Crypto Crash: Is Bitcoin a Smart Buy Right Now?

In recent weeks, high inflation and rising bond yields have dampened enthusiasm for more speculative assets like cryptocurrency. And the Federal Reserve’s plan to raise interest rates three times in 2022 has added fuel to this fire, causing the recent cryptocurrency crash. In fact, the cryptocurrency market is now down about 35% from its all-time high.

Of course, seasoned investors know that volatility is common when dealing with these digital assets. The market has collapsed before, and it is almost certain that it will collapse again. However, every previous pullback has been a buying opportunity, so there is good reason to believe that these headwinds are temporary in nature.

For this reason, now seems to be the time to invest, and Bitcoin (CRYPTO: BTC) It has come to pick. It is currently trading nearly 40% below its all-time high, but the optimism of institutional investors – the group that has been bullish on Bitcoin – could translate into gains of 10 times (or more) in the next few years. Here’s what you should know.

Image source: Getty Images.

The principle of supply and demand

With its launch in 2009, Bitcoin became the first modern cryptocurrency. The world has been dazzled by blockchain technology, a record-keeping system that is maintained by a decentralized network of miners rather than a central institution, such as a bank. To that end, Bitcoin acts like electronic cash, allowing people to transact digitally without going through a bank or using a credit card.

This quality has certainly played a role in making Bitcoin popular, and there are many people who believe that it could one day become a global currency. However, Bitcoin is too volatile to replace any fiat currency like the US dollar, and the current market environment is an excellent example of why it hasn’t worked. Who wants money that could lose 40% of its value in a matter of weeks?

However, the importance of Bitcoin’s popularity should not be overlooked. Despite being the oldest cryptocurrency, it remains the most valuable, with a market capitalization of around $800 billion. This means strong demand, which is especially noteworthy given the limited supply. Specifically, the Bitcoin source code imposes a cap of 21 million coins, which means that it is a limited asset. Basic economic principles tell us that when demand exceeds supply, the price of an asset will rise.

Despite the recent market crash, I don’t think the current headwinds will dampen long-term demand for Bitcoin. In fact, there is a catalyst at work that could boost demand significantly in the coming years.

institutional adoption

A recent study from Fidelity indicates that 52% of institutional investors own digital assets, and it is not surprising that Bitcoin is the most popular digital asset among large money managers. Most importantly, the study indicated that 71% of institutional investors plan to diversify into digital assets. In other words, they are becoming more and more optimistic about cryptocurrency.

Another report, this one from Nickel Digital Asset Management, indicates that 62% of institutional investors without current exposure will buy cryptocurrency in the next year, and 82% of institutional investors plan to increase exposure to digital assets by 2023. In all cases, this should The increasing demand for digital assets is acting as a tailwind for Bitcoin, causing its price to rise over time.

As a final thought, Cathy Wood, CEO of Ark Invest, believes that institutions will eventually put 5% of their funds into cryptocurrencies — a significant number, given that institutional investors now have more than $100 trillion in assets under management. To this end, Wood believes that the price of Bitcoin will reach $500,000 by 2026, implying a gain of more than 1,000% from its current price. That is why now seems to be the right time to buy this cryptocurrency.

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.