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Bitcoin, Ethereum and other cryptocurrencies have had a difficult year. In 2022, many have struggled following record-highs in the previous year. Understandably, investors are asking the reasons for this, the outlook ahead and what the implications are for their portfolios. In this article, our team at Bure Valley Group offers some answers to some recent frequently-asked questions about cryptocurrencies in 2022.
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What has happened in the crypto markets?
Since there are so many cryptocurrencies (potentially over 18,000!), it helps to concentrate on the leading one – i.e. Bitcoin. In 2020, Bitcoin (BTC) enjoyed an explosive climb towards the end of the year after it broke a key resistance level. It had also received endorsement from the likes of PayPal, which decided to allow BTC transactions on its platform. Inflation was also starting to rise, leading investors to seek higher returns in alternative investments like cryptocurrencies.
Since late 2021, however, Bitcoin has been highly volatile and on a downward trend – moving from $65,396 in November 2021 to $20,366 in June 2022.
Why have so many cryptocurrencies crashed?
As the bellwether, Bitcoin’s fall has applied significant downward pressure on other popular cryptocurrencies such as Ethereum – which has dropped from $4,646 to $1,066 in the same time period above. However, this is not the only force at play.
Cryptocurrencies have received more negative publicity recently, leading to a loss in investor confidence. Bill Gates, for instance, came out saying on Reddit: “The value of crypto is just based on what one person decides how much another person will pay for it.”
Tesla also made a u-turn on accepting Bitcoin as a payment method, and China has been coming down hard on ICOs (initial coin offerings for new cryptocurrencies). The government in China also made all crypto transactions illegal in late 2021.
What’s going on with “stablecoins”?
A stablecoin is a type of cryptocurrency that is meant to have a stable value (e.g. $1 per token). This is often achieved by pegging it against the value of a national currency. However, in May 2022 the largest stablecoin, tether, crashed to $0.98 – leading Bitcoin and Ethereum to also fall, by 5% and 12%, respectively.
Another popular stablecoin called terra also crashed soon afterwards. The reasons for this are partly found in tightening of monetary policy by the US Federal Reserve. Also, the algorithm’s balancing act of trying “mint” UST and “burn” luna failed – leading to a downward spiral.
Will the crypto market recover – and when?
This, of course, is the question on everyone’s minds right now! Here, opinions differ widely.
At present, Bitcoin and other cryptocurrencies are far away from the record-highs of 2021. Yet when you look at the bigger picture, Bitcoin is still up hugely from 2014 when it was barely over $300 per coin. Today, it stands at $20,666.
Investor sentiment is difficult to read at the moment. On the one hand, investors have panicked in 2022 as cryptocurrencies have taken blow after blow. However, the likes of Bitcoin remain highly popular and the wider investment landscape – in particular, high inflation – is rendering “traditional” investments, such as bonds and stocks, less attractive.
Bear in mind that similar bull runs have been seen before in 2013 and 2017. So, do not think that we are experiencing anything particularly new. There is still every chance that Bitcoin and other cryptocurrencies could recover and even move on to new record-highs.
What should I do with my cryptocurrency investments?
Given the extra uncertainty and volatility surrounding cryptocurrencies right now, investors will do well to be especially vigilant about holding true to time-honoured investment principles.
In particular, be careful not to invest in anything you do not understand. Whilst you do not need to grasp the intricacies of a specific cryptocurrency algorithm, you do need to know what makes it different and how it can marshal a sustainable competitive advantage in a very crowded crypto marketplace. Take time to research its strengths, weaknesses, opportunities and threats to help ensure you retain confidence if the price gets more volatile.
Investors should also ensure appropriate diversification. There have been some very sad stories about individuals putting their life savings into stablecoins, for instance, and then going on to lose everything in the May 2022 crash. Spread out risk appropriately across various markets, assets and cryptocurrency investments.
Finally, take care to reflect on your investment horizon and risk tolerance. When might you need the money from your crypto portfolio? Are you comfortable with the level of risk you are taking? Taking confidence in the answers can help you keep a cool head when others are losing theirs.
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