Blockchain Market Update: H1 2022 in Review

Historic blow to value of digital assets “had to happen”

Greg Taylor, Chief Investment Officer at Purpose Investments, traced back the current pullback to the market trends he recognized in 2021 — primarily a rush of entry for new investors amid an influx of pandemic relief and cost-saving funds.

“There was so much money out there looking for a home and looking for exposure to different assets that it had to go somewhere, and it went to some of the riskier parts of the market,” Taylor told INN.

As 2022 rolled around, Taylor explained, the hits to inflation and spending meant “we saw a generalized pullback in all of these riskier parts of the markets.”

Elliot Johnson, Chief Investment Officer and Chief Operating Officer with Evolve ETFs, agreed with Taylor’s findings sharing the concept that despite all the challenges of this year, the blockchain-based cryptocurrency market is not going anywhere.

“I don’t think it means it’s over by any stretch, I think this is really more than anything a right setting and resetting the tables for the next move,” Taylor said.

Johnson went as far as to say the violent volatility of the market in 2022 is “a necessary thing for an emerging asset class” like this one to grow and mature.

“What we’re going through now is a pretty big shakeout where everyone is coming back and reassessing their leverage in the system and pulling that back,” Taylor said. “And this is something that I think had to happen.”

Investors learning to live with volatility in 2022

The blockchain-based investment world offers investors a variety of new opportunities, chief among them exposure into digital coin assets. But these opportunities come hand in hand with a violent wave of volatility, which has been seen in the bear market of 2022 so far.

Increasingly so, financial experts have told INN this status is merely the reality of the market and an adjustment will be needed from investors interested in gaining positions here.

“We’ve done a good job of trying to explain the long term value as well as the short term volatility risk, and people are sizing themselves accordingly,” Johnson said. “I think if you’re doing that then you’re probably going to be okay, and you can continue to use these assets in your portfolio strategy.”

The fund manager explained the downturn of 2022 has been incredibly dramatic, but also critically necessary.

“This is what you want, and it’s also what’s expected,” Johnson said. “But it’s certainly difficult if you overextended or if you didn’t consider the volatility last year.”

The investment strategy surrounding digital assets like bitcoin has shifted so rapidly that investment managers have a tough time grappling with plans for investors moving forward.

“It certainly is not acting as much of a risk diversifier as some had thought when they called it digital gold — it’s certainly not acting like that,” Taylor said. “It’s acting more like a risk on an asset. But it does feel like it fits in the portfolios.”

The rush of volatility has also caused Johnson to pull back on his own way to evaluate the market.

“You need to look at the adoption metrics to get a sense of what’s really happening, because on a short term basis it’s way too confusing,” he said.

When asked if the volatility seen from digital assets in the first half of 2022 would have a significant impact in the uphill climb these investment tools face to become more mainstream, Johnson said the results of this year don’t help the cause.

“Does it tarnish crypto as an asset class? I think, yes, it definitely does. None of these news stories are encouraging,” he said. “But to use an analogy, companies go bankrupt all the time.”

How should investors approach crypto investments in 2022?

The market downturn seen throughout the first half of 2022 has resulted in several cryptocurrency projects being shut down and quite a few coins disappearing.

Both financial experts agreed in seeing this event as a maturing move for the general crypto market.

Could fewer coin options now mean investors have a more streamlined buying opportunity when it comes to these digital assets? Johnson and Taylor seem to think so.

While breaking down the current dynamics of the digital asset market, Johnson told INN there’s a clear understanding bitcoin is the top of the class for all digital coins. The use of ethereum as a backbone for blockchain solutions places it in second place, according to the fund manager.

And while other projects out there may grab his attention here and there, Johnson said all other alternative coins are “not worth spending any time on.”

Taylor told INN the removal of some of the obtuse access coins will be beneficial in the long run.

But how should investors approach crypto as questions on its long-term stability abound?

“If you’re really getting involved In crypto as you saw everyone else making money on it, and you want to get it, that’s probably not the right thing,” Taylor said.

The Purpose Investments expert said key benchmarks haven’t been met for the market to gain more stability, such as institutional support or the launch of an active fund US-based ETF.

“There’s certainly a few hedge funds involved as well. But institutions, for the most part, haven’t come into this. They’re still looking,” he said. “It’s important to step back and realize just how early we are in the investment cycle of the crypto universe.”

Investing in a company or an asset?

The rise of value for cryptocurrencies like bitcoin and ethereum has also opened the doors to new age tech investments in the way of companies pursuing business models closely attached to the progress of these coins.

The potential for ancillary companies growing alongside the mainstream appeal for cryptocurrencies has resulted in more options for investors in the market.

But for these companies, being so closely tied to the valuation of these coins means having to be prepared for the arrival of serious periods of volatility, and no better challenge of that theory has been seen than in 2022.

Johnson told INN that investing in companies riding the ups and downs of the cryptocurrency market, such as those mining different digital assets, means more time should be spent for due diligence.

“If (investors) look at a company, like a miner, (they need) to make sure (the company is) going to remain solvent, even if the price of bitcoin doesn’t recover for a period of time,” the financial expert said.

At the end of the day, evaluating these companies boils down to some of the tried and true fundamentals investors know about — a strong balance sheet, access to capital or previously raised capital — according to Johnson.

Taylor told INN the sector has shifted recently from a focus on miner operators to companies firmly attaching themselves within the cryptocurrency ecosystem.

In the future, he’s excited to see the progress of payment solutions companies that are advancing their cryptocurrency options, which he called now in the early days.

“Companies that do make it out to the other side of this and are stronger for it, I think, will be the leaders,” the Purpose Investments executive said.

Investor takeaway

Investments in cryptocurrency assets or any other blockchain-based operations will require serious dedication from investors when it comes to due diligence and research.

But according to Johnson, he has already seen an evolution in the way investors tackle these opportunities and the attention to detail displayed by the market.

“That’s gonna set us up for the next market phase,” the fund manager said.