Experts are divided on the direction of the crypto market in 2022. While on the one hand, enthusiasts assert that Bitcoin and other digital assets are the future of finance, the naysayers — on the other hand — insist that it’s a bubble awaiting a big and bold burst.
Since Jan 2021, the aggregate value of digital currencies has increased by 228% to over $3 trillion.
Investors were and still are frenzied by the excitement surrounding the evolving applications of the blockchain in decentralized applications and decentralized finance (De-Fi), non-fungible tokens (NFTs), and the mammoth potential for blockchain-based gaming in the metaverse.
And let’s face it, some crypto assets have delivered monumental returns, more than 45,000,000% year-to-date increase in the case of meme-coin Shiba Inu (SHIB). Unfortunately, however, the upcoming year may not treat digital currencies kindly. What follows are some reasons cryptocurrencies, as a whole, could take a hit in 2022.
Meme coins lose their magic
Most meme coins share one key trait: They lack anything close to a competitive advantage.
Shiba Inu was one of the most-searched digital currencies in 2021, but the social-media hype it garnered doesn’t translate to real-world appeal or long-term functional utility. Digging deeper, Shiba Inu is essentially an ERC-20 token built on the Ethereum blockchain that is by default exposed to the same high fees and processing lag that often cripples Ethereum’s network.
History suggests reversions are imminent
Since the March 2020 bottom, the total value of all digital currencies has jumped more than 20-fold to over $3 trillion.
This is somewhat similar to the 35-fold increase in total market value between March 2017 and January 2018. However, following the January 2018 spike, the aggregate value of all cryptocurrencies declined by just shy of 90%, wiping out all the gains it brought along.
Similarly, tokens like Nano, XRP, and Litecoin witnessed short-term peak gains ranging from 24,000% to nearly 462,000% but eventually lost 93% to 99% of their value in subsequent months.
Blockchain euphoria outpaces its use case
While blockchain is exciting and transformative, it’s simply not widely adopted yet. Not anywhere close to broad-based adoption. Businesses are largely unlikely to jump at the chance to support large-scale projects until there’s evidence of its real-world effectiveness and utility value.
Inability to decouple from the stock market
Cryptocurrencies haven’t held up well when the stock market undergoes crashes or corrections.
The very notion of decoupling from mainstream finance is losing conviction. During the fourth quarter of 2018, the S&P 500 approached bear market territory (a decline of 20%). Meanwhile, the aggregate value of cryptocurrencies plunged from around $222 billion to roughly $130 billion over the same stretch (a 41% drop).
The crypto market was also bled during the five-week coronavirus crash in February and March 2020.
The Fed and the Metaverse
Another school of thought holds that as companies from Meta Platforms Inc. (formerly Facebook) to Apple Inc. push deeper into the metaverse and consumers keep piling into non-fungible tokens, that will push crypto higher regardless of the macroeconomic forces at play.
“Countering this trend is the start of interest-rate normalization by the Federal Reserve but with other major central banks likely to follow as well. That will challenge the raison d’être that crypto is an alternative to fiat money,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific
Growth for digital assets will be subjected to a regulatory check, as tightening regulations from various government entities are closing in on digital currencies and assets. However, there is strong support from buyers and traders, willing to tie all loose ends together to ensure the market can yet again outperform standing predictions.
Financial regulators will issue a batch of new regulations and enforcement actions, which will cause frustration but should eventually drive crypto further into the mainstream, says Patrick Haggerty, director at Klaros Group, a financial services advisory and investment firm.