We have witnessed the growth of cryptocurrencies in the stock market since the beginning of 2021. What put the value of cryptocurrencies at risk in 2022?
When the year 2021 concludes, it will be remembered as another strong year for the stock market. Over the preceding four decades, the benchmark S&P 500 had more than quadrupled (+24 percent) its average annual total return of 11%. However, things haven’t been good for cryptocurrencies; in fact, they’ve been exceptional. The total value of digital currencies has surged by 176 percent to $2.14 trillion since the start of the year.
The hype around decentralized apps and decentralized finance (DeFi), the development of non-fungible tokens (NFTs), and the massive potential for blockchain-based games in the metaverse have all fueled investor interest. Let’s face it, cryptocurrencies are also seeking life-altering returns, such as the Shiba Inu meme-45,000,000% coin’s year-to-date surge (CRYPTO: SHIB). The following year, on the other hand, may not be kind to digital currencies.
The following are five reasons why cryptocurrencies might fall in 2022 as a whole.
1. Reversions appear to be prevalent in history.
To begin with, the crypto market’s history implies that it is in peril. Even though large upswings have happened often during the last decade, reversions are typical. The entire value of all digital currencies has increased more than 14-fold to $2.14 trillion from the low in March 2020. This is akin to the 35-fold gain in overall market value between March 2017 and January 2018, which occurred during 10 months.
However, following the January 2018 high, the total value of all cryptocurrencies in the stock market fell by about 90% over the next 11 months. We’ve seen comparable reversions in specific cryptos that have resulted in life-changing wins. Popular coins like Nano, XRP, and Litecoin saw short-term rises of 24,000 percent to roughly 462,000 percent.
2. The enthusiasm around blockchain technology has outpaced its use.
People seem to be enthusiastic about blockchain technology’s future possibilities. DeFi allows for virtually immediate cross-border payments at cheap costs, and it may democratize the process so that even inhabitants of emerging markets can participate. Smart contract-based blockchains have the potential to transform supply networks. Businesses are reluctant to leap at the possibility to finance large-scale projects.
But if there’s one thing that every next-big-thing technology has in common, it’s that investors consistently underestimate how rapidly a new technology or service will be embraced. With the advent of the internet, business-to-business trade, genomics, 3D printing, and now, blockchain technology, we’ve seen it happen. While blockchain is fascinating, it is still not extensively used or even close to being widely used.
3. Inability to separate oneself from the stock market
The difficulty of cryptocurrencies to separate from the stock market is another reason they may fall in 2022. Digital currencies are considered autonomous assets and a hedge against the larger market in many respects. Bitcoin (CRYPTO: BTC), for example, gives the impression of a restricted token supply, which is capped at 21 million. With the money supply in the United States increasing, investors see Bitcoin as a safe-haven investment.
The issue is that when the stock market falls or corrects, cryptocurrencies in the stock market haven’t fared well. The S&P 500 Index reached bear market territory in the fourth quarter of 2018. (a decline of 20 percent ). During the same period, the total value of cryptocurrencies fell from around $222 billion to around $130 billion (a 41 percent drop).
4. Margin debt is a disaster
A fourth reason why cryptocurrencies in the stock market may fall in value in the coming year may be found in margin debt. The amount of money borrowed with interest by investors to buy or short-sell stocks is referred to as margin. Investors that use margin to leverage their transactions can boost their profits in some cases.
However, if the securities acquired on margin do not move in the predicted direction shortly, the brokerages that provided the loans may contact you. Investors will be required to put up additional cash as collateral, or they may be forced to sell assets. A margin call is what this is called.
Because the crypto-exchange market is so fragmented, it’s difficult to know exactly how much margin debt is owed. However, make no mistake: invitations to use leverage aren’t hard to come by. Earlier this year, select investors were able to use 100 times leverage on their investments.
5. Meme coins lose their mystical properties.
Finally, don’t be shocked if the popular “fear of missing out” (FOMO) movements suffocate the bitcoin industry in 2022. Almost any coin named after the Japanese Shiba Inu dog breed has been a hit this year. Through Dec. 13, the aforementioned Shiba Inu has increased by more than 45,000,000 percent, while Dogecoin and Floki Inu have increased by 3,119 percent and 2,763 percent, respectively.
But all of these meme currencies have one thing in common: they don’t have anything approximating a competitive edge. Shiba Inu may be one of the year’s most popular digital currencies, but its popularity on social media doesn’t always translate to real-world appeal or long-term potential.
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