Should You Invest in Cryptocurrency in 2022?
Cryptocurrency has been around for more than a decade since the inception of Bitcoin, the first cryptocurrency, in 2009. From the onset of the pandemic, the digital asset grew handsomely, reaching its peak of $3 trillion in market value in November 2021. However, in the light of tightening monetary policy from the U.S. central bank, the crypto market has given up all its gains from 2021 and then some. The cryptocurrency routs have begged the question: Should you invest in cryptocurrency in 2022?
Let's look at some of the good and bad from the crypto bandwagon.
1. The security risks faced by crypto exchanges
The digital asset market has been notoriously known for its security vulnerability. A total of $14 billion worth of crypto was stolen in 2021, according to data from blockchain analytics firm Chainalysis. The data excluded some high-profile hacks the communities have seen so far in 2022.
For example, in February, $320 million worth of Ethereum – the second biggest token – was stolen from Wormhole, a popular cryptocurrency platform. And in April, $625 million in cryptocurrency from Ronin Network, a company behind the popular blockchain-based game Axie Infinity, was lost to a hack. Finally, just last month, in late June, a theft of $100 million was conducted on Harmony's Horizon Bridge, a platform facilitating transactions between blockchains.
2. Most crypto projects fail the test of time or become outright scams.
There are currently 12,000 cryptocurrencies circulating in the market, but they have little purpose other than swindling money from investors.
One example is the Squid coin, created in late October 2021 based on Netflix's popular drama, Squid Game. The coin rose from a little more than a mere cent to $2,861.80, an astonishing 28 million percent increase, but then precipitously plummeted to $0. The incident turned out to be a rug pull, where the creators abruptly cashed out their $3 million positions, but also had set up a mechanism that prevented other investors from selling their holdings.
Besides many fraudulent crypto schemes, prominent projects are not necessarily a safe bet. Many users are still not recovered from the dramatic collapse of Terra stablecoin – a digital token whose value was supposed to maintain a 1:1 peg with the dollar – in May. When the system started to dwindle because of technical flaws, the stablecoin experienced something equivalent to a bank run, precipitating the price to free fall. The Terra debacle collectively put the market value of almost $60 billion goes up in smoke, resulting in some people losing their life savings.
3. The domino effect of a highly leveraged environment
The fiasco of Terra stablecoin exerts a ripple effect on an interconnected crypto market, further exacerbated by leverage.
A crypto hedge fund Three Arrows Capital (3AC), which oversees $3 billion worth of cryptocurrencies, invested $200 million into the Terra project, which is now essentially worthless since the ecosystem has imploded. Ultimately, the collapse partly fueled the insolvency of 3AC.
Three Arrows Capital's failure also led to knock-on consequences for Voyager Digital, a U.S. cryptocurrency broker and lender, because of an outstanding $650 million loan Voyager lent to the hedge fund. Voyager has suspended all withdrawals and trading on its platform due to 3AC's default. Both companies now seek legal protection by filing for bankruptcy. The overleveraged operations in the market seem to make one collapse of a major platform lead to the downfall of another.
However, it's not all dark and gloomy in the crypto world; there have been substantial and pivotal developments for digital currency within the past few years.
1. A broad spectrum of adoption, from institutional investors to developing nations
We have seen more institutional investors dipping their toes into the uncharted water. One of the first movers was MicroStrategy which bought $425 million worth of Bitcoin in the second half of 2020. MicroStrategy's initiative was then followed by payment processor Square's $50 million BTC purchase in October 2021 and EV manufacturer Tesla's $1.5 billion BTC in February 2021.
In addition, users can now buy crypto with PayPal, a giant in the payment system industry - albeit only Bitcoin, Ethereum, Litecoin, and Bitcoin Cash are available. And PayPal's 392 million active users now have access to the cryptocurrency market, further increasing the exposure of these digital tokens.
b/ Developing nations
Besides the institutional presence in the industry, countries are trying to adopt cryptocurrencies as their legal tenders. The first pioneer is El Salvador. The nation established Bitcoin Law in June 2021, which made Bitcoin its legal tender shortly after. El Salvador also tries to encourage a more prevailing usage of Bitcoin by setting up a network of Bitcoin ATMs and creating a Bitcoin e-wallet called "Chivo".
Following the lead of El Salvador, "The Central African Republic announced that it would accept Bitcoin as an official currency" and "Panama's legislature also recently approved a law to allow the use of Bitcoin and several other cryptocurrencies as a means of payment," according to Fortune.
In the wake of Russia's incursion into Ukraine, Ukraine has used crypto to fund the war, raising a total of $120 million in March. "Ukraine's deputy minister for digital transformation said crypto donations have enabled the army to buy military equipment, and medicine" per Bloomberg.
2. The expansion of the prominent coins
Culling out the right cryptocurrencies in a sea of over 18,000 tokens is difficult, so you're better off selecting the ones that have withstood the test of time.
The most well-known option would be Bitcoin, the first and largest cryptocurrency. Bitcoin pioneers the whole crypto developments and fuels the digital assets bandwagon. The token is reputed as digital gold because of its potential to become the primary store-of-value vehicle. Hedging against inflation is another rationale for choosing Bitcoin. The digital currency is designed to cap its supply at 21 million coins, giving Bitcoin deflationary pressure. But perhaps the most lucrative reason to own Bitcoin is the prospect of substantial price appreciation. For instance, BTC's price in May 2016 was $500, and it has now reached $22,000 at the time of writing this article. That is a whopping 4,400% jump in price.
Being the mainstream token, Bitcoin has attracted several financial services from institutional entities. Canada and Europe have offered Bitcoin exchange traded fund, making it easier to invest in Bitcoin, though indirectly as you don't own the coin, for regular investors. While the U.S. is expected to follow suit, it currently only has Bitcoin futures ETFs that track bitcoin futures contracts. Furthermore, Fidelity Investments, the largest 401(k) provider in the U.S, has started providing Bitcoin as an option for 401(k) plans. Should the employers incorporate this policy in their savings plans, Bitcoin will have access to trillions of dollars in savings account assets.
Bitcoin is not the only player in this auspicious industry; Ethereum, the second-largest cryptocurrency, has also seen its ecosystem expand rapidly. Ethereum functions more like software, with features allowing developers to embed digital code on it. For example, Ethereum's unique properties allow for smart contracts, which are contracts that execute automatically based on the terms written on the contract code. The technical details of smart contracts can be too complicated to grasp, but the technology has far-reaching implications. That is, smart contracts can potentially disrupt the real estate and banking industry, as they remove all the intermediaries and directly connect buyers and sellers.
The Ethereum ecosystem has also facilitated decentralized applications, or dApps. These are financial service providers that operate on the Ethereum platform and use smart contracts. The main purpose of dApps is to provide a peer-to-peer service free of any control of a single authority. Even though the nuts and bolts of these technologies can be very perplexing and intricate, the growing applications and usages of dApps have contributed to the appreciation in Ethereum token price - from $140 per ETH at the beginning of 2020 to the price of $1,252 per ETH as of July 8, 2022.
Cryptocurrency is still a budding industry with the potential to become the world's medium of exchange. Whether you should invest in the digital token in 2022 depends on your risk tolerance. The Crypto market is still facing scams and an overleveraged environment, leading to the collapse of many projects and platforms. However, as the saying goes, high-risk, high-reward, choosing the right cryptocurrency today offers the probability of yielding an outstanding return in the future.