Crypto Has Been Through the Wringer in 2022: What Now?

Cryptocurrencies, or digital assets, have gone through a lot of turmoil so far in 2022. Since their high-water mark in late 2021, major assets like Bitcoin and Ethereum have seen dramatic pullbacks in prices. These pullbacks made a chain result in other areas of the digital asset market, which eventually led to the insolvency of several crypto platforms – and a crash that wiped out the value of a few large cryptocurrencies.

Many coins have seen massive price drops since their all-time highs and have not in excellent health. As an shareholder, how should you deal with crypto now?

Crypto basics & recent tumbles

First, a brief outline of crypto and recent major events:

The blockchain equipment used to trade cryptocurrencies has been hailed as a game-changer for the future of currency. Users can “confirm transactions without a need for a central clearance power,” which democratizes access to the economy, mainly for those who have historically not had access to fiscal institutions. Cryptocurrencies like Bitcoin, Ethereum and other coins or tokens are simply an uncommon form of payment known as digital currencies. While the makings drives crypto’s allure, so does speculation. And even though crypto has been lauded as “inflation-proof,” its recent tumbles affect their market value rapidly.

One of the major events that occurred just was the dramatic end in value of TerraUSD, an algorithmic stablecoin, which was meant to behave like cash. TerraUSD’s algorithm was structured to keep it pegged tightly to the U.S. dollar, but the peg failed, prompting panic selling and at once loud another well loved token, LUNA, which was linked to TerraUSD. Both tokens have lost tens of billions of dollars in total market capitalization.

Another major event that rocked the digital asset world was the end of Three Arrows Capital (3AC), a cryptocurrency hedge fund. This had a knock-on effect as other crypto trading platforms that were counterparties to 3AC had to freeze withdrawals for their clients.

Essential value propositions vs. ‘pump and dump’

I don’t say all of this to scare you out of investing in cryptocurrency. But I believe the prudent deal with to this asset class is to focus on the essential value proposition of a digital asset – along with fully appreciative its utility – before investing in it.

There are plenty of websites that promote new and imminent coins based on recent spikes in routine; rosy claims about these coins’ long-term the makings are inevitable. Much of this is self-serving, as seed investors in digital assets will try to promote their projects to keep prices going up, which in turn allows them to promote bonus price appreciation and momentum in the coin.

Just like we have seen with the fluctuations in “meme” stocks, holders of some assets will use the internet and social media to promote the assets they now hold in hopes they can pump and dump them. I urge avoiding the temptation to chase returns in the new and lesser-known uncommon coins. Some investors have been flourishing at making money with this approach, but it carries a very high risk – and can be financially devastating for investors who are over-concentrated in these types of assets.

Bitcoin and Ethereum – the most well-customary players

Federal parameter of digital assets is still pending – though it may take on a renewed priority after the recent fallout. In the meantime, a more conservative approach would be to invest in the most customary digital assets, counting Bitcoin and Ethereum. Both have begun rallying in value since their mid-June lows, coinciding with clear returns in other risk assets over the same period.

Bitcoin is the largest digital asset by market capitalization and the most well-known. It is also the digital asset enjoying the utmost adoption among institutional investors. BlackRock, one of the largest asset managers in the U.S., just announced a link with Coinbase to offer digital asset trading to its clients. Institutional demand for Bitcoin could provide a steady boost to its price given wider demand in portfolios. Bitcoin also continues to be used for sending and getting global payments.

Ethereum is the second-largest digital asset by market capitalization. What makes Ethereum’s value unique is the fact that it’s used as a network for many, many other digital assets and projects – counting “DeFi” or Decentralized Finance applications. As more projects are built on Ethereum’s network, the demand for its token, ether, increases. Ethereum is also working toward a major upgrade in the next quarter that would substantially reduce the energy usage of its blockchain, in theory sinking its carbon trace by 99%! Appeal in ether, and its price, has surged since early July.

Taking into account crypto? Thought-out a conservative allocation

Given the above, it’s no bolt from the blue that I typically urge a conservative allocation to digital assets. Digital assets, compared to stocks, are highly precarious – as we have already seen in 2022. The Nasdaq composite, in place of tech stocks, was down about 33% year to date at its lowest point, while the more well-known S&P 500 index (a guide for U.S. large cap stocks) was down around 24% as its low point for the year.  Bitcoin, by evaluation, dropped more than 60% from its value at the end of 2021 at its lowest point. 

For a well-diversified choice, cryptocurrencies can provide an boost in the makings return and some diversification refund when collective accurately. Digital assets, in general, have a low degree of correlation to stocks. In modern choice construction, low associated assets tend to be wanted as this means that when one asset is rising or falling, the price of a low associated asset does not go in lockstep with it. In other words, if the market is panicking and assets are selling off, you don’t want every asset in your choice going down at the same time.

 Digital assets might also provide a small bit of excess return the makings for periods when stocks are flat or trading in a range.

With any investment choice, it’s also vital to periodically re-evaluate the approach and set up whether or not any strategic or tactical changes are vital.