The cryptocurrency bandwagon in 2020 and 2021 has attracted retail investors and institutional entities to pour money into this emerging asset. However, since the start of 2022, due to strict monetary policies from the U.S. central bank, a looming global recession, and Russia’s invasion of Ukraine, the crypto industry has lost at least two trillion dollars in market value (fact check).
Bitcoin, the largest digital token, is already down 72% from its peak in November. Ethereum, the second largest cryptocurrency behind Bitcoin, also plunged about 72% from its peak in the same month. Additionally, the volatility and unregulated environment of the cryptocurrency market have caused Biden’s administration and other government agencies to rein in the digital market.
Despite all those bleak sentiments, people are still highly interested in the digital currency. Cryptocurrency advocates believe Bitcoin will become the store of wealth for clients around the world, and the Ethereum ecosystem will provide a new concept of programmable money, a feature able to disrupt global finance and other legacy industries. As well, more and more institutions express interest in investing in the digital asset, with some of them already owning Bitcoin on the company’s balance sheet.
So, should you invest in cryptocurrency in 2022? Before you decide to involve your investment portfolio with this budding and complex technology, let’s look at some of the risks as well as exciting aspects of investing in virtual tokens.
How old do you have to be to invest in crypto?
The majority of the cryptocurrency platforms require you to be at least 18 years before you start investing in the Crypto market.
Fierce competition among blockchain projects
There are currently thousands of crypto projects out there that promise innovative features and mainstream adoption. While the former is true – with many projects offering cutting-edge and advanced technology – few of them will succeed and reach a large base of users. Every new and burgeoning industry has innate volatilities. As a result, experts warn not to invest blindly, as even a prominent digital coin widely used in the cryptocurrency community won’t guarantee long-term success.
For example, the infamous case of the Terra Luna crash caused turmoil in the industry and precipitated a collapse in the cryptocurrency market at the time. TerraUSD, or UST, is a stablecoin whose value was pegged to the U.S. dollar through an algorithmic procedure. In other words, one UST could always be exchanged for one dollar, or at least that how the stablecoin was supposed to function. However, as everything unfolded, the stablecoin TerraUSD was in fact not very stable due to fundamental flaws in its underlying protocol.
Consequently, the whole ecosystem collapsed, which also led to the wipeout of a linked Luna token. The fiasco resulted in an estimated loss of $42 billion in the system, according to David Carlisle, vice president of policy and regulatory issues at crypto researcher Elliptic.
Cyber risks facing cryptocurrency exchanges
An exchange is a platform that facilitates buying, selling, and storing of cryptocurrencies. These companies offer crypto-related financial services to retail investors, as well as institutional entities. Because of this, they manage to attract a large amount of money from their clients, which makes them an attractive target for cybercriminals. Because the industry is still in its nascent stage, security safeguard has been inadequate to protect the customer’s digital asset. This has resulted in numerous high-profile security breaches, leading to sizable losses.
For example, so far in 2022, Crypto.com was hacked $35 million in January, with the hacker able to extract Bitcoin and Ether from customer accounts; $325 million was stolen from a blockchain network Wormhole in February because of a cyberattack, though the lost amount has been retrieved; and finally, one of the largest cryptocurrency hack took place in March of this year, with $625 million taken from the blockchain-based play-to-earn game Axie Infinity developed by studio Sky Marvis.
Additionally, even if cryptocurrency exchanges are not hacked, the exchanges themselves could pose a risk to the user. Even though these businesses have become more vigilant in protecting their users’ assets from being stolen by cybercriminals, they fail to prevent themselves from taking excessive risks. Large cryptocurrency institutions tend to be interconnected and invest in each other, which means they borrow money from and lend money to one another.
Consequently, when one corporation fails, it drags others in the network down with it. For instance, when TerraUSD imploded, a Singapore-based cryptocurrency hedge fund Three Arrow Capital (3AC) incurred a $200 million investment loss from the stablecoin, causing the company to file for bankruptcy. Furthermore, Celsius, a cryptocurrency lending company, gave a $650 million loan to 3AC before the bankruptcy, leading Celsius to suspend trading, deposits, and withdrawals from millions of users because of liquidity problems in July 2022.
Cryptocurrency crackdown from regulators
The government views the digital assets class as a threat to investors and consumers as they continue to propose provisions to rein in the industry. U.S. President Joe Biden signed an executive order in March, calling on federal agencies to examine the “responsible development” of cryptocurrency. The order has also prompted the U.S. Treasury Department to publish “Framework for International Engagement on Digital Assets” article in July, which provides guidelines on how the U.S. should involve with other countries regarding virtual tokens.
The U.S. Securities and Exchange Commission Chairman, Garry Gensler, has consistently expressed interest in policing the digital currency. He claims cryptocurrencies are a type of security, and the asset should be governed under the jurisdiction of the SEC. The chairman also believed a more stringent regulation on the industry ensures the safety of investors when they invest in the cryptocurrency market.
