Will Crypto Recover?

Cryptocurrencies suffered tremendously in 2022. Scandals and bankruptcies rattled several large and popular names in the space, against a backdrop of raging inflation and painful anti-inflation policies. From market-darling growth stocks to overpriced real estate properties, anything risky took a massive price cut.

Of course, cryptocurrencies led that race to the bottom, and many investors lost their enthusiasm for the crypto sector after price cuts like these:

Data source: YCharts.

Was that the beginning of the end for crypto investments? Did the crypto bubble pop once and for all last year? Or should you expect at least some of these plunging coins to make another comeback?

Here's what I think about these burning questions. Let's see if you agree or not.

Historical perspective

Let's rewind to 2013. Bitcoin was the only name in the game back then, but that was more than enough fuel for some head-turning market action. The token was worth less than $13 per coin when it performed its first "halving" in November 2012. That's a preordained 50% cut in the rewards earned for mining a new Bitcoin block, scheduled to occur roughly every four years. The inflation-killing event inspired more people to try their hand at Bitcoin mining and the token soon soared.

Bitcoin prices rose to $130 by August 2012 and then peaked at $1,151 in December. That's when a leading cryptocurrency exchange was hacked, popping that bubble with authority. Bitcoin retreated to roughly $180 per coin amid loud proclamations that the whole cryptocurrency concept was just a mirage with no real value. We Fools poked fun at the fledgling crypto market with the fictional FoolCoin launch on April 1, 2014. Har de har har.

Another surge, peak, and crash followed in 2017, about one year after the next halving. This time, Bitcoin's moves led the pricing action in thousands of newer cryptocurrencies, including all the names listed in the table above. The trading volumes were also much higher and the price moves saw more coverage in traditional news outlets. Bitcoin prices nearly reached $20,000 per coin this time. Yet, another crypto winter followed and plenty of investors swore off cryptocurrencies forever. The old joke just wasn't funny anymore, right?

The next halving during the COVID-19 lockdowns in May 2020 didn't seem to do much at first, as Bitcoin prices held firm for several months at roughly $10,000. Still, another bull run followed in 2021 and Bitcoin prices soared above $60,000 a couple of times. Some of the same people who had given up on crypto in 2018 took this market seriously again. Non-fungible tokens were red-hot for a while. Some store chains started accepting payments in Bitcoin, Ethereum, or even Dogecoin (DOGE -2.60%).

And then, you know, the inflation-inspired retreat from risky investments followed. The eternal death of Bitcoin, Ethereum, Dogecoin, and Cardano was announced from the rooftops. This is different somehow. This really is the end. There's no coming back from the devastating price cuts you saw in that handy little data table.

Right?

Don't call it a comeback (crypto has been here for years)

Well, the rumors of crypto's death have been exaggerated many times before and I expect another full recovery. You see, these nifty digital currencies have game-changing implications for every corner of the financial world. The market is off to a good start in 2023, too.

The government seems to have tamed the inflation beast at long last. The economy may go through a recession this year but should come out stronger on the other side. Investors are interested in riskier growth-oriented ideas again, including cryptocurrencies. The four digital currencies listed above are up by at least 43% year to date, led by Bitcoin's 73% upward charge.

And there are several additional growth catalysts in the cards right now:

• The next Bitcoin halving is about one year away. The exact date depends on how quickly people and companies are earning their Bitcoin-mining rewards, but the last block at the current rewards rate should fall near the end of April 2024. You've seen what usually happens a few months later. History doesn't repeat itself but it does tend to rhyme. This cyclical pattern alone seems almost certain to spark a fresh bull run next year.
• Regulators and crypto projects are hammering out a future framework for crypto regulation. The Securities and Exchange Commission (SEC) lawsuit against XRP's managing body, Ripple Labs, is awaiting a judgment after more than three years of claims, filings, and high-profile media sparring. When that gavel bangs, it should bring some much-needed clarity to how the SEC and other government agencies should treat the crypto market as a whole. Even a draconian ruling in the SEC's favor would be better than the rudderless boat crypto investors have been stuck with so far.
• The inflation crisis gave a lot of people the idea that traditional financial systems may not be perfect after all. Cryptocurrencies could have the power to right many of the old-school banking market's wrongs, for example. Just a couple of usable and widely adopted decentralized finance (DeFi) apps would light a fire under whichever blockchain network powered the new app. Even a smaller hit could do the trick for a modestly sized crypto like Cardano, while Ethereum's needle is harder to move.

Bitcoin's predictable halving events may set the rhythm of the crypto market, but in the long run I'm much more interested in robust regulations and mass-market adoption of DeFi apps. That's where the crypto market's real value springs from. Without developers and app users, cryptocurrencies don't mean a thing.

So there is no doubt in my mind that cryptocurrencies will soar again. The timing and magnitude of the next rise is up for discussion, though. Again, look for successful DeFi apps and invest in the cryptocurrencies that make them tick. Ideally, you already own some before the rocket launch starts without much advance notice.