Bitcoin has been rising since 2021 and tripled in value since November 2021. And the optimism is justified. The digital currency has increased by 70% since the start of the year, bringing the total worth of the crypto market to $2 trillion.
Bitcoin’s prospects have been dampened by recent price volatility and heightened regulatory scrutiny. Experts warn that the market may head for a downturn. With next year already shaping up to be another wild ride for digital currencies, let’s look at a few predictions that analysts have made.
Six Reasons Cryptocurrencies Can Crash
The hype surrounding decentralized applications and decentralized finance (DeFi), the rise of non-fungible tokens (NFTs), and the massive potential for blockchain-based gaming in the metaverse have all fueled cryptocurrency investor interest.
However, the coming year may not be kind to digital currencies. The following are six reasons why cryptocurrencies could crash in 2022 as a whole.
1. History Suggests Reversions Are Commonplace
The history of the crypto market suggests that it is in peril. Although large upswings have occurred frequently during the last decade, reversions are typical.
Since March 2020, the total value of digital currencies has surged more than fourteen-fold to 2.14 trillion dollars. It is akin to the 35-fold gain in overall market value between March 2017 and January 2018, which occurred over the last ten months. Following the high in January 2018, however, the overall value of all cryptocurrencies dropped by nearly 90% over the next 11 months.
Similar reversions have occurred in specific cryptos, resulting in life-changing wins. Popular coins such as Nano, XRP, and Litecoin saw short-term rises of 24,000% to roughly 462,000%. In a 12- to 26-month period, all of them lost 93% to 99% of their value.
The point is that – in the cryptocurrency market, trading enthusiasm always retraces in a big way.
2. Blockchain Euphoria Outdoes Its Use Case
People can be thrilled about blockchain technology‘s future potential. DeFi allows for almost immediate cross-border payments at low costs, and it can democratize the process so that even residents of emerging markets can participate. Blockchains with smart contracts have the potential to alter supply chains.
However, there’s one thing that every next-big-thing technology has in common. Investors overestimate how rapidly new technology will be adopted. We have seen it happen with the advent of the Internet, 3D printing, genomics, business-to-business commerce, and now blockchain technology.
While blockchain technology is exciting, it is still not widely used or even close to being widely used. Businesses are reluctant to jump at the possibility of financing large-scale projects until there is proof of their effectiveness in the real world.
However, we won’t have this proof until enterprises embrace blockchain. However, this massive rise can be stymied by a Catch-22 situation.
3. Inability To Detach Itself From The Stock Market
Another reason cryptocurrencies may crash in 2022 is the inability to separate from the stock market.
Digital currencies are considered independent assets and a hedge against the broader market. For example, Bitcoin (BTC 0.17%) gives the impression of a limited token supply, with a maximum of 21 million. With the US money supply growing, investors regard Bitcoin as a safe haven investment that will help them store and increase their wealth — at least better than the ever-diluting dollar.
The problem is that whenever the stock market collapses or corrects, cryptocurrencies haven’t fared well. In the 4th quarter of 2018, the S&P 500 Index entered the bear market zone (a 20% decline).
The overall value of cryptocurrencies plummeted from approximately $222 billion to around $130 billion within the same time period (a 41% drop). During the five-week coronavirus crisis in February and March 2020, the crypto market was pummeled.
An increasing number of signals point to the stock market collapsing or seeing a double-digit percentage correction in 2022.
4. Margin Debt Wreaks Havoc
The money borrowed with interest by investors in order to purchase or sell securities on the short side is known as margin. Investors who use margin to leverage their transactions can boost their profits in some cases.
However, if the securities purchased on margin do not move in the predicted direction, the brokerages that offered the loans can contact you. Investors may have to put up further capital as collateral, or they may be forced to sell assets. It is called a margin call.
Since the crypto-exchange market is so scattered, determining the exact amount of outstanding margin debt is challenging. However, make no mistake: offers to use leverage are not hard to find.
Certain individuals were able to use 100 times leverage on their cash position when trading Bitcoin earlier this year. Even a 1% or 2% rise in Bitcoin (which happens in seconds) could result in a margin call and forced liquidation with such high leverage.
5. Meme Coins Lose Their Magic
Finally, don’t be surprised if the famous “fear of missing out” (FOMO) movements suffocate the bitcoin industry in 2022.
In 2021, almost any coin bearing the name of the Japanese Shiba Inu dog breed had become a hit. Through December, Shiba Inu has increased by more than 45,000,000%, while Floki Inu and Dogecoin have increased by 3,119% and 2,763%, respectively.
However, all these meme coins have one thing in common: they don’t have anything approximating a competitive advantage.
Shiba Inu is perhaps one of the well-known and popular digital currencies, however, its social media popularity does not necessarily translate to long-term potential or real-world appeal. Shiba Inu is an ERC-20 token developed on the Ethereum blockchain, which means it’s vulnerable to the same high fees and processing slowness that plagues Ethereum’s network.
Nothing about Shiba Inu (or Dogecoin or Floki Inu) suggests it will be the go-to payment token for businesses in a crowded field of blockchain ventures.
6. Regulatory Issues
This year, regulators exercised their muscles on cryptocurrencies, with China outright prohibiting all crypto-related operations, and the US government is cracking down on select businesses.
Regulation, according to analysts, will be a big issue for the business in 2022. The desire of many governments, particularly the United States, to regulate the crypto realm has never been greater.
A crash can occur when the price of an asset climbs swiftly and hits a new high. At the very least, a correction will occur when the price recovers to a more “normal” level. At the time, Bitcoin seemed to be in this state. When it comes to investment, there are no assurances. That bitcoin might rise as soon as it falls, one cannot say for sure.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Tim Thomas has no positions in the stocks, ETFs, mutual funds, forex, cryptocurrencies, or commodities mentioned.
This post was produced and syndicated by Smart Bitcoin Buyer/ Timothy Thomas Limited.
Featured image credit: Pixabay.