Bitcoin has fallen over 50% since the beginning of 2022.(Photo by Dan Kitwood/Getty Images)
The cryptocurrency sector has copped a hammering so far in 2022. That’s no surprise to anyone, but there comes a time where even the biggest crypto fans will start to question where they should keep their ‘diamond hands.’
At some point, crypto investors might begin to look at the red splashed all across their portfolio and think, “should I just sell?”
If that’s you, we’re here to help.
When we’re looking at the stock market, we’ve got over a hundred years of history to compare to. We’re able to look at previous market crashes and find similarities from the past that closely match what’s happening to the market and the economy today.
This can provide insight into what might come in the future, and comfort that eventually things are likely to turn around and the stocks that we’ve lost money on will recover. Now with individual stocks that’s not always the case, but so far the overall market has always come back to beat its previous high.
Crypto doesn’t have such a long track record. Bitcoin was invented in 2009, and it wasn’t really until 2017 that it started to generate attention in the mainstream. Over that time, bitcoin and the rest of the crypto sector have already gone through multiple boom and bust cycles.
So given that bitcoin still has another eight years until it can have a beer, does the past give us any clues as to when the current crypto winter might be over?
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Crypto’s current run kicked off right around the beginning of the Covid-19 pandemic. With everyone in the world stuck at home with a lot more time on their hands, attention turned to investing.
As well as memes like GameStop and the stock market in general, crypto was all of a sudden gaining a lot of attention. With more attention, comes more buying and with more buying generally comes higher prices.
It wasn’t just bitcoin that rode this wave of popularity, with alt coins like ether ETH eum and dogecoin DOGE launching into the arena and minting millionaires along the way. Into 2021 we had celebrities like Elon Musk, Mark Cuban, Paris Hilton, Logan Paul and Kim Kardashian all talking about crypto.
The market was incredibly volatile through 2021, with bitcoin falling almost 50% between April and July. It recovered just as quickly, heading back up to almost $70,000 before the current crash began.
As of the time of writing, the price of bitcoin is back down below $20,000. Other coins have fared even worse. Ethereum is now sitting at just over $1,600 from a high of over $4,600. Dogecoin has fallen from a high of $0.65 down to the current price of $0.06.
Terra Luna LUNA has collapsed completely. DeFi platform Celsius has been made bankrupt and Coinbase has laid off thousands of employees.
It’s no surprise that investors are worried about whether the good times will ever be back again.
The first thing we can begin to look at is how previous crypto winters have played out. According to digital asset fund manager Grayscale Investments, the current crypto winter officially began on June 13th 2022.
This might come as a surprise, given that Bitcoin had already fallen over 60% at that point. Grayscale made this distinction to take into account the rapid rise in prices prior to the fall, by conducting analysis of the blockchain to find the point where most crypto investors were holding losses from their purchase price.
The past major crypto cycles in 2012 and 2019 lasted an average of four years from peak to trough. Given that the current crypto winter only began over the past few months, this could mean that we’re in for a long winter.
In both cases, the crypto winter ended with a catalyst that increased the interest and adoption of bitcoin and other currencies. In 2012, this was the arrival of the first widely used crypto exchange, Mt Gox (that didn’t end well), and the rise of the Silk Road.
This allowed for bitcoin to be used as an actual currency to purchase things. The items in question weren’t exactly above board, and the Silk Road was eventually shut down by the FBI. Nevertheless, it created a precedent of a marketplace that used cryptocurrency.
The most recent bull market began with the Initial Coin Offering (ICO) frenzy of 2017, which saw a massive number of ‘altcoins’ (crypto coins and tokens that aren’t bitcoin) arrive on the market.
Some of these have gained popularity and generated big returns for early investors, many more have collapsed completely or turned out to be outright scams.
We have no way of knowing when (or indeed, if) the current crypto winter will end, but if it follows the pattern of the past, we may not see another bull run until 2026.
The question, of course, is will the sector actually recover? It’s a somewhat difficult question to answer, because bitcoin and other cryptocurrencies don’t have fundamentals like a publicly traded company does.
A company stock has value to an investor because it generates cash flow. The profits that the company makes will generally be, at least partially, paid back to shareholders in the form of a dividend.
This profit can be used to analyze the fundamental value of the company against other companies in the same sector, and to compare whole sectors to others.
This isn’t the case with cryptocurrency. It doesn’t have a mechanism to pay income, without some other third party involved such as lending it to someone, like you could with Celsius. We saw how that ended.
It means that the future value of a cryptocurrency can’t be calculated on a fundamental basis, because it’s based on speculation.
Of course, if it becomes more widely adopted then it will have a value based on the fact that other people perceive it to have a value. This is known as the ‘network effect’. It’s similar to how we have viewed gold and other precious metals for thousands of years.
Gold does have some use in industry, but the majority of its value is derived from the fact that it is scarce, and we as humans have communally agreed over many generations that it is valuable.
Bitcoin, Ethereum and some other crypto projects have vastly increased their network effect over recent years. Not only are more retail investors holding positions, but so are Wall Street firms, venture capital funds and even some major public companies.
We are getting to the stage where the crypto sector will become too much a part of mainstream financial markets to not recover. We may already be there, but it remains to be seen.
The rules for investing in crypto are really very similar to investing in the stock market, just turned up to 11. It’s important to understand the risks involved with investing into highly volatile, highly risk assets like crypto, and understand you could lose money that you invest.
It can be a minefield, which is why we’ve created a number of different Kits that give investors exposure to crypto assets, without having to worry about trading themselves.
Our Emerging Tech Kit is one of these. It doesn’t purely invest in crypto, but we use AI to allocate portfolio weights each week across four verticals. One of these verticals is crypto, with the others being tech ETFs, large tech companies and small tech companies.
If our AI thinks crypto is a good place to be this week, it will automatically increase the exposure to it. If things start to look a bit more shaky, the AI reduces the position in crypto and re-weights it to another vertical.
It’s a great way to get some exposure without going all in, and with a hedge fund-like approach to actively managing the position.
If you’re looking for a different approach to making money on Bitcoin, we’ve created a pair trade which can make money even if the market remains challenging.
Bitcoin has shown itself to be highly correlated to the overall tech sector. While the direction of travel is often similar, the magnitude of the moves are generally larger with Bitcoin.
In our Bitcoin Breakout Kit we’re aiming to take advantage of this by implementing a pair trade that goes long on Bitcoin via ETFs, and short the tech sector as a whole through an inverse NASDAQ 100 ETF.
It means that even if tech continues to sell off, investors can still make money if the gap between Bitcoin and tech narrows. It still comes with a fairly high level of risk, but it’s a more nuanced approach than simply hodling.
It’s a sophisticated trade usually reserved for high net worth hedge fund clients, but we’ve made it available to everyone.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
