Will Cryptocurrency Collapse?
Hysteria about a cryptocurrency collapse is widespread because of the fall in cryptocurrency prices. People are afraid because the cryptocurrency market lost almost two-thirds of its value in the last eight months.
For example, Statista estimates overall Cryptocurrency Market Capitalization (the market value of all cryptocurrencies) hit $3.049 trillion on 10 November 2021. Yet, CoinMarketCap estimates the Global Crypto Market Cap was $1.274 trillion on 6 June 2022.
In particular, Bitcoin’s Coin Price fell from $67,582.60 on 8 November 2021 to $31.149 on 6 June 2022. Hence, Bitcoin (BTC), the most popular cryptocurrency, lost over half of its value in under eight months.
Is Bitcoin (BTC) the Problem?
I think Bitcoin (BTC) is driving the market crash. CoinMarketCap estimates Bitcoin comprised 46.8% of the Global Cryptocurrency Market Cap on 6 June 2022.
Bitcoin is old, slow, and clunky. Indeed, crypto observers will call Bitcoin outdated technology. Yet Bitcoin is popular because it is the first and best-known cryptocurrency.
Bitcoin has serious limitations. For instance, Bitcoin is slow. Statista estimated it took 40 minutes to process a BTC transaction in March 2022. In contrast, it took just five minutes to process an Ethereum (ETH) transaction while Ripple (XRP) transactions were nearly instantaneous.
Hence, Bitcoin is too slow for commercial transactions. Nobody is going to wait at the cash register for 40 minutes to pay for groceries. Nor will anybody spend 40 minutes standing at the ATM waiting for cash. Nor is any gaming platform going to rely on something that takes 40 minutes to process a player’s order.
Bitcoin’s Value Explained
Bitcoin is slow because all the encryption and security measures make it hard to move and process. Ironically, I think it is all the slowness and awkwardness that attracts people to Bitcoin.
To explain, I think many people see Bitcoin (BTC) as an inflation hedge. Bitcoin investors are looking for a means of protecting cash and spending power from the market.
Hence, Bitcoin resembles gold, with the added advantage you can process BTC electronically and store it on a flash drive. That makes Bitcoin lighter and easier to move and hide than physical gold. You cannot send gold through the blockchain or carry it in your pocket. You can send BTC through the blockchain and keep it on a flash drive or hardware wallet in your pocket.
Thus, the post-COVID-19 economic recovery is one reason for Bitcoin and crypto’s crash. To explain, people thinking the economy is recovering are pulling cash out of hedges (such as Bitcoin) and putting it back into the traditional economy.
Why People Consider Bitcoin (BTC) a Hedge against Inflation?
One reason people consider Bitcoin a hedge is the limited supply. Theoretically, they can only mine 21 million Bitcoin (BTC). That keeps the price high by creating scarcity.
Notably, most of the Bitcoin is already in existence, CoinMarketCap estimates there was a Total Supply of 19.059 million BTC on 6 June 2022. In contrast, there was a Circulating Supply of 121.072 million Ethereum (ETH) on 6 June 2022. Ethereum’s Circulating Supply is high because you can mine unlimited amounts of ETH. Thus, Ethereum is far more vulnerable to inflation than Bitcoin.
Consequently, I consider Bitcoin more of an asset than a currency. People do not buy Bitcoin for its spending power. Instead, I think they buy Bitcoin (BTC) for its reputed safety. You can consider Bitcoin the modern equivalent of the gold coins, your great grandfather buried in the backyard or hid under the floorboards.
Can Inflation Boost Bitcoin?
Conversely, I predict Bitcoin (BTC) could rise again as inflation rises. Data shows inflation is rising, America’s inflation rate rose to rose 8.3% in the 12 months ending in April 2022.
That is the highest inflation rate America has seen since 1981, the US Inflation Calculator reports. Inflation is higher in some areas of the economy. For example, energy prices rose by 30.3% between April 2021 and April 2022, the US Inflation Rate Calculator estimates.
Bitcoin is already a popular inflation hedge in Latin American countries with historically high inflation. For example, Venezuela and Argentina. I expect a similar rush to Bitcoin, particularly among younger people, in America as US inflation rises.
I think younger people will turn to Bitcoin (BTC) because it is one of the few inflation hedges available to them. Remember, it is hard for younger people to buy real estate in America. Similarly, many younger people, who remember 2008, do not trust banks or government bonds. They want something they can control.
