Crypto assets, which are known as a highly volatile asset class overall, have plummeted in recent weeks, with bitcoin, the largest cryptocurrency, down over 50% from its November highs. Matt Hougan, CIO of Bitwise, and David Lawant, director of research for Bitwise, addressed the recent pullback in the crypto markets in a white paper.
The main driver of weakening crypto sentiment they feel is the change in investor behavior from risk-on investing to a risk-off one, in which investors shy away from higher risk allocations in favor of more defensive and reliably performing ones, as investors and advisors begin hedging for tightening monetary policy from the Fed.
It’s a shift that has been seen impacting many sectors, including tech, with the Nasdaq Composite down more than 10% from November highs. Current market sentiment and behavior is what was seen in the fourth quarter of 2018 when fears of Fed hawkishness sent investors scrambling. At the time, the Nasdaq Composite dropped 18% in a quarter and bitcoin dropped over 44%.
“Q4 2018 is instructive because it reminds us of two things: 1) Crypto’s negative and high-beta reaction to a risk-off market shift is normal; and 2) as long as the fundamentals remain intact, this too shall pass. After all, crypto bottomed in Q4 2018 and proceeded to enter a multi-year bull market, running up more than 2,000%,” the authors wrote, though they cautioned that past performance does not guarantee future results.
Bitwise feels that the fundaments of crypto remain strong, despite weakening sentiment. Last year, there was a record amount of venture capital invested into crypto startups ($30 billion), a record number of developers working in crypto, record numbers of users of crypto applications, record institutional adoption, record activity in public markets, and a broadening of addressable markets within crypto beyond just cryptocurrencies.
A Look Ahead for Crypto in 2022
Things that Bitwise will be looking for going forward in 2022 are any changes to rate hike expectations, which often send markets and crypto spiraling, as well as flow data into funding that would indicate negative sentiment towards the crypto ecosystem. The biggest needle-mover for crypto markets, however, will be the executive order potentially coming out next month from the Biden administration regarding crypto. The order supposedly will call for evaluation of risks and opportunities and place the White House at the center of crypto regulation.
“Fundamentals often don’t matter in the short term, but they usually dominate in the long run. While there is likely continued volatility ahead, the secular and fundamental tailwinds powering crypto are likely too strong to hold down the asset class over the long term,” wrote the authors. “We believe that, as it has so many times in the past, the market will find its bottom and continue to build.”
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