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 the current pullback to the market trends he recognized in 2021 — primarily a rush for new investors amid an influx of pandemic relief and cost-cutting funds.

“There was so much money out there looking for a home and looking for exposure to different assets that they had to go somewhere, and they 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 general decline in all these riskier parts of the markets.”

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

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

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

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

Investors learn to live with volatility in 2022

The blockchain-based investment world offers investors a number of new opportunities, primarily exposure to 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, financial experts have told INN that this status is just the reality of the market, and an adjustment will be needed from investors interested in getting 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 size themselves accordingly,” Johnson said. “I think if you do that, you’ll probably be fine and you can continue to use those assets in your portfolio strategy.”

The fund manager explained that the downturn in 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 extend yourself or if you didn’t consider the volatility last year.”

The investment strategy around digital assets like bitcoin has changed so quickly that investment managers are having a tough time grappling with plans for investors going forward.

“It certainly doesn’t behave as much of a risk spread as some would have thought when they called it digital gold – it certainly doesn’t behave like that,” Taylor said. “It acts more like an asset risk. But it feels like it fits into portfolios.”

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

“You have to look at the adoption metrics to get a sense of what’s really going on, because in the short term it’s far too confusing,” he said.

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

“Is crypto struggling as an asset class? I think, yes, it definitely does. None of this news is encouraging,” he said. “But to use an analogy, companies go bankrupt all the time.”

How should investors approach crypto investing in 2022?

The market downturn seen through the first half of 2022 has resulted in several cryptocurrency projects being shut down and some coins disappearing.

Both financial experts agreed to see this event as a maturing move for the overall 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 that there is a clear understanding that 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 might catch his eye here and there, Johnson said any other altcoins are “not worth the time.”

Taylor told INN that removing some of the blunt access coins will be beneficial in the long run.

But how should investors approach crypto when there are many questions about its long-term stability?

“If you’re really getting into crypto when you saw everyone else making money from it and you want to get it, it’s probably not the right thing,” Taylor said.

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

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

Invest in a company or an asset?

The rise in value of cryptocurrencies such as bitcoin and ethereum has also opened the doors to new-age technology investment in the way of companies pursuing business models closely tied to the progress of these coins.

The potential for ancillary companies growing alongside the mainstream appeal of 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 being prepared for severe periods of volatility to come, and no better challenge to this theory has been seen than in 2022.

Johnson told INN that investing in companies that ride the ups and downs of the cryptocurrency market, such as those who mine various digital assetsmeans that more time should be spent on due diligence.

“If (investors) look at a company, like a miner, (they have to) make sure that (the company) is going to remain solvent, even if the price of bitcoin does not recover over 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 that the sector has recently shifted from a focus on mining operators to companies entrenching themselves in the cryptocurrency ecosystem.

In the future, he is excited to see the progress of payment solutions companies promoting their cryptocurrency options, which he called now in the early days.

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

Investor takeaway

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

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

“It will set us up for the next market phase,” the fund manager said.