Cryptocurrencies suffered dramatic losses Monday, as global markets continued to respond to unexpectedly high inflation data released in the U.S. Friday. It is just the latest blow to financial instruments intended, in part, to hedge against inflation. And for many investors, the question of should I buy Bitcoin, and when, has suddenly taken on fresh urgency.
XBitcoin traded around $22,308 Tuesday morning, recovering slightly from its 13% drop yesterday that took it below $21,000. The cryptocurrency is down more than 67% from its November all-time-high near $68,990. About 53% of that occurred in the first six months of the year. Ethereum, the second-largest cryptocurrency, is in an even greater tailspin. After plummeting more than 13% on Monday, its ETH token is trading around $1,214 early Tuesday. It is down 75% from historic highs set in November, with the overall price declining 68% so far this year.
"With the loss of liquidity, we will likely continue to see a sell-off on what some investors consider their 'risky' assets. So crypto, high multiple stocks, even cannabis stocks," said Noah Hamman, CEO of Maryland-based AdvisorShares. His investment firm launched its Managed Bitcoin Strategy ETF (CRYP) on April 27 and immediately underwent a baptism by fire.
Coinbase CEO Sees 'Crypto Winter'
Anticipating a recession, Crypto exchange platform Coinbase Global (COIN) announced it's reducing its headcount by 18% and laying off 1,100 employees on June 14. The news comes after Coinbase implemented a hiring freeze and started rescinding offers at the beginning of the month. The cuts will leave its workforce at 5,000 employees as of June 30.
"A recession could lead to another crypto winter, and could last for an extended period," Co-Founder and CEO Brian Armstrong wrote in a blog post. "In past crypto winters, trading revenue (our largest revenue source) has declined significantly."
Coinbase has survived four crypto winters - when prices contract and remain low for extended periods - by managing costs, he writes. But after quadrupling the size of its workforce over the past 18 months, employee costs have become too high to effectively manage.
Armstrong admits the company was overly-ambitious with its growth since the start of 2021. Currently, Coinbase expects to incur $40 million to $45 million in restructuring expenses related to severance and termination benefits, according to its 8K filing. COIN stock dropped 5% when the market opened and is trading around $49.30 per share.
Should I Buy Bitcoin While ARKK Is Sinking?
Like most public investment vehicles, Bitcoin prices move largely according to investor confidence and activity. That confidence, in the case of Bitcoin and other cryptocurrencies, is based on future expectations, according to Matthew Sigel, head of digital asset research at New York-based VanEck. Digital assets have been most associated with the tech market, which has seen broad losses amid the market's recent volatility. Cathie Wood's flagship ARK Innovation ETF (ARKK), focused on disruptive tech and blockchain stocks like Zoom (ZM), Tesla (TSLA), Block Inc (SQ) and Coinbase Global Inc. (COIN), is indicative of the trend. ARKK's share price has dropped 61% to about $38.23 so far this year, and is 77% below its Feb. 2021 high.
But a large portion of Bitcoin's recent price decline is also linked to its rising cost of production, as electricity and financing have become more expensive, Sigel says.
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Large, publicly-traded "miners" — the independent operators that race to earn payment by being first to scan the blockchain ledger and confirm each transaction — are able to produce Bitcoin at around $10,000 per coin. That has helped keep them in the black during the downturn. But while the Bitcoin price hangs below $30,000, "a not immaterial portion of Bitcoin miners are not profitable," Sigel noted, based on estimates he's worked with.
Among Bitcoin miners, Marathon Digital Holdings (MARA), Riot Blockchain (RIOT), Hut 8 Mining (HUT), HIVE Blockchain Technologies (HIVE), and Bitfarms (BITF) are some of the largest.
Small Cap Vs. Large Cap Crypto
While volatile, Bitcoin is also cyclical. It's programmed to cut the rewards for mining tokens by 50% every four years. That process, known as halving, makes Bitcoin uniquely exposed to bad fundamental news, Sigel says.
"It gets twice as hard to mine a coin and takes us twice as much processing power," he said. "Those periods have tended to correspond with the most parabolic Bitcoin returns, and we're now exactly halfway between the last halving."
These factors will likely cause many of the early miners — many of which are smaller mining operations, individual investors and hobbyists — to pause production or sell their virtual machines to firms with more scale, he said.
Meanwhile, investors with less buying power have been exiting Ethereum in favor of safer opportunities. Unlike Bitcoin, Ethereum has an open source blockchain that allows developers to make their own decentralized apps and projects, like altcoins or NFTs. It uses smart contracts to automatically process transactions between two parties. But the benefit of speed comes at the cost of high gas fees — transaction processing fees that fluctuate based on demand — as well as security vulnerabilities.
"How people are using Bitcoin is not exactly how they're using Ethereum … think about large cap vs. small cap," said Hamman.
