There has been a bloodbath in cryptocurrencies in 2022. To be sure, volatility and cryptos go hand in hand. However, the steep fall in crypto assets in 2022 has left many people wondering if crypto is dead. Will crypto recover and go back up?
The bloodbath isn't limited to cryptos alone and there has been a broad-based sell-off in risk assets. Tech stocks, especially the loss-making growth companies, have been under pressure. The Nasdaq is down almost 16 percent from its peaks and is deep into the correction territory.
Why is crypto going down?
Over the last few years, the rally in risk assets like cryptos was driven by the abundant availability of cheap money. Now, with U.S. inflation running at a multi-decade high, the Fed has started the process of unwinding the accommodative monetary policy. It's set to end the monthly bond-buying soon and a March rate hike looks like a real possibility.
Crypto bulls have long argued that the massive money printing by the central banks was a reason they're losing faith in the so-called fiat currencies. However, the same money printing provided the cheap money to drive cryptos higher.
Now, with the Fed moving towards a more normalized monetary policy, cryptos are feeling the heat. A normalized monetary policy punctures the bullish thesis for cryptos. Also, rising bond yields mean that the cost of funds is rising for crypto traders.
Is crypto dead?
Is crypto really dead? After all, crashes are common in the crypto market. We saw a massive crypto crash in the first quarter of 2020 and then again in 2021. Every time cryptos crash, people get worried that they are dead. The market has bounced back after every crash and hit a new high.
The current crash in cryptos is coming amid a steep fall in all speculative assets. Investors are finding solace in value stocks while loss-making and speculative companies are out of favor. Meme stocks have also crashed as retail investors seem to be getting disenchanted with them.
Cryptos can't be an alternative to currencies.
Coming back to cryptos, bears see them as a Ponzi or a pyramid scheme. However, bulls see them as the future of finance. It's tough to convince either side to arrive at a middle ground. The crash in cryptos that we have seen is common. Crashes might not kill cryptos even though they erode some peoples' faith in them. After all, a currency that can fall 50 percent in a matter of days isn't exactly a currency.
What could kill crypto is the regulatory environment. After China, Russia is also moving ahead with banning cryptos. India is considering a law to regulate them. Globally, regulators are looking at ways to regulate digital assets. While higher regulations will be a short-term negative, they can spur the industry’s long-term growth.
Will crypto recover?
The market sentiments towards speculative assets are negative. While the crypto market has somewhat stabilized after the crash, a sustainable recovery towards all-time highs looks unlikely in the short term.
While bears would cite the recent crash to (once again) write obituaries for cryptos, the market isn't dead (yet). However, it might go into hibernation for some time amid the normalization of monetary policy in the U.S.