For investors, 2022 was a year of extraordinary challenges. Crypto investors' nerves were particularly strained in the process: Some 74 percent of the top 100 crypto assets saw their value drop by 80 percent or more over the course of the past year, Ha Duong writes in his article for finews.first. But what’s next?
This article has been published on finews.first, a forum for authors specializing in economic and financial topics.
Since the beginning of 2023, however, we have seen increasing signs of a return to more positive momentum. While lower liquidity and trading volumes will continue to create volatility in the market in the coming months, the broad industry deleveraging and market shakeout should have fundamentally come to an end. Investors are now positioned more conservatively and with significantly less leverage than last year.
Only very few market participants had expected the rally since the beginning of the year. Investors currently tend to be under-positioned. Institutional investors had cleared their books of crypto assets towards the end of the year to keep certain positions from appearing in their annual reports. In doing so, however, they missed the start of the recovery since the beginning of 2023. Quite a few are now standing on the sidelines waiting for the right signal to get back in.
«With the banking market under pressure, investors are assuming a less steep yield curve»
Similarly, liquidity reductions in monetary policy have eased globally in recent months, providing further relief. Contrary to popular belief, analysis shows that central banks have added a net $1 trillion or so in liquidity since the market bottom in October 2022. In addition, with the US banking market under pressure and the associated systemic risks, investors are assuming a less steep yield curve.
Improved financial conditions and liquidity in the market also tend to mean tailwinds for riskier assets. Bitcoin and Ethereum reacted to corresponding macroeconomic signals with significant price jumps within a few hours.
«Progress has also been made on the regulatory side»
The Bitcoin blockchain is about to experience a defining event. The upcoming Bitcoin halving in March 2024 could positively affect the price development. The so-called block rewards, i.e., the premiums for mining a unit, will then be reduced again – from currently 6.25 bitcoin per block to only 3.125 bitcoin.
Past halving events have positively affected investor sentiment both before and after the halving of daily Bitcoins produced – due to reduced selling pressure anticipated for the cryptocurrency after halving. On average, BTC reaches a low 1.3 years before halving and a high 1.3 years after halving.
Progress has also been made on the regulatory side, and accelerated regulatory processes can be observed in many regions around the world. In the short term, concerns about overly strict regulation caused uncertainty in the market.
«Tighter regulation can pose a not inconsiderable risk to the market»
In the meantime, numerous crypto companies had to accept a damper on their share price development after the US Securities and Exchange Commission (SEC) acted against several crypto trading exchanges such as Coinbase, Kraken and Binance. Tighter regulation can pose a not inconsiderable risk to the market. This is particularly evident in the USA in the short term - a market in which the regulation of crypto assets is now very restrictive and fragmented.
It is to be welcomed that the pace of regulatory integration is now picking up. At EU level, the first important step in this direction has already been taken through the Markets in Crypto-Assets (MiCA) regulation as part of the digitalization package. Also, with MiCA and the DLT pilot regime, the EU regulators are creating an innovative, Union-wide solution that makes decentralized trading of crypto-assets possible.
Even if details remain unclear in some places and the «Decentralized Finance» (DeFi) area has not yet been adequately addressed, the measures should lead to more legal certainty and trust overall. In this way, the EU is creating important preconditions for the widespread establishment of the technology. This should further promote the acceptance of crypto assets in the financial world.
«We see very good reasons that Bitcoin and Ethereum will not simply disappear overnight»
About 99 percent of the crypto assets today could completely lose their value in the long term. Overall, however, we see very good reasons that Bitcoin and Ethereum will not simply disappear overnight. The number of users in the crypto ecosystem has increased and institutional adoption is progressing rapidly.
What is true for all asset classes is especially true for crypto assets: investments should never be geared toward the short-term timing of the market but should aim to participate in long-term development. In addition, it is important to emphasize: The past has shown that crypto assets have recovered and reached new highs after every previous crash. This also applies to Bitcoin, which has always more than made up for past losses. For example, anyone who invested in BTC five years ago is looking at a considerable return today.
Ha Duong is a Director of Crypto Strategies and the Portfolio Manager of BIT Global Crypto Leaders and BIT Crypto Opportunities at BIT Capital.
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