Risky bets can have big payoffs – if they’re successful. Investing in cryptocurrency is one of the riskiest bets you can possibly make. But should you take the chance now, or has the time passed for joining the crypto game?
According to Yahoo! Finance, the price of bitcoin dropped almost 56% in the second quarter of 2022. That’s a pretty steep drop, but does it mean that bitcoin is over for good?
Before you make any decisions about how and where to invest your money, take a look at what we’ve found about the current status of bitcoin, recent market events, and the age of cryptocurrency.
Bitcoin vs. Other Cryptocurrencies
Bitcoin is the most well-known and one of the most popular cryptocurrencies. It’s also suffered significant losses in recent months. Before we dig into those losses, it’s important to know that bitcoin may be the key player in the crypto market, but it’s not the only one.
Other top cryptocurrencies include Ethereum, Tether, USD Coin, BNB, and Binance. Many of these currencies have experienced losses like crypto, with Ethereum especially following a similar pattern as bitcoin.
Why Is Bitcoin Valuable?
Bitcoin is similar to a digital equivalent of gold. It’s not exactly the same, but it’s close. Like gold, bitcoin has become more scarce over time, and these scarce resources generally see an increase in value over time as demand for them rises.
Bitcoin also offers plenty of perks for those who are in the financial industry already. For example, for people who live in countries with oppressive regimes, bitcoin can be a safe alternative to investing money in an economy that they don’t trust.
Also, it’s possible to move money internationally and settle large transactions quickly with cryptocurrency.
The Problem with Bitcoin
However, there’s a key problem with bitcoin, and this problem led to the recent major events we’re about to dive into. Bitcoin is not secured by the government, and it’s also not secured by banks.
While this may change in the future, as of now, the lack of requirements regarding guarantees means that cryptocurrency is a risky game.
Value Investing vs. Momentum Trades
Knowing about investing philosophies can help you decide about the benefits of investing in bitcoin or other cryptos. Whether you invest in the traditional stock market or the cryptocurrency market, there are plenty of strategies you can choose from, including value investing and momentum trades.
As the name implies, value investing is about investing in the stock of what you believe has intrinsic value, no matter what that stock is doing in the market. For example, if you invest in Apple stock because you believe Apple creates high-quality products like the iPhones you love, then you’re practicing values investing. This philosophy is about supporting what you personally believe has that intrinsic value, specifically by not selling your shares when the stock value decreases.
On the other hand, momentum trades are all about following the market. With momentum trades, you sell when the stock falls and you buy when the stock rises up in value.
The main benefit of investing in cryptocurrency is that you might be able to make a profit when you sell it off to another crypto investor. That might not be a practice that holds intrinsic value for you. If you subscribe to the philosophy of momentum trades, however, then that benefit may be appealing to you.
But if you subscribe to the values investing philosophy, it’s tough to see why you would choose to invest in bitcoin or any cryptocurrency. Many people do not see an intrinsic value in an all-online currency.
The Actual Value of a Bitcoin
Whether you subscribe to values investing or momentum trades, the fact of the matter is that bitcoin has value. Once valued at $70,000 per coin, the value of Bitcoin has dropped dramatically to approximately $19,000 per coin.
So, what’s the actual value of this currency? Experts have shared that $20,000 might be too low a valuation, but $70,000 is too high, and an accurate figure would be somewhere in between the two.
The TerraUSD Collapse
However, bitcoin remains at its $19,000 valuation for now. One of the contributing factors to this lower valuation is the collapse of TerraUSD.
TerraUSD is a stablecoin that investors bought on the premise that it would always be worth at least $1 a coin. In May of 2022, however, the value of TerraUSD dropped to 30 cents a coin. Because this coin was only backed by an algorithm and its community, it didn’t have the secure backing of a government or bank, and it collapsed. When things started to slide, the value of TerraUSD (and Terra, a related cryptocurrency on the same blockchain) plummeted.
