The mood in the capital market is anything but relaxed at the moment. Almost no asset class is spared the current correction in the markets. Digital assets such as Bitcoin have recently come under particularly strong pressure. Nevertheless, there is no need to panic, rather investors should keep an eye on the long-term development opportunities in the blockchain industry. Because there are still opportunities for returns and an increasing adoption rate for cryptocurrencies.
Current market assessment of Michael B. Bußhaus, Founder and CEO of justTRADE
The stock market slogan “Sell in May and go away” has once again become a reality: Rarely has there been such a sharp sell-off in the financial markets as in the past month. Investors hoping for a green spring on the stock market were bitterly disappointed. The blockchain sector in particular was hit hard. Bitcoin, which had been in a cooling phase since its record high of over $ 69,000 in November last year, recently lost momentum again. From the beginning of the year to mid-May, the cryptotope dog lost over 40 percent in value. The rest of the crypto market also joined the general sale: Big players like Ethereum (ETH), Cardano (ADA), Solana (SOL) had to accept discounts of over 50 percent in some cases.
Stress tests also for traditional financial markets
The Bitcoin correction is by no means an isolated case as it does not look much better in the classic financial markets. U.S. indices like the S&P 500 and Dow Jones have been down in the double-digit percentage range since the beginning of the year, with technology stocks suffering the biggest losses: in mid-May, heavyweights like Tesla were about 38 percent lower. their price at the beginning of the year lost well-known stocks like Shopify (minus 75 percent) or Nvidia (minus 41 percent) even more feathers. Prices also came under pressure due to the rapidly rising inflation and the associated interest rate hikes by the US Federal Reserve. The Fed has already raised interest rates twice since the beginning of the year to a current range of 0.5 to 1.0 percent. The war in Ukraine, rising energy prices, supply chain problems and the strict lockdown policy in China are making things worse. Anyone looking for reasons for the uncertainty in the financial markets will find plenty of arguments.
There is no doubt that the divestment – especially in the crypto sector – creates increased uncertainty among many investors. But right now, the long-term development of the market needs to be kept in mind. Four points about the development of the crypto market that investors should keep in mind.
Bitcoin can continue to offer return opportunities
1. Although it hurts to look at your own portfolio at first, massive price declines in the crypto market are not uncommon. Historically, Bitcoin has brought investors nice profits, but also deep red numbers. Two recent examples: In March 2020, the cryptocurrency lost about 50 percent of its value at the beginning of the corona pandemic, and in May 2021, it was even 53 percent. But that did not stop Bitcoin from heading for a new record high shortly after. So holding – or “hodling”, as it is called in crypto-jargon – can pay off. Especially since digital assets in the long run still offer better risk-adjusted return opportunities than many traditional asset classes despite their volatility. With a Sharpe ratio of around 1.6, Bitcoin continued to offer a balanced risk-reward trade-off in mid-May. For classification: A Sharpe Ratio> 1 signals an above average return chance for the asset in relation to the risk taken. Other assets such as US equities (1.47), gold (1.3) and bonds (0.55) cannot hold a candle to Bitcoin. Nevertheless, cryptocurrencies are significantly more risky than the aforementioned assets, and investors should only invest amounts that are not necessary for daily life. A total loss is possible.
Blockchain is still in its infancy
2. Behind Bitcoin & Co is blockchain, an innovative technology that is still at the beginning of its potential. Similar to the beginnings of the Internet in the 1980s, blockchain also offers great potential for transformation for several economic sectors. In recent months, therefore, more and more major players in the financial market have invested in this area. One of the goals: A stronger interconnection of classic and decentralized financial structures. The DeFi area shows how financial products can be implemented in a decentralized, cost-effective and transparent way. For example, loans, insurance, bonds and interest payments can be managed via decentralized apps (DApps) – making redundant key providers such as banks and payment providers redundant. Innovations are also emerging elsewhere – most recently, for example, non-fungible tokens (NFT). With NFTs, the crypto sector is trying to bring more and more economic applications to blockchain. For example, the tokenization of all tangible assets is steadily advancing. Items that are difficult to liquidate, such as art, real estate, but also intangible items, such as license requirements from musicians, can be represented as NFT, stored and traded on the blockchain in a technically counterfeit-proof manner.
Correction could give Kryptos a rejuvenation
Digital assets are no exception to other asset classes: Serious market corrections – as the crypto sector has often experienced – are sometimes necessary to reassess the market. If the crash occurs, the industry’s fundamentals will come under increased control. Liquidity then flows primarily into crypto projects with stable and promising business models. If you look at the movement of the 100 best cryptocurrencies over the last few years, you will see that after market corrections, there is always a rotation of market positions. Large cap protocols take a back seat and make room for smaller more innovative projects. An example: While projects like Dash, NEM or the Bitcoin fork Bitcoin Gold were still among the ten most popular cryptocurrencies in 2017, a year later none of the tokens could be found in the rankings. Instead, they had made room for other blockchain projects. This rejuvenation can strengthen the market in the long run.
Millennials: Tomorrow’s heirs could boost the crypto market
4. Hardly any other generation is as preoccupied with digital assets as the young generation of millennials. According to the analysis platform “Coin Dance”, more than 50 percent of those involved in bitcoin belong to the so-called Generation Y, ie the age group from the mid-20s to the early 40s. No wonder: after all, many millennials are so-called “digital natives” – that is, people who grew up with the Internet and therefore have a high affinity for new technologies. For long-term investors, the crypto-affinity of the younger generation opens up opportunities. Millennials are waiting for an economically rosy future: According to the latest estimates, the young generation of Europe will inherit 2.6 trillion euros in the 2020s. If Bitcoin & Co remains so popular, digital assets in particular should benefit from this transfer, and demographic changes could provide a long-term tailwind for cryptocurrencies.
However, this does not mean that investors should buy cryptocurrencies without hesitation. As with all investments, investors should only have access to it if they have comprehensive information about the respective crypto value in advance and know exactly what and how much they are investing in.
About the author
Michael B. Bußhaus is the founder and CEO of justTRADE. He was the CEO of onvista bank and as head of brokerage was responsible for the entire securities business of comdirect bank AG until 01/2019.
justTRADE is a Frankfurt-based online broker offering traders trading securities and cryptocurrencies consistently for € 0 order commission (plus usual market spreads) and from a depository. More than 500,000 securities – stocks, ETFs, ETCs, wiki folios, certificates, warrants and leverage products – can now be traded on a mobile device via iOS and Android or via the desktop browser, both on the exchange via three exchanges (LS Exchange, Quotrix and Tradegate Exchange) and over the counter four trading partners (Citi, Société Générale, UBS and Vontobel). About 1,500 ETFs, ETCs and ETPs from ten providers (21Shares, Amundi, DWS, iShares, GlobalX, Lyxor, Vanguard, VanEck, UBS and WisdomTree) complete the range. With the ability to trade the 21 available cryptocurrencies from the same depository as all securities, justTRADE offers its clients an unprecedented offering in Germany. In addition, a total of around 200 securities are eligible for savings at justTRADE.