For many investors, early this year was not a good time to be holding crypto, and particularly bitcoin, the most popular of the group. Bitcoin’s price nearly halved, to $35,000 on Jan. 22 from $69,000 on Nov. 10.
Alt coins or other crypto besides bitcoin also saw sharp declines. Ethereum, the second crypto by market value, and the very popular meme coins dogecoin and shiba Inu also suffered.
This was also the case for native tokens tied to decentralized finance, or DeFi, like solana, avalanche, compound and aave. What makes these of particular interest is that they are examples of crypto-use cases since they are related to financial services (loans and trading) that the crypto industry is offering to companies and individuals.
The declines affirmed what investors have seen from the outset: Bitcoin and cryptocurrencies generally are volatile and risky assets. When you invest in them, you should expect jolts in both directions.
For speculators and investors looking for quick gains, crypto can be a money pit and a source of severe disenchantment. Despite the big promises that crypto players make, it’s not yet a fully mature industry, and investors should proceed with caution, experts say.
For investors looking longer term, it might pay off. Consider: In just 10 days the crypto market has recovered almost all the losses it suffered in more than two months. Bitcoin, for example, has increased 20% since mid-March, which helped it wipe out all the 2022 losses and left it up about 2% for the year.
Why Are Prices Rising Sharply Now?
The rise in crypto prices reflects several factors. One is that prices of crypto, and bitcoin in particular, have to some extent been tracking the stock market. To apply the adage: When the stock market coughs, crypto catches a cold. When the stock market goes up, as it has been, so does crypto.
The VIX, a measure of volatility often referred to as the fear index, can help you track the direction of the stock market and therefore crypto.
Except for a few days in early February, the VIX rose sharply from Jan. 14 through March 14. This period coincided with factors like market fears about the economic impact of Russia’s invasion of Ukraine, as well as concern about inflation, recession, and the Federal Reserve’s withdrawal of support for the economy, all as the Covid-19 pandemic has been easing.
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The VIX is down right now, which means there is less uncertainty in the markets. That’s often a signal pushing investors to move into riskier and more speculative assets. Investors also generally seem a bit less concerned about regulation.
Clearly, we must wait to see what the Biden administration will decide, but its executive order has reassured investors that crypto is no longer seen exclusively as a tool for criminals. Another factor that has helped popularize crypto among the general public is the use of crypto to help Ukrainians. Many people not fully familiar with crypto have discovered that it can be used for real-life cases.
Is This the Start of a New Frenzy? Welllll….
The year has been golden for the crypto industry. The rebound in prices since mid-March may seem like the start of an ascent. And several factors point in this direction.
Large investors who have been on the sidelines could at some point invest in bitcoin and crypto more broadly. The amount of U.S.-dollar-pegged stablecoins (including Tether, USDC, and Binance USD) sitting on centralized exchanges — an indication of the amount of cash sitting on the sidelines that might be deployed to buy digital assets — went up sharply between the end of January and the beginning of February, according to Glassnode.
If this money is invested in bitcoin and altcoins, prices might rise very quickly. This is a scenario that should not be ruled out. Hedge fund big names like billionaires Ray Dalio, Ken Griffin and the Bond King, Bill Gross, recently said they were wrong about bitcoin and crypto.
But at the same time, some alarm bells are resounding in the cryptosphere.
Investors should not forget that they are still far from the November records. The market is still down $800 billion from the high of $3 trillion crossed on Nov. 8, according to data firm CoinGecko.
In addition, they would do well to remember that crypto project platforms are vulnerable. A number of them have been hacked this year, the most recent one occurring just a few days ago and leading to the theft of $625 million.
In addition, nonfungible tokens, or NFTs, which helped fuel the euphoria around crypto, have lost their luster. Investors are beginning to wonder how useful NFTs — enabling them to to own pieces of digital content, like a unique photo or GIF — really are.