Why Invest in Cryptocurrencies?
At the end of 2021 cryptocurrencies were the rage. Everyone wanted in and the sky was the limit. As we begin 2023, numerous crypto exchanges and decentralized finance businesses are in ruins and one of the moguls of the crypto world, Sam Bankman-Fried, is on house arrest awaiting trial for wire fraud and numerous other charges while his business, FTX, is in bankruptcy court. At the end of 2021 the crypto world was counting profits and believing that the sky was the limit. At the beginning of 2023 investors are asking if they will ever get their money back from failed crypto businesses. Why invest in cryptocurrencies today?
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Over the years various reasons have been proposed for why one should put their money into cryptocurrencies. The one that is the strongest even during the ravages of crypto winter is that unlike currencies like the US dollar or euro (fiat currencies), cryptocurrencies like Bitcoin have a maximum supply that is set by their internal code or mathematical algorithm. Thus, nobody can keep printing more and more currency like happened in Germany in the 1920s or is happening today in countries like Venezuela and Argentina.
Reasons to Invest in Crypto That Have Fallen by the Wayside
Crypto proponents said that crypto tokens like Bitcoin were unrelated to other financial assets and thus not subject to the same financial pressures. They were a hedge against inflation and a store of value during times of social and political unrest as well as times of war. However, over the last years Bitcoin has gone up and down virtually in lockstep with the Nasdaq market. The world is seeing the worst inflation in four decades and crypto has fallen by as much as three-fourths of its peak value while the dollar has risen against other currencies during crypto winter
. War is raging in Ukraine as Putin seeks to reestablish the Soviet Empire and crypto has fallen. The one way in which crypto currencies have helped is in the ability for Ukrainians to walk out of their country and carry the key to their savings on a thumb drive!
Bank Failures and Recovery of Bitcoin
What is in the news recently is the failure of SVB and other regional banks which has caused fears of the collapse of many regional banks. Meanwhile, Bitcoin, Ether, and other crypto tokens have rallied. One needs to mention that the “recovery” of Bitcoin has mirrored that of the Nasdaq as stock market traders bet that a stressed banking system will keep the Federal Reserve from raising interest rates any more or at least so rapidly.
What Does the 2022 Collapse of Crypto Tell Us?
Bloomberg published a useful article detailing the many facets of the 2022 crypto collapse. The salient feature of crypto in 2022 when all was said and done was that the decentralized system of crypto exchanges, decentralized finance businesses, and even blockchain gaming, NFTs, and the Metaverse were much more centrally controlled than envisioned in a perfect crypto world where transactions were supposed to be person to person without middlemen taking their cut. Not only were so many crypto businesses interlinked with loans and investments but many, like FTX, were claiming money loaned from one branch of the business to the other as separate and unencumbered assets. What this tells us is that it is time to bring crypto into the broader regulatory scheme that other financial entities must endure in order to protect investors from business collapse and fraud.
Does Supply and Demand Apply to Bitcoin?
The best argument for Bitcoin and other cryptocurrencies as an investment is that there will be a limit on the supply. The demand is another matter. On the other hand, crypto businesses like decentralized finance, blockchain gaming, non-fungible tokens, and various aspects of the Metaverse all hold promise as useful and profitable ways that cryptocurrencies can and will be used for years to come. Our opinion is that crypto tokens that are tied to practical applications are more likely to increase in value and be good investments than tokens whose only selling point is scarcity. In this regard we expect Ether to surpass Bitcoin in market cap going forward.