We’ve seen this all before, and the crypto market has recovered to reach new highs every single time. In a nutshell, what we’re seeing isn’t a crypto problem… It’s the Federal Reserve.
By Greg Wilson, analyst, Palm Beach Daily
Since the start of the year, we’ve seen a lot of scary headlines come out of the crypto markets…
Things like “Bitcoin Will Run Out of Greater Fools,” and “The Long-Term Bitcoin Price Will Be Zero.”
And you may be asking yourself, what’s going on? Or wondering if you should worry.
Now, we don’t blame you for being concerned… Watching the bitcoin and Ethereum in your portfolio fall 26% and 37%, respectively, in just a few months can be hard to stomach.
The crypto market shed roughly 33% in the first quarter of 2022. And overall, it’s currently down about 39% from the all-time high in November.
But here’s the thing… we’ve seen this all before, and the crypto market has recovered to reach new highs every single time.
In a nutshell, what we’re seeing isn’t a crypto problem… It’s the Federal Reserve.
So in today’s essay, I’ll break down what’s happening in the markets… why you shouldn’t panic with your cryptocurrency holdings… and share some advice on how to profit from the situation.
First, we need to understand what’s driving the current plunge in crypto prices…
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Inflation and the Fed
Over the last 12 to 18 months, concerns over record inflation have fueled fear in the markets…
The latest report shows the U.S. inflation rate has hit 7%. The highest since 1982.
It’s gotten so bad that Chairman Jerome Powell and the Fed have finally stopped describing inflation as “transitory” in their reports.
At the same time, unemployment is back under 4% and close to pre-pandemic record lows.
This means the Fed needs to focus on price stability again… In other words, fighting inflation.
And as we saw this week, that means raising rates.
Wednesday’s Fed rate hike of 50 basis points was the first time the Central Bank has raised rates this much in more than two decades.
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So now borrowing is a bit more expensive, causing people to spend less, lowering demand for goods and services, and hopefully causing inflation to fall.
The Fed has also talked about tapering (reducing its bond purchases), which should help increase the dollar’s value.
In Wall Street talk, the Fed’s gone from being “doves” to “hawks.”
Put another way, it’s gone from cheaper money to more expensive money.
Those moves have created a “risk-off” environment, making risky assets like high-growth stocks and cryptocurrencies less desirable to investors.
Today, that’s exactly what we see in the market. Bitcoin is down 14% since January 1, while Ethereum is down 21%. Other cryptos are down even more.
This begs the question, should you be worried about the cryptocurrency markets?
The short answer is no.
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2021 Was a Record Year for Crypto
If you really want to understand what’s happening in crypto, you must look at the bigger picture. You can’t just focus on the present or the negative.
Here are a few key statistics from 2021:
- The number of bitcoin transactions increased by 317% to $4.2 trillion.
- The number of Ethereum transactions increased 729% to $3.3 trillion.
- The overall stablecoin supply grew 388% to $140 billion.
- Stablecoin volume increased by 370% to over $5 trillion.
We’ve also seen the breakout of Layer 1 platforms (aka new crypto infrastructure), exponential growth in crypto derivatives, parabolic growth of non-fungible tokens (NFTs), and the continued expansion of the overall decentralized finance (DeFi) ecosystem.
Of course, as they say, past performance is no guarantee of future results. But at PBRG, we’re still bullish on blockchains and cryptocurrency for three reasons:
- Venture funding in the digital asset space is at record highs.
Funding in 2021 reached a record $25.1 billion, and there were over 1,700 deals.
That’s a massive amount of investment.
In fact, more money went into crypto venture funding in 2021 than in the previous six years combined. And this record inflow of money will propel the industry forward over the coming months and years.
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And it hasn’t stopped. The first quarter of 2022 saw continued growth with nearly $15 billion in blockchain investments.
- Talent continues to pour into the industry.
Per Electric Capital’s 2021 Developer Report, a record 18,000-plus developers are working in crypto… And that number is growing faster than ever.
A separate report by The Block showed crypto firms went on a “crazy hiring spree” in 2021.
Of the 27 major firms it tracked, Binance, Coinbase, and Kraken all added over 1,000 employees. And in total, the 27 firms hired over 8,400 people.
- Crypto innovation continues at a breakneck speed.
In the 2015–16 timeframe, new developments like Ethereum and Ethereum-based tokens and wallets entered the crypto universe.
In 2017–18, initial coin offerings (ICOs), ERC721 tokens (the foundation of NFTs), and ENS domain names (simplified, “human-readable” crypto addresses) came onto the scene.
More recently, we’ve seen the rapid growth of things like DeFi, distributed autonomous organizations (DAOs – a new paradigm for running an organization), and NFTs.
Each innovation cycle increases the capabilities of crypto ecosystems. And that, in turn, helps the ecosystem develop and grow.
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Crypto’s Fundamentals Are Stronger Than Ever
These advances are all part of crypto’s virtuous cycle.
Each innovation attracts interested individuals. They invest time and money. They make crypto better and create new innovations. That attracts more interested individuals. The cycle repeats.
With record amounts of investment, talent, and innovation, we’re confident the cryptocurrency markets will continue to grow larger in the future.
And keep in mind that we tend to overestimate the short term and underestimate the long term.
The Fed’s attempts to rein in inflation are causing investors to worry about the short term. That’s the main reason behind crypto’s rough start to the year.
But when you look at the long-term metrics, the crypto markets are fundamentally sound today and poised for a bright future.
So, if you haven’t already, consider buying some bitcoin or Ethereum at today’s prices. A $200–400 position is suitable for most investors. And you’ll be taking advantage of the risk-off market.
Consider this… if you bought BTC or ETH during our last risk-off period (March 2020), you would be up 701% and 2,562%, respectively, even with the recent selloff.
Remember, as Teeka Tiwari says, “Volatility is the price of admission for life-changing crypto gains… Trust the research. Follow our risk management. And let time do the heavy lifting.”
When the dust settles, and crypto prices reach new highs in the year ahead, you’ll be happy you held on or added to your positions.
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And remember… the recent pullback is a short-term blip in a long-term crypto trend that’s made millionaires out of patient investors.
As crypto continues to go mainstream… and investors realize the opportunity before them… the biggest returns will be in the past.