The past year has devastated many crypto investors. The crypto market peaked near $3 trillion last November, then abruptly reversed course and entered a free fall as the macroeconomic climate deteriorated. By mid-June, the market had declined 73% to $818 billion, meaning more than $2 trillion had evaporated.
However, investors just got some much needed good news. The crypto market regained its $1 trillion valuation on Monday, as Bitcoin (BTC 1.90%) and Ethereum (ETH 1.46%) have soared 17% and 44%, respectively, over the past week. Does that mean a more substantial rebound is on the horizon?
Here's what you should know.
The crypto market crash
Tough macroeconomic conditions were the spark that started the crypto market crash, but risky investment strategies turned that spark into an inferno. Specifically, many retail traders bought crypto on margin, meaning they funded their investments with debt. But when crypto prices started to fall, those investors saw their positions forcibly liquidated, adding to the downward pressure on the market.
Unfortunately, a similar domino effect also hit institutional investors. In late June, falling prices forced crypto hedge fund Three Arrows Capital (3AC) into liquidation. And because 3AC was indebted to several other companies, its collapse has forced crypto lender Celsius and crypto brokerage Voyager Digital into filing for bankruptcy as well, while leaving many others in a dire financial situation.
Perhaps worst of all, the implosion of the Terra blockchain in May left a once-promising decentralized finance (DeFi) ecosystem worthless, destroying $60 billion in the process. That event not only shocked investors, but it also cast doubt on the sustainability of other DeFi ecosystems.
However, the silver lining on those liquidation events is that leverage is being worked out of the crypto market. In fact, a report from J.P. Morgan recently said the deleveraging process may be nearing an end. Of course, no one knows when the crypto crash will end, but that bit of good news should give investors confidence.
The case for Bitcoin
Bitcoin was the first widely adopted cryptocurrency, and it remains the most popular as measured by almost any metric. About 75% of individual crypto investors own Bitcoin, according to eMarketer, and Bitcoin accounts for 42% of the value of the entire crypto market. Better yet, a survey from Fidelity suggests that Bitcoin is the most widely held digital asset among institutional investors, a group with over $100 trillion in assets under management.
That popularity stems from scarcity. The Bitcoin supply is limited to 21 million coins, a quality enforced by its source code, and that forms the foundation of the investment thesis. Given its finite quantity, the price of Bitcoin should rise as long as demand continues to grow, and there are several reasons to believe that will happen.
Bitcoin has become much more accessible in recent years. Retail investors can buy Bitcoin through a growing number of fintech platforms, including those operated by Block, PayPal, Robinhood, and SoFi. That accessibility makes adoption easy. Additionally, 71% of institutional investors expressed interest in buying digital assets last year, up from 59% in 2020, according to Fidelity. That bodes well for Bitcoin.
Ark Invest is particularly bullish. Research from the firm suggests Bitcoin could achieve a market cap of $28.5 trillion by 2030 as it becomes a bigger part of corporate and nation-state treasury strategies. Though that's only one opinion, it implies 65-fold upside from its current price, and with gains of that magnitude on the table, I think this cryptocurrency is worth buying.
The case for Ethereum
Ethereum was the first widely adopted smart contracts platform, and it remains the most popular despite an onslaught of competition from rivals like Solana. Whereas the Bitcoin blockchain serves as a system of record for transaction data, the Ethereum blockchain also allows developers to build decentralized software and services.
In that context, DeFi platforms are particularly noteworthy. They allow consumers to invest, lend, and earn interest on money without involving banks or other institutions, and by doing away with those middlemen, DeFi makes financial services more accessible and more efficient. On that note, Ethereum supports the largest DeFi ecosystem by a wide margin, accounting for 58% of all DeFi investments across any blockchain.
More broadly, Ethereum is also the most popular ecosystem of decentralized applications (dApps), accounting for 73% of all dApps running on any blockchain. That includes OpenSea and the Axie Marketplace, the two most popular non-fungible token marketplaces in the world by both transaction volume and total traders.
Going forward, Ethereum is well positioned to maintain its leadership, as consumer demand has translated into popularity with developers. In 2021, there were more than twice as many developers on Ethereum as compared with the next closest blockchain. That should keep its robust ecosystem of software and services growing, incentivizing more consumers to adopt Ethereum-powered products. Ultimately, that should translate into demand for the underlying ETH coin, driving its price higher.
