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Will Bitcoin reach $100,000 per coin? Could a sharp crash be on the horizon? What about the other cryptocurrencies, like Ethereum? What might happen to cryptominers in the months ahead after China effectively banned crypto mining in 2021?
Many investors are excited by the strong returns that can be generated by crypto investments. However, they do come with considerable volatility, and overall investment risk. Below, our team at Bure Valley Group outlines some possible scenarios in 2022.
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Scenario 1: crypto crash
One possibility in 2022 is that Bitcoin could experience a sharp crash. As the bellwether for the cryptocurrency landscape, this could also lead to other cryptocurrencies declining.
Some analysts anticipate a crash for historical reasons. In 2018, Bitcoin fell to nearly $3,000 after climbing to $20,000 just a few months prior.
In 2021, Bitcoin reached a record high of nearly $69,000 in November 2021. So, some expect the 2018 “Bubble” to repeat itself in the months ahead as investors crystallise their gains.
A factor that could influence crypto prices in 2022 is regulation. In the USA in particular, many are watching certain legislation very carefully – such as the Build Back Better Act.
This could impose “wash sale” rules on commodities, currencies and digital assets. If it passes, investors could be barred from immediately buying back the same asset after selling at a loss.
Scenario 2: crypto surge
Another scenario, of course, is that Bitcoin’s value rises past even its record highs in 2021. Some even predict a rise to $100,000.
One much-anticipated, possible development that could appear in 2022 is the approval of the first spot bitcoin exchange-traded fund in the United States. This could act as a huge positive sign to crypto investors, encouraging further capital inflows to the likes of Bitcoin.
Whilst the SEC did approve the launch of the ProShares’ Bitcoin Strategy ETF in 2021, this tracks Bitcoin futures contracts. It does not allow investors to invest in the underlying assets.
One overarching influence on crypto prices in 2022 is likely to be inflation, which now stands very high in many developed economies. In the UK, it is 5.1% (the highest since 2011) and in the USA it is 7% – the highest since 1982.
Cryptocurrencies are often regarded as an “inflation hedge” (since central banks cannot print more cryptocurrencies like they can fiat currency), so higher inflation in 2022 could lead more investors to flock to them – driving up prices.
Scenario 3: volatility
Cryptocurrencies are, of course, highly volatile by nature (compared to other asset classes. However, another scenario is that Bitcoin fluctuates a lot throughout 2022, but ends the year almost where it started at the time of writing.
Technology valuations (i.e. on US public exchanges) are highly bloated at the moment. This contributes to an already-challenging environment for equities in 2022, with the US Federal Reserve (the “Fed”) looming in the background.
If the central bank raises interest rates in an attempt to control inflation, this will act as large downward pressure on stock market valuations as investors seek the higher returns offered by “risk free assets” (i.e. government bonds).
Should this happen later in the year, then a significant “bear market” (e.g. 10-20%) is likely to encourage further cryptocurrency volatility. This could take the wind out of Bitcoin’s sails even after months of steady price growth.
Implications for strategy
These are just a few possible scenarios and, of course, nobody can predict the future. Let’s all remember early 2020, when most analysts were predicting a strong year for stock markets and yet COVID-19 arrived – decimating valuations in March.
At least two key factors need to be borne in mind by investors regarding cryptocurrency: new entrants and regulation. Almost every day, a new cryptocurrency is launched and picked up by investors. There are now thousands of crypto options available and the marketplace is very saturated. Whilst this presents opportunities for diversification, it does also mean that investors need to think even more carefully about what makes their crypto choice unique (e.g. more friendly to the environment).
The threat of more regulation also should act as a reminder that cryptocurrencies do not operate independently. Rather, they can only thrive within friendly jurisdictions. India and China have already stamped down hard on Bitcoin and its contemporaries. Other countries such as the US, UK and (notably) El Salvador have been more welcoming for the time being.
One area where investors might consider for their portfolio is crypto mining – e.g. investing in mining companies directly, or via funds (E.g. ETFs). Many miners are able to “switch” to other cryptocurrencies if their current, target one becomes unprofitable (e.g. due to computational power). You could even consider offering some of your own computational power – such as an idle graphic card – for crypto mining through the likes of NexGen Cloud.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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