After generating incredible returns through 2020 and 2021, cryptocurrencies have come to a screeching halt in 2022 as the easy monetary conditions that helped them thrive have come to an end and interest rates have risen. Furthermore, many participants in the industry have exacerbated the downturn, shooting themselves in the foot by taking on too much leverage and being caught offside when crypto prices declined, which triggered a wave of forced selling and insolvencies that drove prices down even further.
This overleverage saw top cryptocurrencies like Terra (LUNA +2.54%) implode over the course of just a few days, wiping out billions of dollars of market value in the process. Popular brokerage Voyager Digital (VYGV.F +0.00%) and leading crypto hedge fund Three Arrows Capital filed for bankruptcy, while other popular platforms like BlockFi and Celsius are seeking bailouts from other crypto exchanges like FTX. As the dust clears and the leverage unwinds, what cryptocurrencies could bounce back in the second half of 2022 and give crypto investors something to cheer about?
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1. Bitcoin -- the bluest of blue chips
CRYPTO: BTC
Key Data Points
As with stocks, a bear market is a good opportunity to pick up blue-chips names while they are down. While it may not be the most revolutionary choice, Bitcoin (BTC +3.02%) is one of my top candidates to bounce back over the second half of 2022. If the asset class is going to recover, it will be led by Bitcoin with more than 40% of the total crypto market cap. While Bitcoin's 57% year-to-date decline and 70% fall from its all-time high of $68,721 last November seem to have put a chink in its armor as a true inflation hedge, let's consider some of the positives.
Many leveraged traders and investors were forced to sell their Bitcoin positions to cover other losses, which drove prices lower. Now that many of these participants have become insolvent, it's likely that the wave of forced selling that has been acting as an overhang for Bitcoin will subside and that it will be able to stabilize and recover.
Ultimately, the bull case for Bitcoin remains similar to what it was nearly a decade ago: It is the first truly decentralized form of money. Unlike many other cryptos, Bitcoin has no parent company or foundation governing it that would be able to make decisions that could jeopardize its existence, as we saw with Terra. There is no "CEO of Bitcoin" that could, for example, decide to issue a stablecoin and pay unsustainable interest rates to holders. There is no central foundation that gave itself a large trove of tokens so that it could control the Bitcoin network. In some ways, the problems that are hurting the industry right now further burnish the bull case for Bitcoin as a truly decentralized asset.
2. Ethereum -- getting ready for The Merge
CRYPTO: ETH
Key Data Points
Like Bitcoin, Ethereum (ETH +2.95%) is a blue-chip cryptocurrency that is down substantially, having experienced a 75% decline from its all-time high of $4,847.57 set last November. Ethereum is down 68% year-to-date, but the back half of the year is already setting up nicely for the second-largest crypto by market cap -- Ethereum is up 14% over the past week, and has already rallied 36% off of the low it hit in June.
Ethereum participants are getting ready for "The Merge", Ethereum's long-awaited transition to a faster, energy-efficient proof of stake consensus. This move should help to reduce fees and cut transaction times, addressing two of the main issues that participants currently have. Lower gas fees and quicker transaction times will help to make Ethereum more practical to use for everyday transfers and commerce. In the past, if gas fees were $16, it would be impractical to send $20 of Ethereum to another user. If gas fees come down substantially and become more predictable, Ethereum will become a much more attractive option for everyday usage.
3. Chainlink -- a truly differentiated crypto
CRYPTO: LINK
Key Data Points
Outside of the blue chips with the largest entrenched user bases and the biggest market caps, other cryptocurrencies will need to have truly differentiated models or compelling real-world use cases to bounce back and succeed over the long term. One compelling example would be Chainlink (LINK +3.05%).
Chainlink is an oracle chain, meaning that it enables smart contract platforms to pull in information from the outside world in order to ensure the accuracy of smart contracts. For example, if a smart contract is triggered based on the result of a sports score or the price of a different cryptocurrency or equity, an oracle like Chainlink is required to provide this data to the blockchain in an accurate and secure manner. Even many cryptocurrency skeptics acknowledge that blockchain technology is useful and will increase in adoption. As more businesses around the world begin incorporating blockchain technology into their operations, the need for an oracle like Chainlink that can provide information about weather conditions, data from internet-of-things-enabled devices, and more will continue to increase, and its value should grow.
Will these top cryptocurrencies bounce back in the second half of 2022?
The first half of 2022 has not been kind to crypto investors. But some rays of light are starting to shine through, and the second half of the year is starting to look better. Blue-chip cryptocurrencies like Bitcoin and Ethereum look like they offer good entry points, and differentiated projects with compelling real-world use cases like Chainlink seem likely to separate from the pack over the long term.