“More broadly, the public right now would benefit from investor protection around these various service providers … the exchanges, the lending platforms, and the broker-dealers,” Gensler said in a recent interview. Besides the SEC, the Commodity Futures Trading Commission is also inclined to regulate the digital asset class. However, the problem right now is that no consensus has been established to answer whether cryptocurrencies are security or commodity.
Increasing cryptocurrency adoption
Despite the dropping in value and facing more scrutiny from regulators, acceptance of cryptocurrencies and blockchain technology is growing. More retail investors are including digital assets in their investment portfolios, as well as more financial corporations are offering crypto-related services.
For example, Fidelity Investment, the nation’s largest retirement plan provider with $11.3 trillion in assets under administration, began offering Bitcoin as an option for its clients’ 401(K) in April, making Fidelity the first provider to do so. In addition, a cryptocurrency exchange, Coinbase Global, partnered with asset manager BlackRock to provide crypto trading services to institutional investors. And a group of Walls Street giants, including Charles Schwab, Citadel Securities, and Fidelity Investments, established a joint venture to launch a cryptocurrency exchange called EDX Markets.
Apart from the involvement of financial institutions, publicly traded companies are also jumping onto the cryptocurrency train. MicroStrategy, which provides business intelligence, mobile software, and cloud-based services, was the first public company to buy Bitcoin as a part of its capital allocation strategy in 2020. Since then, the companies kept accumulating Bitcoin and were reported to hold a total of $5.7 billion in the cryptocurrency by the end of 2021.
After MicroStrategy’s first move, other companies followed suit. The EV maker Tesla bought $1.5 billion in Bitcoin in early 2021, and the company CEO Elon Musk announced earlier this year that Tesla would accept Dogecoin as payment at charging stations and for some merchandise sales. As well, two payment system giants, Block and PayPal, have allowed users to buy, sell and transfer cryptocurrencies.
AMC also accepts Bitcoin, Ethereum, and Litecoin as a form of payment for its movie tickets. Finally, the eCommerce juggernaut Amazon is offering Amazon Managed Blockchain, which is a cloud service that allows users to create and manage blockchain infrastructure.
Investing in the top cryptocurrencies
Instead of allocating your money toward new cryptocurrency projects from an unknown developer, You should invest in established tokens that have stood the test of time, ensuring the longevity of the investment. Of course, the established tokens are Bitcoin and Ethereum. Bitcoin was the first cryptocurrency to be ever created, which was followed by Ethereum. The two digital currencies are also the largest ones in the crypto market.
Bitcoin’s inception happened during the Great Recession in 2009 as people were becoming more distrustful of the traditional financial system. They wanted another form of money that was not under the government’s or banks’ purview. However, as time passed, Bitcoin today doesn’t possess enough key ingredients to be a new medium of exchange.
But the token is considered by supporters to be digital gold, which people hope will become the main digital store of value in the future. Also, the supply of Bitcoin is fixed – capped at 21 million coins – which potentially allows Bitcoin to be an inflation hedge. All the while, it is in the nature of a fiat currency, such as the dollar, to lose value over time due to inflation – which was still at a four-decade high level reported in the August CPI data. If Bitcoin is here to stay and continues to prosper, it has the capacity to become the first global currency in the form of digital cash.
While Ethereum is smaller than Bitcoin in terms of market cap, it has an ecosystem with more innovative and advanced technological developments. Ethereum network can be viewed as a computing platform because of everything its blockchain can do.
Firstly, Ethereum is the foundation underpinning decentralized applications (dapps). Dapps provide functionality and services to consumers, but instead of having a centralized control like a regular web app, such as Uber or Twitter, Dapps run on Ethereum blockchains and don’t have a single centralized authority. Additionally, Ethereum also facilitates smart contracts, which are transaction protocol that executes automatically when the terms and conditions of the contract have been met.
This has the potential to disrupt legacy industries like real estate and banking, where smart contracts can make the middleman obsolete. These features, as well as other technologies like NFT, turn the Ethereum network into something called programmable money, which offers various possible utilities in the future, helping those who invest in the cryptocurrency have more sustainable and longer-term value.
Conclusion
Cryptocurrency is the hot new thing in the finance industry. However, before you invest your hard-earned money into this digital asset class, you should be aware of all of its headwinds, such as cyberattacks aimed at crypto exchanges , increasing regulations from the government, and most cryptocurrency projects failing before reaching mainstream adoption.
Yet, the digital currency still has the potential to bring in great returns for investors. With more institutional money pouring into the industry, the crypto market will become less volatile and more established. And finally, only invest, at most, 5% of your portfolio in well-known tokens like Bitcoin and Ethereum to ensure the long-term value gain of your investment.
