further increases to $40,000 to $50,000 by 2024 and possibly reaching the $100,000 mark by 2025. However, with challenges persisting, these predictions remain uncertain.
How to Invest
Many bitcoin units have not been used for any transactions in the past half-year, indicating a strong HODL (Hold On for Dear Life) trend as holders wait for opportunities to recoup their losses. For those considering investing in crypto, there are alternative approaches to consider:
- Buy shares of crypto-related companies: Invest indirectly by purchasing stocks of crypto-related companies from core crypto exchanges to businesses that support the sector by accepting crypto payments.
- Invest in Bitcoin ETFs: While Bitcoin ETFs are not permitted to trade bitcoins directly, they trade financial products and assets linked to the price of bitcoin.
- Trade crypto options: With BTC or ETH options, you can trade without the obligation to own or sell the asset itself, providing flexibility to trade based on speculations.
Alternatively, for those who prefer to trade crypto directly, adopting a risk mitigation approach is recommended, which may include diversifying your crypto portfolio, maintaining the 5% rule of crypto investing, and holding despite fear of missing out (FOMO) pressure.
Despite the challenges, the sector holds promise, especially with its connections to innovative technologies such as web 3, decentralized finance, and the metaverse. A crypto bear market can be a fantastic opportunity to launch tech startups, particularly in solving fintech challenges using crypto and blockchain innovations.
Conclusion
While the short-term future of the crypto market may seem bleak, the sector’s long-term sustainability offers reasons to remain hopeful. Despite volatility, as long as higher highs and higher lows continue, it would be premature to declare the crypto bubble as permanently burst.
Featured Image Credit: Provided by the Author; Pexels; Thank you!
