Will Crypto Ever Recover or Will Winter Last Forever?
Bitcoin has fallen over 50% since the start of 2022. (Photo: Dan Kitwood/Getty Images)
Important takeaways
- According to crypto investment manager Grayscale Investments, the crypto winter only began in June.
- The average crypto winter lasts four years, meaning crypto may not recover until 2026.
- Crypto is still a new and relatively untested market, making it much higher risk than stocks.
- We have created a number of ways to use AI to access hedge fund-like investment strategies that include exposure to crypto.
The cryptocurrency sector has taken a hit so far in 2022. It’s no surprise to anyone, but there comes a time when even the biggest crypto fans will start questioning where they should keep their “diamond hands.”
At some point, crypto investors may start looking at the red splattering all over their portfolio and thinking, “should I just sell?”
If that’s you, we’re here to help.
When we look at the stock market, we have over a hundred years of history to compare with. We are able to look at past market crashes and find similarities from the past that closely match what is happening to the market and economy today.
This can provide insight into what may come in the future, and comfort that things will eventually turn around and the stocks we’ve lost money on will recover. Now with individual stocks that is not always the case, but so far the overall market has always come back to beat its previous high.
Crypto doesn’t have such a long track record. Bitcoin was invented in 2009, and it wasn’t really until 2017 that it started to gain attention in the mainstream. During that time, bitcoin and the rest of the crypto sector have already gone through several boom and bust cycles.
So given that bitcoin still has eight years until it can have a beer, does the past give us any clues as to when the current crypto winter might end?
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Where is the crypto sector right now
Crypto’s current run started right around the beginning of the Covid-19 pandemic. With everyone in the world stuck at home with a lot more time on their hands, attention turned to investing.
In addition to memes like GameStop and the stock market in general, crypto suddenly got a lot of attention. With more attention comes more purchases and with more purchases generally comes higher prices.
It wasn’t just bitcoin that rode this wave of popularity, with altcoins like ether
The market was incredibly volatile throughout 2021, with bitcoin falling nearly 50% between April and July. It recovered just as quickly, going back to nearly $70,000 before the current crash began.
At the time of writing, the price of bitcoin is back below $20,000. Other coins have fared even worse. Ethereum is now at just over $1,600 from a peak of over $4,600. Dogecoin has fallen from a high of $0.65 down to today’s price of $0.06.
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It’s no surprise that investors are worried about whether the good times will ever return.
How long have past crypto winters lasted?
The first thing we can start looking at is how previous crypto winters have played out. According to digital asset fund manager Grayscale Investments, the current crypto winter officially began on June 13, 2022.
This may come as a surprise, given that Bitcoin had already fallen over 60% at the time. Grayscale made this distinction to account for the rapid rise in prices prior to the fall, by performing analysis of the blockchain to find the point at which most crypto-investors had a loss from their purchase price.
The last major crypto cycles in 2012 and 2019 lasted an average of four years from peak to trough. Given that the current crypto winter only began within the past few months, this could mean we’re in for a long winter.
In both cases, the crypto winter ended with a catalyst that increased the interest and use of bitcoin and other currencies. In 2012, this was the arrival of the first widely used crypto exchange, Mt Gox (which did not end well), and the rise of the Silk Road.
This allowed bitcoin to be used as an actual currency to buy things. The items in question were not exactly overboard, and the Silk Road was eventually shut down by the FBI. Still, it set a precedent for a marketplace that used cryptocurrency.
The most recent bull market began with the Initial Coin Offering (ICO) frenzy of 2017, which saw a huge number of ‘altcoins’ (non-bitcoin cryptocurrencies and tokens) hit the market.
Some of these have gained popularity and generated great returns for early investors, many more have collapsed completely or turned out to be outright scams.
We have no way of knowing when (or indeed, if) the current crypto winter will end, but if it follows the pattern of the past, we may not see another bull run until 2026.
Will the crypto sector ever recover?
The question, of course, is whether the sector will actually recover? It is a somewhat difficult question to answer, because bitcoin and other cryptocurrencies do not have fundamental characteristics like a publicly traded company.
A company stock has value to an investor because it generates cash flow. The profit the company earns will generally, at least in part, be paid back to the shareholders in the form of dividends.
This profit can be used to analyze the fundamental value of the company against other companies in the same sector, and to compare entire sectors with others.
This is not the case with cryptocurrency. It doesn’t have a mechanism to pay out income without another third party being involved, such as lending it to someone, like you could with Celsius. We saw how it ended.
It means that the future value of a cryptocurrency cannot be calculated on a fundamental basis, because it is based on speculation.
Of course, if it becomes more widespread, it will have value based on the fact that other people perceive it to have value. This is known as the “network effect”. It is similar to how we have viewed gold and other precious metals for thousands of years.
Gold has some industrial uses, but most of its value comes from the fact that it is scarce, and we as humans have collectively agreed for many generations that it is valuable.
Bitcoin, Ethereum and some other crypto projects have significantly increased their network power in recent years. Not only are more retail investors holding positions, but so are Wall Street firms, venture capital funds and even some large public companies.
We are getting to the stage where the crypto sector will become too much a part of the mainstream financial markets not to recover. We may be there already, but it remains to be seen.
What investors need to know about investing in crypto
The rules of investing in crypto are actually very similar to investing in the stock market, right now turned up to 11. It is important to understand the risks involved in investing in highly volatile, high-risk assets like crypto, and understand that you can lose money as you invest.
It can be a minefield, which is why we’ve created a number of different kits that give investors exposure to crypto assets, without having to worry about trading themselves.
Our Emerging Tech Kit is one of these. It doesn’t invest purely in crypto, but we use AI to assign portfolio weights every week across four verticals. One of these verticals is crypto, while the others are technology ETFs, large tech companies, and small tech companies.
If our AI thinks crypto is a good place to be this week, it will automatically increase exposure to it. If things start to look a little more shaky, the AI reduces the position in crypto and reweights it to another vertical.
It’s a great way to get some exposure without going all in, and with a hedge fund-like approach to actively managing the position.
If you are looking for a different approach to making money on Bitcoin, we have created a pair trade that can make you money even if the market is still challenging.
Bitcoin has proven to be highly correlated to the general technology sector. While the direction of travel is often similar, the magnitude of the movements is generally greater with Bitcoin.
In our Bitcoin Breakout Kit, we aim to take advantage of this by implementing a pair trade that goes long on Bitcoin via ETFs, and short the tech sector as a whole through an inverse NASDAQ 100 ETF.
That means even if technology continues to sell off, investors can still make money if the gap between Bitcoin and technology narrows. It still comes with a fairly high level of risk, but it’s a more nuanced approach than just hodling.
It’s a sophisticated trade usually reserved for high-net-worth hedge fund clients, but we’ve made it available to everyone.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we add another $100 to your account.
