Published on January 13, 2022, 10:12
The recent plunge in the cryptocurrency market creates an opportunity for long-term investors.
In recent weeks, high inflation and rising bond yields have dampened enthusiasm for more speculative assets like cryptocurrencies. And the Federal Reserve’s plan to raise interest rates three times in 2022 has added fuel to the fire, triggering the most 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 crashed before and it is almost certain to crash again. That said, every past pullback has been a buying opportunity, so there is good reason to believe that these headwinds are temporary in nature.
That’s why now seems like a good time to invest, and bitcoin (CRYPTO:BTC) is ripe for the picking. It’s currently trading nearly 40% below its all-time high, but optimism among institutional investors — a group increasingly supportive of bitcoin — could translate into tenfold (or more) gains in the coming months. years. Here’s what you need to know.
The principle of supply and demand
With its launch in 2009, bitcoin became the first modern cryptocurrency. He wowed the world with blockchain technology, an archiving system run by a decentralized network of miners rather than a centralized institution, like a bank. To this end, bitcoin acts like electronic money, allowing people to make digital transactions without going through a bank or using a credit card.
This quality has certainly helped make bitcoin popular, and many believe that it could one day serve as a global currency. That said, bitcoin is far too volatile to replace a fiat currency like the US dollar, and the current market environment perfectly illustrates why that wouldn’t work. Who wants money that could lose 40% of its value in a few weeks?
However, the importance of bitcoin’s popularity should not be overlooked. Although it is the oldest of the cryptocurrencies, it is still the most valuable, with a market capitalization of nearly $800 billion. This implies high demand, which is particularly remarkable given its limited supply. Specifically, the bitcoin source code imposes a cap of 21 million coins, which means it is a limited asset. And basic economics tells us that when demand exceeds supply, the price of an asset increases.
Despite the recent market meltdown, I don’t think the current headwinds are going to dampen long-term demand for bitcoin. In fact, there is a catalyst at work that could significantly boost demand in the years to come.
A recent study by Fidelity indicates that 52% of institutional investors own digital assets, and unsurprisingly, bitcoin is the most popular digital asset among these big money managers. More importantly, the study suggests that 71% of institutional investors plan to diversify into digital assets. In other words, they are becoming more crypto-friendly.
Another report, this one from Nickel Digital Asset Management, says that 62% of institutional investors with no current exposure will buy cryptocurrencies in the next year, and that 82% of institutional investors plan to increase their exposure to cryptocurrencies. digital assets by 2023. Either way, this growing demand for digital assets should be a headwind for bitcoin, pushing its price higher over time.
As a conclusion, Cathie Wood, managing director of Ark Invest, believes that institutions will end up putting 5% of their money in cryptocurrencies – a considerable figure, since institutional investors today manage more than 100 trillion dollars of assets. To that end, Ms. Wood believes the price of bitcoin will hit $500,000 by 2026, implying a gain of more than 1,000% from its current price. This is why the time seems right to buy this cryptocurrency.
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