on the crypto
Bitcoin (quotation BTC) stands out in the cryptocurrency industry with its strong branding and first-mover advantage. With its price down 52% from one year to the next, many investors are wondering if it's time to go for a rebound. Let's analyze two factors to consider before clicking on the buy button.
Bitcoin is not a safe haven against inflation
The experiences of 2021 and 2022 suggest that Bitcoin is not a reliable hedge against inflation. Despite a skyrocketing annual inflation rate, the asset has lost much of its pandemic-era earnings. The Federal Reserve's tightening of monetary policy could be behind this unexpected trend.
The US inflation rate hit 9,1% in June, well above the Fed's 2% target. To cool the situation, the central bank is reducing its balance sheet and raising interest rates, two measures that raise the cost of capital and reduce the amount of money circulating in the economy.
When capital is in short supply, investors are less willing to risk speculative assets like Bitcoin. With many economists predicting the Fed will continue to raise rates until the end of 2023, this headwind should be on the minds of investors wanting to bet on a cryptocurrency rebound. Before defining the fund, I would like inflation to peak and start falling, thereby reducing the Fed's incentive to keep tightening rates.
The dust hasn't settled yet
The market value of cryptocurrencies dropped by more than 50% (to around $ 1.000 trillion) in 2022 alone. This rapid decline has led to a jolt of riskier projects with flawed business models.
This month, the popular cryptocurrency lending platform Celsius filed for bankruptcy following liquidity problems due to the decline in the market. The crisis follows the collapse of the Earth / Moon, a $ 60 billion stablecoin platform (at its peak) that has dropped to virtually zero after losing its peg to the dollar.
As an established cryptocurrency with a relatively simple use case (i.e. a way to store and transmit value), Bitcoin is shielded from many of the volatility challenges faced by newer and more complex rivals. But his confidence and stability can be a double-edged sword.
For example, the failed Earth / Moon project held Bitcoin reserves to help maintain its stablecoin peg. When the project failed, these assets were released to the market, putting selling pressure on Bitcoin. Considering the risk of contagion from other assets, investors may want to wait for things to calm down before returning to the Bitcoin market.
Bitcoin is still a winner in the long run
With its massive size and strong brand, Bitcoin still looks like a long-term winner in the cryptocurrency industry, especially now that the market crash has exposed the weaknesses of some of its more recent rivals.
That said, rising inflation and Fed squeeze seem like short-term challenges for the cryptocurrency market as a whole. Furthermore, the panic of altcoins could put selling pressure on established cryptocurrencies like Bitcoin. Investors looking for the bottom of this bear market should be careful not to take the leap.