The TerraUSD crash resulted in a market decline of approximately $14 billion.
Will Bitcoin Drop to $0?
Seeing the collapse of TerraUSD might cause you to ask if the value of bitcoin will ever drop that low. It is possible that the value of bitcoin could drop to $0, but it’s not likely. There are two primary reasons: first, use cases for the currency have been established. For example, El Salvador even allows bitcoin to be used just like traditional currency. Fidelity Investments is also allowing its clients to include bitcoin in their 401(k)s.
Secondly, because investors may have to supply collateral for their bitcoin investments, it’s unlikely that the value will completely bottom out. However, it’s important to know that if lenders do not provide proper guarantees, the value could drop to $0.
Similarly, security issues could cause the value of bitcoin to bottom out. Take a look at what happened at Harmony.
The Harmony Horizon Bridge Breach
Harmony is a blockchain, or a digital database, that stores information that can be shared. They offer low fees for players in the crypto game, as well as super-fast transaction speeds.
Their website states that they have locked in $1.09 billion worth of bitcoin. However, in June 2021 the company tweeted that they had lost $100 million to hackers.
The attack on Harmony was specifically directed at their Horizon Bridge, which allows cryptocurrency to move across different blockchains. According to Margi Murphy at Bloomberg, “While remarkable for the sheer amount of stolen cryptocurrency, the Horizon attack highlighted a vulnerability in so-called cryptocurrency bridges, which have been seen as a solution to clunky inoperability of some blockchains and virtual currencies.”
The timing of this breach, when inflation is high and cryptocurrency has been tanking, doesn’t help the valuation of bitcoin. The lack of security –the weaknesses’ in blockchains’ cyberdefenses – creates more doubt about crypto.
The Celsius Pause
Another crypto platform, Celsius, decided in late June 2022 to pause all withdrawals, Swaps, and transfers. According to Celsius, “We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets.” Concerns about market volatility led this major player in the crypto game to take a significant step back.
What does this mean for investors? Simply put: they won’t be able to access any of the money they invested through Celsius until the pause is over. Effectively, their funds are frozen. That lack of access has driven concern up and the value of bitcoin down in the market.
Due to those market conditions and Celsius’ pause, the crypto market has experienced a severe downturn. According to Investopedia, “The Celsius move triggered a slide across cryptocurrencies, with total crypto value dropping below $1 trillion for the first time since January 2021. Bitcoin, the largest token by market cap experienced a 14% tumble over the weekend to below $23,000.”
The Bank of England’s Take
The TerraUSD crash, the Celsius pause, the Harmony Horizon Bridge breach, have all led to serious losses. In the aftermath of these events, the Bank of England, which has been developing its own position on cryptocurrency for years, released a statement about crypto in its July 2022 Financial Stability Report.
According to the statement, “These events did not pose risks to financial stability overall. But, unless addressed, systemic risks would emerge if cryptoasset activity, and its interconnectedness with the wider financial system, continued to develop. This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”
Essentially, while the losses in the crypto world might not affect the overall economy yet, they could in the future. Therefore, more regulation is needed to protect the economy at large, and it may be the key to the continued growth of cryptocurrencies.
The Case for Investing in Crypto
Despite these concerns, there is a case for investing in crypto. The future is uncertain, but some investors are willing to take the bet that crypto will continue to grow in popularity. They predict that those who currently invest in gold, for example, might choose to invest that money in bitcoin instead.
The key number to remember is 21 million. There cannot ever be more than 21 million bitcoin. So if the demand for bitcoin rises, then its value will also increase (again, like gold), because bitcoin will be a relatively scarce resource.
How Much Should You Invest in Crypto?
If you’re set on investing in crypto no matter what, it’s a good idea to follow the experts’ recommendations. Don’t invest more than 2% to 5% of your portfolio in crypto. It’s possible to gain major returns through investing in crypto, but it’s also extremely risky.