The Hack Factor
For investors wondering should I buy Bitcoin or some other cryptocurrency, some of the most notable crypto projects are built on the Ethereum blockchain. CryptoPunks, The Board Ape Yacht Club and The Sandbox have made headlines for the eye-popping sales prices of their NFTs and digital real estate. Many of these projects and altcoins were posting incredible returns with affordable price points. But massive hacks, rug-pulls and phishing scams have made many investors skeptical.
Pay-to-earn video game maker Axie Infinity had $615 million stolen from its Ronin Network on March 23. Hackers gained access by an exploit in the Ronin Bridge, which allows users to transfer their tokens between the Ronin Network and Ethereum. Bored Ape Yacht Club, which creates the famous monkey NFTs, has had more than $13 million of digital assets stolen through phishing scams after its Discord and Instagram accounts were hacked.
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Ethereum is planning to launch a major network upgrade later this summer to address such issues. Ethereum 2.0, or ETH2, will use a proof-of-stake system, which aims to improve security, scalability, transaction speed and energy efficiency.
"Over the long run, we think it'll be cheaper for entrepreneurs to build native web applications on Ethereum," Sigel said. "But over the short run, investors are trading these growth assets in-line and not overly-differentiating. So Ethereum has been hit harder."
Institutions Are Still Bullish
Even in the midst of this downturn, institutions have been voicing their support. About $506 million has flowed into Bitcoin for the year to June 3, maintaining its status as the top token. Digital assets overall rebounded $100 million between May 28 and June 3, bringing the sector's total to $39.8 billion, according to a weekly report from CoinShares.
There's a more pessimistic outlook on Ethereum, which has suffered nine straight weeks of outflows, including $32 million in the week ended June 3.
"Investors are placing a premium on certainty and stability," Sigel said. "And Bitcoin is the most immutable crypto asset, similar to how gold has outperformed other kinds of traditional assets."
Another indicator of positive sentiment is the number of crypto-focused investment firms and funds that have recently launched or completed massive funding rounds.
Silicon Valley VC firm Andreessen Horowitz (a16z) announced a new $4.5 billion crypto fund on May 25, bringing its total amount raised for blockchain investments to $7.6 billion.
On June 1, Binance Labs closed a $500 million investment round, even while facing probes from the SEC and IRS over potential unlicensed security sales during its 2017 Initial Coin Offering and allegations of processing illicit transactions.
Currently, more than one-third of all traditional hedge funds are investing in digital assets, according to this year's Global Crypto Hedge Fund Report from PricewaterhouseCoopers.
Should I Buy Bitcoin, Or Stablecoins, Or ...?
Hamman and Sigel contend that you can't judge cryptocurrencies like typical stocks, because they don't have earnings. Instead, their fundamental metrics are the numbers of wallets, transactions and users, which are pointing in the right direction, according to Hamman.
"What we're seeing in the marketplace is an increasing adoption and use of, not only Bitcoin, but the blockchain technology behind it," Hamman said. "You've got more and more institutions accessing Bitcoin, holding Bitcoin, creating infrastructure and payment processing."
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A recent Deloitte survey indicated that 75% of merchants plan to accept cryptocurrencies or stablecoins (which link their value to assets such as the dollar or gold prices) within the next two years.
"People are investing a lot of time and money in it," Hamman said. "It doesn't mean it all works out. But right now, all those signs point to a really good opportunity, both for Bitcoin and the blockchain."
Use Outside The U.S.
Sigel believes the greatest, short-term growth potential for Bitcoin lies overseas. Last year, El Salvador accepted Bitcoin as legal tender and the Central African Republic followed suit in May. He says many countries see Bitcoin as a way to regain monetary sovereignty, because they only need solar energy and a bit of private capital to get set up and start mining.
"Control over their own money supply is very powerful and alluring for the small percentage of the world that is in default and negotiating with the IMF (International Monetary Fund), or has some other legacy, economic subjugation," Sigel said. He predicts the number of people living in countries where Bitcoin is legal tender will increase tenfold, to 100 million, over the next 12 to 18 months.
So, Where To Invest?
It's unclear when the crypto market will rebound, and it could get worse before it gets better. Sigel and Hamman agree actively-managed ETFs and multi-asset investment funds are the best options to mitigate short-term risk while capitalizing on long-term blockchain opportunities.
They recommend allocating 1% to 5% of portfolios to Bitcoin or cryptocurrencies, depending on personal financial situations and risk tolerance. But when it rebounds, they contend, investors may be wishing they invested more.
"Anything that's long-duration tech will be sold first and revisited when the narrative changes," Sigel said. "So you tell me when that narrative change happens, and I'll tell you, you probably don't own enough Bitcoin when it does."
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