December 4, 2022

Crypto isn’t dead, but its core principles are on life support. The illusion that bitcoin is an inflation fighter has been dispelled. The first serious bout of inflation since the 1970s coincided with a 60% drop in the price of bitcoin over the past year. The case has also gone that bitcoin is “digital gold”. The precious metal has outperformed bitcoin, stocks and bonds this year, falling just 6%.

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But it would be a mistake to interpret the travails for bitcoin as proof that the entire industry is a mistake. Ethereum, the second largest blockchain, has just undergone a major upgrade that could fuel a renaissance of crypto activity. Other blockchain-enabled companies are still aiming to establish new systems for financial products, payments, and digital assets.

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Just as the Internet survived the extinction of Pets.com, the crypto crash is not the epitome of blockchain technology. In fact, remove the junk and all that’s left is an industry worthy of a second glance. “In earlier crypto cycles, your engagement had declined. Here, more people are using digital assets and building on top of blockchain,” said Alkesh Shah, cryptocurrency strategist at Bank of America.

Investors still need to be careful. dogecoin,
The “mem” token that began as a joke holds a market cap of $8 billion, similar to the equity of companies such as American Airlines Group (ticker: AAL). Despite the $2 trillion loss in token market value, much foam remains. “The durability of crypto assets is questionable,” says Cornell University professor Ishwar Prasad, a leading digital-asset expert. “But there does seem to be some durability to the technology.”

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If you are looking to invest in crypto, here are four lessons to consider.

Searching for the reason bitcoin still exists

Supporters of bitcoin have spent a decade promoting its use as a currency beyond government control, as digital gold, and as an inflation hedge whose restricted supply would protect its price. Token has failed to deliver on those promises.

Beyond that, there is little consensus on what bitcoin really is: another set of software rules, a truly revolutionary technology like the Internet, or a quasi-currency that could one day be a $500,000 coin – something like Bulls argue – above $20,000 today .

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“It makes me think of the vision of blind people around an elephant,” says Morningstar senior analyst Madeline Hume. No male can figure out what an elephant really is because each can only feel a single feature such as teeth or skins. “We are slowly stumbling towards an understanding of bitcoin,” she says.

The role of bitcoin as an alternative asset also remains questionable. The crash punctuated the belief that the crypto market could avert the macro pressure that has pushed the Nasdaq Composite Index down 29% this year. Bitcoin’s correlation to the Nasdaq hit a record high in September and averaged 0.66 over the past six months, indicating that bitcoin and tech stocks often move together.

Despite the drawbacks, proponents like Shah argue that bitcoin and other cryptos are still viable long-term investments. “People are realizing that digital assets are acting as an internet operating system, like high-growth segments of the economy,” he says.

Big money flooded in. It is not a seal of approval.

Before the crash, one of the big selling points of crypto was that it attracted institutional capital from pension funds and venture capital firms. Why would these sophisticated funds save and invest in crypto companies built on weak promises of revenue and profits? At the time, the thinking was that they wouldn’t do it. This created a selling point to attract even more capital from retail investors.

But like many small investors, as soon as the market cracked, the big money got burned. Take Celsius Network, a crypto-lending firm that attracted more than $20 billion in customer deposits, partly on a pitch to pay yields of up to 18%. Celsius is now operating under bankruptcy protection, its CEO has stepped down, and thousands of investors are trying to replenish their savings.

,The price of bitcoin could double if it is a CFTC-regulated market.,


— CFTC President Rostin Behnam

Yet eight months before stopping customer withdrawals in June, the company raised $400 million in a funding round involving Caisse de dépôt et Placement du Québec, the second largest pension fund in Canada. “No one will invest this amount in Celsius if there is a serious concern that what we are doing is not legitimate and is not complying with all regulations,” former CEO Alex Mashinsky said in a video livestream. A few days after the announcement of the funds.

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Pension funds have since reduced their Celsius investments. According to the Montreal Gazette, Charles Amond, head of the 392 billion Canadian dollar ($288 billion) fund, said during an August press conference that the loss “wasn’t even a rounding error in our returns”, although he has said he is considering legal are doing. Option after writing off the fund’s $150 million investment. Celsius did not respond to a request for comment.

Venture capital firm Andreessen Horowitz—the biggest supporter of crypto start-ups in Silicon Valley—could also be suffering. The firm invested more than $7 billion in crypto start-ups, including $314 million in tokens issued by Solana Labs. The Solana token rose to $259 in November, but is now trading at $33, a drop amid concerns about the network’s security and ability to scale. Andreessen and the Solana Foundation declined to comment.

Venture funds expect most of their bets to flop, while hoping that the next meta platform will be (meta). David Nez, portfolio manager at crypto investment firm Arka, says retail investors shouldn’t take solace in venture capital riding the shotgun with him. “If it’s a big fund and a small check, the amount of bandwidth and support offered to that project is quite small,” he says.

Blockchain infrastructure separate from tokens.

Many large companies are betting that blockchain technology will survive long after purely speculative tokens disappear. The thinking is that blockchain and related digital assets provide ways to access new markets—whether its video games, financial products, or new iterations of art, music, and video repackaged as immutable tokens, or NFTs. .

Plans range from trivial to dead serious. On one hand, Starbucks (SBUX) said last month that it would roll out “digital collectible stamps” that would give its most loyal customers “access to immersive coffee experiences.” That’s unlikely to move the needle on track for a company with $33 billion in sales this year.

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SWIFT, on the other hand, the interbank messaging system that handles trillions of dollars in global transactions, is testing a system that would allow messages to guide token transfers. If this works, banks could start sending money on the blockchain in line with the method already used to transfer traditional funds.

“We are in a crypto winter, but we are certainly not in an infrastructure winter,” says Will Peck, head of digital assets at exchange-traded fund provider WisdomTree Investments (WETF). “Everyone is still talking about building blockchain-based infrastructure.” WisdomTree itself is launching a short-term Treasury fund that trades on the blockchain, the Short-Term Treasury Digital Fund, which it says could allow for faster clearing and settlement.

Investing in companies serving the crypto industry is less risky than buying tokens. One standout is Silvergate Capital (SI), a bank developing services for crypto brokerages, financing firms, and others in the industry. Silvergate managed to grow its crypto customer base through the crash. Its net income is expected to grow 72% to $277 million in 2023.

The stock trades at twice the book value, which is well above the bank industry average. But Wall Street still loves it; The average price target is $129, which means it is up 63% from the current price of $79.

Other crypto-related stocks include Signature Bank (SBNY), PayPal Holdings (PYPL), Block (SQ), and Coinbase Global (COIN). Aside from Coinbase—the large digital-asset exchange—all these companies are building crypto services alongside their core businesses.

Granted, crypto stocks have been underperforming. The Transformational Data Sharing ETF (BLOK), the largest ETF holding of crypto-related companies, is 50% off. This counts as a 70% win against rivals such as the Global X Blockchain ETF (BKCH).

Shah says investors should look to crypto as future proof of their earnings for large companies. “The incumbents who are adopting technology, piloting or getting educated can do well in the next five to 10 years,” he says.

Regulation can really help.

Like the others…