When the curtain closes in 2021, it will drop as another strong year for the stock market. Until December 13, the standard Standard & Poor’s 500 It has doubled (+24%) its average annual total return of 11% over the past four decades.
But for cryptocurrencies, things weren’t so good – they were great. Since the beginning of the year, the total value of digital currencies has increased by 176% to $2.14 trillion. Investors were driven by the excitement surrounding decentralized applications and decentralized finance (DeFi), the emergence of non-fungible tokens (NFTs), and the huge potential of blockchain-based gaming in the metaverse. And let’s face it, cryptocurrencies are also seeking life-changing gains, such as the over 45,000,000% YTD increase in meme-coin Shiba Inu (CRYPTO: gray hair).
However, next year may not treat cryptocurrencies very kindly. Here are five reasons why cryptocurrencies as a whole could collapse in 2022.
1. History suggests that relapses are common
First of all, history suggests that the cryptocurrency market is in trouble. Although major upheavals have occurred frequently over the past decade, reversals following these upheavals are also common.
Since the March 2020 low, the total value of all digital currencies has jumped more than 14-fold to $2.14 trillion. This is somewhat similar to the 35-fold increase in total market capitalization over the roughly 10 months between March 2017 and January 2018. However, after the sharp rally in January 2018, the total value of all cryptocurrencies will only continue to drop by 90%. over the next 11 months.
We’ve also seen similar reversals in individual cryptocurrencies that have made life-changing gains as well. Popular emoticons like nanoAnd XRP, And Litecoin He made short term gains ranging from 24000% to nearly 462,000%. And all lost 93% to 99% of their value in a period ranging from 12 months to 26 months.
The point is, the euphoria of trading always comes back in a big way in the cryptocurrency space.
2. Blockchain’s euphoria trumps its use case
People have every right to be excited about the future potential of blockchain technology. DeFi offers the ability to make virtually instantaneous cross-border payments at a low cost and can democratize the process to ensure that even residents of emerging markets can participate. There is also a smart contract-based blockchain that can revolutionize supply chains.
But if there’s one constant with every next big tech, it’s that investors always – and I mean Always Overestimate the speed at which a new technology or service will be adopted. We’ve seen it happen with the advent of the internet, B2B commerce, genomics, 3D printing, and now, blockchain technology.
While blockchain is exciting, it simply hasn’t been widely adopted yet, nor is it close to widespread adoption. Firms are unlikely to take advantage of the opportunity to support large-scale projects until there is evidence of their effectiveness in the real world. However, we won’t have that proof until companies welcome blockchain technology with open arms. It’s quite the enigma/Catch-22 that could get in the way of this brutal gathering.
3. The inability to separate from the stock market
Another reason for the collapse of cryptocurrencies in 2022 is their inability to decouple from the stock market.
In many ways, digital currencies are seen as a standalone asset and a hedge for the broader market. for example, Bitcoin (CRYPTO: BTC) It presents a visualization of a limited token supply of a maximum of 21 million. With the money supply in the US soaring, investors are looking at bitcoin as a safe investment that will help store and grow their wealth – at least better than the ever-declining US dollar.
The problem is that cryptocurrencies do not hold up well when the stock market suffers crashes or corrections. During the fourth quarter of 2018, the S&P 500 approached bear market territory (20% drop). Meanwhile, the total value of cryptocurrencies dropped from around $222 billion to nearly $130 billion over the same stretch (41% drop). The cryptocurrency market also took a hit during the five-week coronavirus crash in February and March 2020.
I offer this warning because there is a growing number of clues that the stock market will crash or undergo a double-digit percentage correction in 2022.
4. Marginal debt wreaking havoc
Look no further than margin debt for the fourth reason cryptocurrencies may drop next year.
Margin describes the amount of money investors borrow with interest to buy or sell short securities. In some cases, investors who use margin to raise their trades can increase their returns. But if margin-purchased securities do not move in the expected direction in the short term, brokerages offering these loans may call. They will either want the investors to put up additional capital as collateral or they may demand/force the sale of assets. This is known as a margin call.
Since the cryptocurrency exchange space is so fragmented, it is not entirely clear how much margin is due. But make no mistake about it – it’s not hard to find offers to spread leverage.
Earlier this year, it was possible for some investors to take advantage of 100 times the leverage on their cash position when trading bitcoin. At such massive leverage, even a 1% or 2% move in bitcoin (which often happens in the blink of an eye) can lead to a margin call and forced liquidation.
If the music suddenly stops in the cryptocurrency market, margin calls could be close.
5. Meme coins lose their magic
Last but not least, don’t be surprised if FOMO is sucking life out of the cryptocurrency market in 2022.
This year, any coin bearing the name of the Japanese Shiba Inu dog breed caught fire. The above-mentioned Shiba Inu has gained more than 45.000.000%, while Dogecoin And Floki Inoue Higher by 3119% and 2763%, respectively, as of Dec. 13.
But all of these meme coins share one key feature: they lack anything resembling a competitive advantage.
Shiba Inu may be one of the most searched for cryptocurrencies this year, but the hype on social media doesn’t translate into real-world appeal or long-term potential. The fact of the matter is that Shiba Inu is an ERC-20 token built on Ethereum A blockchain that is subject to the same high fees and processing delays that often affect the Ethereum network. Nothing about Shiba Inu (or Dogecoin and Floki Inu) indicates that it will be the preferred payment currency for companies in an increasingly crowded field of blockchain projects.
If the FOMO that drove investors into meme coins subsides, we could watch the crypto euphoria quickly evaporate as well.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.