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The cryptocurrency market is a hot mess, and many investors are finding it difficult to turn a profit amid current conditions. Since January, the price of Bitcoin and other cryptocurrencies has either been restricted within ranges or has fallen, giving the typical buy-and-hold investor little choice but to sell or wait for the elusive rally.
But most long-term investors and analysts are either holding on to their investments or repositioning their portfolios by increasing crypto exposure.
According to a Blockhead survey, that is largely to take advantage of depressed prices and on expectations for digital assets to reverse their losses and regain lost ground next year.
“Best time to buy more to leverage the fall in cryptos and crypto-related investments,” the head of alternative asset research at a prominent investment firm in Europe told Blockhead.
Our bet is a significant pick-up, and the bias is more to the upside because of the sizable decline.
“Will there be more downside? Perhaps. But the important view is what they would return in over a year or so. Our bet is a significant pick-up, and the bias is more to the upside because of the sizable decline,” he added.
A Blockhead survey of 20 analysts at research and investment management firms conducted in August after the Fed’s July meeting and re-polled post-US inflation data showed the world’s largest cryptocurrency was forecast to jump by more than double its current value to US$45,000 by the end of 2023.
The response to an additional question from a smaller sample in that survey showed that nearly 60% of analysts, or 10 of 17, were repositioning their portfolio amid the crypto winter, will all of them rejigging their cryptos exposure betting to increase.
“The worse, obviously, is behind us. There may be more downside in the near-term, but it also gives us more opportunities to buy,” said a chief investment officer of a large US asset management firm in Boston.
“We are looking at cryptos as any other asset but expect the upside to match the dramatic fall this year and outpace the returns of other assets. The markets will turn next year when retail investors will return to cryptos in droves, similar to how they exited this year,” he added.
What Goes Up Has to Come Down – But the Opposite is Equally True
While top cryptos recovered to post their best gains in July after several months of free fall, last week, cryptocurrency prices dropped significantly, with short selling pushing bitcoin to a three-week low.
Traders disagreed on the cause of the drop.
Indeed, Bitcoin dropped as much as 7.7% to US$21,404 in a short period on August 19 and has languished around those levels since. And Ether fell to US$1,721, down 8.32%. The pair currently sit at US$20,200 and US$1,534 respectively.
Since the start of the year, cryptocurrency prices have plummeted precipitously as investors have fled riskier investments due to Federal Reserve rate increases and extremely high global inflation, over multi-decade highs in several countries.
While that sentiment on rates and inflation has not completely turned, expectations for the cryptos’ value loss certainly have, at least for next year.
“These abrupt changes are typical of the extremely volatile bitcoin sector. On June 15, Bitcoin fell more than 15% because investors were alarmed by the failure of the so-called stablecoin TerraUSD and the blocking of customer withdrawals by a prominent cryptocurrency lender,” said a fund manager at a large investment firm in Hong Kong.
“But this too shall pass. And more importantly, when the reversal does come, the sharp moves up will be equally reflected. So that is the opportunity for significant returns,” he added.
Although there was no single cause for the massive selling, cryptos saw their worst day since the crisis in June due to the abrupt decline last week.
Bitcoin as a Portfolio Hedge: Debate Rages On
While recent evidence suggests that Bitcoin is not a portfolio hedge anymore, analysts in the Blockhead survey were divided.
Investors wagered that economic weakness would prevent the Fed from fast-tightening monetary policy, or if the US experiences a prolonged recession and the central bank, there is forced to decrease interest rates.
As a result, the recent crypto market surge paralleled gains in riskier assets like shares.
Instead, rather than being viewed as a portfolio hedge like they were in the past, broad global economic themes such as inflation and unintentional monetary policy responses have dominated the market collapse and the trading pattern in cryptocurrencies this year.
But, at the same time, top crypto exchanges have reported an increase in customers due to rising inflation and a historically high dollar that has hurt almost every other asset.
While since late November, Bitcoin and the Nasdaq had surged in tandem, as opposed to in past years, when they moved in different ways, investors have returned in troves to Bitcoin this year despite losing in value by nearly 50% this year as a result of a larger cryptocurrency selloff.
Binance, for one, said despite a recent market fall and El Salvador’s problematic trial with virtual money, savers in the South American country are increasingly lured to cryptocurrencies to balance years of severe inflation, which is now running close to 60%.
“Now that we are seeing inflation ramping up worldwide, we are seeing that more and more people are seeking cryptocurrency, like bitcoin, as a way to protect themselves from inflation,” said Maximiliano Hinz, who heads Binance in Latin America, in an interview in Lima.
But hedging against inflation is completely different from safeguarding one’s portfolio.
Still, despite the significant correlation between cryptocurrencies and stocks, some analysts do not agree and called it a “temporary pattern.”
“A lot in this generation have never invested in a rate-hike regime. At least not over a sustained period, and not in the last two decades, since the sub-prime-led financial crisis,” said a chief investment officer at a top investment firm in London.
“Today, we are still coming out of the once-in-a-lifetime pandemic, faced with an unthinkable war (Russia-Ukraine), supply chains distorted further already hampered by COVID-19-led disruptions, uncertainty surrounding cryptos’ regulation. So, we cannot study the current scenario as a long-term pattern because then it will not be comparing apples to apples anymore,” he added.
Still, the age-old financial market instruments correlation methodology and data models suggest a high relative trading pattern between cryptocurrencies and risk assets, especially tech-driven equity indexes.
The most recent convergence occurred in July when Bitcoin increased and rose along with the growth in stocks.
Only time will tell if that is a blip or a long-term trend.
All in all, long-term investors seem to be betting big on cryptocurrency with an eye on a return to their previous glory next year.