Is Inflation Boosting Bitcoin (BTC) and cryptocurrency?
Interestingly, CoinMarketCap estimates Bitcoin’s share of the Global Cryptocurrency Market Cap grew by 0.06% between 3 June 2022 and 4 June 2022. Similarly, Bitcoin’s Market Cap grew by 2.88% to $568.346 billion in the week ending on 4 June 2022, CoinMarketCap estimates.
Thus, you can argue inflation is already boosting Bitcoin. Nor is it just Bitcoin (BTC) inflation is boosting. For instance, Ethereum’s Market Cap Grew by 0.97% to $214.842 billion between 3 June and 4 June 2022. Meanwhile, the Tether (USDT) Market Cap grew by 0.02% in the same period.
It appears inflation could boost cryptocurrency. However, I think other factors such as rising energy prices and the hysteria about the Ukraine War could also boost cryptocurrencies.
For example, I think some people use the Tether, Binance USD (BUSD), and USD Coin (USDC) stablecoins to hedge US dollars. Theoretically, US Dollars in bank accounts back Tether and USD Coin.
Will there be a Cryptocurrency Crash?
My suspicion is that we have already seen the cryptocurrency crash. The fall from $3.049 trillion in November to $1.23 trillion in June.
The crash could be over and the market is recovering. History shows markets do not go to zero in crashes. For example, during the Great Depression the Dow Jones lost 89.2% of its value and fell from 381.17 on 3 September 1929 to 41.22 on 8 July 1932.
Yet the Dow did not lose all of its value during the Depression.
The Dow kept its value because many of the companies still had value. The Dow fell because of panic selling and the need for cash outside the stock market.
Hence, history disproves the worst crypto skeptics who claim cryptocurrency can lose all its value. Conversely, some individual cryptocurrencies could lose all their value.
Interestingly, the most popular cryptocurrencies Bitcoin, Tether, Ethereum, and Binance (BND) seem to be retaining their value or growing. Therefore, I think what we are seeing is shaking out of the market, as weaker or less valuable cryptocurrencies die off.
Will the Cryptocurrency Crash Continue?
I think the cryptocurrency bust resembles the Dot.com Crash of 2000. To explain, during the Great Tech Bubble of the 1990s the tech-heavy NASDAQ rose to a high of 5,048.62 on 10 March 2000 before plunging to a low of 1,139.60 on 4 October 2002. Investopedia estimates the NASDAQ lost 76.81% of its value during the Dot.com Crash.
The Dot.com Crash occurred because investors overvalued and underestimated tech stocks. Essentially, investors overestimated tech’s capabilities in the short term. For example, investors understood the potential of online retail but not the necessity to spend two decades building a vast network of fulfillment centers to support online retailers.
Yet the same investors underestimated some tech stocks’ particularly Amazon’s (AMZN) ability to fulfill its promises in the long term. Many investors fled tech when the instant profits they were expecting failed to appear.
One reason for the Dot.com Crash was that investors did not grasp the long-term value of some stocks.
For example, Amazon fell to $4.80 a share on 4 April 2001. Interestingly, Amazon’s recovery began before the rest of the tech market. Amazon shares rose to $16.29 on 16 July 2002 and $19.26 on 21 October 2002 just after the bottom of the Dot.com Crash.
I think Amazon (AMZN) shows that good assets recover during a crash as the bad assets fall. Such assets recover, as investors realize the crash is not affecting their underlying value. For example, Amazon was still a good business. Thus, I expect good cryptocurrencies, such as Binance (BNB) will recover and grow to new heights.
How to Survive a Cryptocurrency Crash
Notably, the better cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) are already recovering. Just as Amazon recovered before the bottom of the Dot.com bubble.
If cryptocurrency imitates the Dot.com bubble, the strong cryptocurrencies will recover first while the weak keep falling. Hence, we could see the Global Cryptocurrency Market Cap fall to new lows as the better cryptos rise to new heights.
Investors and speculators need to be careful because there is a cryptocurrency crash. Yet is too early to say whether we are at the end, or the middle of the crypto crash. Thus, I think the smart strategy is to ignore the market and buy cryptocurrencies based on their individual merits, not the market movements.
Such a strategy works because history shows the good will survive and grow while the bad die.