The market landscape changes so often that investors, traders and other participants are often confused. Stocks are getting cheaper, and the bond market has fallen to an 8-year low. The risks have reached levels last seen in early 2020, when the pandemic swept the planet. However, the current picture is very different from the events of 2020.
The Russian-Ukrainian conflict has only exacerbated the economic problems facing humanity.
Many market participants refuse risky assets, and cryptocurrency speculation is the last thing they think about. Since digital currencies collapsed from their November 10 peaks, the speculative frenzy has come to naught. At the end of January, bitcoin, ether and many other cryptocurrencies updated local lows (which are even now closer than the highs of the end of 2021).
All the attention of the markets is focused on the Ukrainian crisis, inflation, the prospects of recession, disruptions in supply chains, quarantine in China, tensions between nuclear powers and many other problems. Now may be the perfect time to include sagging cryptocurrencies in your investment portfolios. The exchange-traded fund Bitwise Crypto Industry Innovators ETF (NYSE:BITQ), which demonstrates a strong correlation with the prices of cryptocurrencies, can act as an indirect investment tool.
The drawdown of bitcoin and ether scared off speculators
The history of bitcoin and ether has become clear evidence that a fortune can be made even from a couple of dollars, which attracted speculators of all stripes.
The higher bitcoin climbed, the more active buyers came to the market; everyone wanted to turn $100 into millions.
Ethereum – monthly timeframe Ethereum – monthly timeframe
Ether is the second largest cryptocurrency by capitalization, and it has experienced a similar surge of speculative interest.
But as soon as prices fell, all the attractiveness instantly evaporated.
High Inflation has Not Helped Cryptocurrencies
Some market participants and “adherents” of cryptocurrencies hoped that a surge in inflation, undermining the purchasing power of fiat currencies, would support digital assets. This theory is based on the fact that central banks can manipulate the money supply in favor of the economy or political agenda, whereas the only way to increase the supply of cryptocurrencies is mining.
These hopes were not destined to be fulfilled; even 40-year highs of inflation did not help bitcoin, ether and most other currencies, of which there are more than 19,470. And all this is happening against the background of the growth of the dollar index due to the increase in the Fed’s key rate. As a result, inflationary pressure, which increases the yield in US dollars, has negatively affected cryptocurrencies.
Cryptocurrencies warn about the risks of recession or stagflation?
While prices are rising everywhere, US GDP declined by 1.4% in the first quarter of 2022. The harsh measures by which the Chinese authorities are fighting COVID-19 outbreaks are undermining the world’s second largest economy. A recession in the classical sense is two quarters of falling GDP in a row (and there is no reason to believe that the economy will turn up in the current quarter).
A recession occurring against the backdrop of growing inflationary pressures is called stagflation and is a challenge for the Federal Reserve System and other central banks using monetary policy instruments to achieve full employment and economic stability.
In addition, the Ukrainian crisis and tensions between the China-Russia and US-Europe blocs have limited the supply of raw materials and undermined business activity. Monetary policy can be very effective in solving macroeconomic problems caused by demand problems, but central banks have practically no instruments for regulating supply.
The sale of cryptocurrencies, in which they form a series of downward extremes, warns of worsening economic conditions, and central banks and governments now look like frightened “deer” in the light of economic and geopolitical headlights.
3 reasons to expect Cryptocurrency Recovery
During periods of active rallies and sales, prices often reach unreasonable and irrational levels. In 2020, the quotes of WTI oil dropped to previously unprecedented negative values, and just two years later, one barrel cost more than $ 110.
The volatile nature of cryptocurrencies only exacerbates this picture. I have identified three factors that will eventually lead to an upward market reversal:
The libertarian ideology of cryptocurrencies rejects the idea of state control over the money supply. As the credibility of governments declines, digital assets are likely to begin to play a more important role in the global economy.
The “hawkish” course of monetary policy lays the foundation for the next crisis, which will lead to another infusion of liquidity and a decrease in the value of fiat currencies. Geopolitical tensions and the consequences of the supply-demand imbalance do not have any negative impact on alternative means of exchange that have already achieved serious recognition.
Cryptocurrencies are the embodiment of the fintech revolution, increasing the speed and efficiency of transaction accounting systems. The widespread introduction of blockchain will lead to the further development of digital currencies as internal tokens of these systems.
It can be argued with a high degree of probability that at the moment when cryptocurrencies find the bottom and return to an upward trajectory, buyers will return to the market.
We invest in infrastructure, not the final product
Markets tend to be cyclical, and cryptocurrencies are now stuck in a “bearish” phase. Extremes can be guaranteed to be identified only retroactively, and in the case of digital assets, the problem is aggravated by high price variance.
Many market participants avoid the new asset class because they do not trust the existing instruments of their storage, which are strikingly different from traditional exchange accounts. At the same time, cryptocurrency exchanges also face unique problems.
Last week, Coinbase (NASDAQ:COIN) warned that bankruptcy could destroy users’ funds, as they would become “unsecured creditors.” In case of bankruptcy, they will not be able to claim any specific property from the exchange in court, and their funds will become unavailable.
The Federal Deposit Insurance Corporation (FDIC) does not protect crypto exchange customers. Coinbase’s statement put additional pressure on cryptocurrencies, creating additional risk.
Coinbase and other exchanges will have to convince customers of their viability. I believe that cryptocurrencies and leading exchanges will not only survive, but will also thrive with the beginning of the “bullish” phase of the cycle.
The Bitwise Crypto Industry Innovators ETF exchange product is a tool for investing in infrastructure, not the final product, since it combines shares of exchanges, miners and other companies related to cryptocurrencies. Here’s what BITQ’s asset list looks like:
Trading at $8.31 per share as of May 17, BITQ managed assets of $59.443 million, and the owners are replaced daily by an average of 141,014 ETF shares. BITQ charges a fee for managing funds in the amount of 0.85%.
BITQ is a volatile product that rises and falls following the prices of cryptocurrencies.
BITQ – weekly timeframe BITQ – weekly timeframe
In November 2021, BITQ reached a peak of $35.68; that’s when bitcoin and ether updated their record highs. At current levels, I consider BITQ to be an inexpensive call option for cryptocurrencies without a specific expiration date. BITQ is not protected from complete depreciation, but at the same time has significant growth potential.
Invest no more than you are willing to lose, because profit always goes hand in hand with risks. Trading at $8.31 per share, BITQ fully justifies the potential risks.
The current situation in the markets makes it more difficult than ever to make the right decisions. The list of problems includes:
Inflation;
Geopolitical upheavals;
Development of disruptive technologies;
Increase in interest rates.
Reliable data, effective data sorting and analysis tools will help to cope with them. You have to take emotions out of the equation.
The InvestingPro+ tool will help you with this, offering the data and tools necessary to make the right investment decisions.