This has been a terrible year so far for bitcoin, down almost 45% from its peak in November 2021. Ethereum is down 50%, having broken new all-time highs in November.
This has prompted discussion as to whether we are in a bear market, or a normal market pullback.
Ryan Allis, managing partner at HeartRithm and publisher of Coinstack, argues that far from being in the midst of a bear market, we may be in a bitcoin supercycle.
Bitcoin typically declines in the third year after every halving event, which occurs every four years. This is when the rate of bitcoin supply is halved to restrict supply to the market.
Historically, this has resulted in a run-up in the BTC price in the 12 to 18 months immediately following the halving event, followed by a drop in price. This explains the drop in price in 2014 and 2018 as shown in the table below.
Based on this pattern, BTC is due for another ‘down year’ in 2022, but Allis outlines several reasons why this cycle may not recur. Here are just a few of the reasons.
1. Bitcoin dominance is declining. In December 2017, BTC accounted for 70% of the total crypto market cap, but that dominance has since dwindled to 40%.
Ethereum is catching up to BTC’s market cap, as shown in the chart below, though other smart contract platforms such as Solana, Avalanche and NEAR are providing alternatives to Ethereum with faster transaction speeds.
2. The growth in DeFi. The total value of funds locked up in decentralised finance (DeFi) is now more than $230 billion, from zero four years ago. This is where crypto’s real use case is to be found, where users can lend, borrow, earn interest and transact outside the traditional financial system.
This is also the space where non-fungible tokens (NFTs) are monetising the digital economy; where gaming cryptos and the metaverse are breathing new life into the digital universe.
3. DeFi is opening up new opportunities for yield hunters. Investors can earn 12% to 18% in DeFi versus 0% to 3% in the traditional finance space.
4. Inflation in the US at 7% is at a 30-year high. Compare that with BTC’s inflation of 1.4% a year, versus 0.9% for Ethereum (ETH). ETH can expect to gain a reputation as sound money in the course of 2022.
5. There are serious problems with traditional finance. It still takes two days to send an international wire through the SWIFT system, and two days to settle an equities trade. “Traditional markets are only open 6.5 hours per day, 5 days per week,” writes Allis.
“The world needs better financial technology that can deliver 24/7 markets – and that is being delivered through asset tokenization and blockchain technology.
Soon enough, all financial assets will be tokenized and trade on transparent blockchains – equities, bonds, and real estate included. The cost of remittances accounts for 5% to 7% and higher in Africa – this is a market begging for the type of disruption that cryptos bring.”
6. Follow the developers to know where the action will be. There has been massive growth in the number of developers operating in the blockchain and Web 3 space (which is a more decentralised version of the current internet, where people control their own data rather than handing it over to tech giants for free). “If you want to know what’s about to grow – follow the developers,” says Allis.
Brett Hope Robertson, investment analyst at crypto investment platform Revix, agrees that many of the arguments advanced for a bitcoin supercycle hold water.
“We are seeing real-world use cases emerging in the crypto space, such as DeFi, Web3 and NFTs. Many cryptos now perform much like tech stocks. Bitcoin and Ethereum have been likened to Faang stocks [Facebook, Alphabet, Amazon, Netflix and Google] in terms of their price behavior and volatility, and the fact that ETH, Solana and other cryptos now generate substantial ‘gas’ fees [means] you could value them on a discounted cash flow model.”
“And this is why cryptos cannot be written off as a bubble. They are volatile, yes, but we are only beginning to see what cryptos are capable of and how they are likely to change the world.”
Allis says he sees a good year for digital asset investing in 2022, and we should expect to see pullbacks of 30% to 50% every six to nine months, but not 85% drops such as we saw in 2014 and 2018.
“We’re seeing the entire global financial system being rebuilt this decade on top of smart contracts, open source code, and blockchains. It’s exciting to be part of chronicling this evolution. And for anyone wanting to reduce volatility in their overall crypto portfolio, you can always park a part of your capital in USDC and earn 8% to 10% on BlockFi, Celsius or Nexo.”
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