Is the Coin Market Gonna Crash Again

When the pall closes on 2021, it'll go downwards equally another solid year for the stock market. Through December. 13, the criterion S&P 500 had more than than doubled (+24%) its average annual total return of 11% over the previous iv decades.

Just for cryptocurrencies, things haven't been skillful -- they've been outstanding. Since the year began, the aggregate value of digital currencies has increased past 176% to $ii.fourteen trillion. Investors have been driven by the excitement surrounding decentralized applications and decentralized finance (DeFi), the ascension of non-fungible tokens (NFTs), and the mammoth potential for blockchain-based gaming in the metaverse. And allow's face information technology, cryptocurrencies are also chasing life-altering gains, such every bit the more than than 45,000,000% twelvemonth-to-date increase in meme-coin Shiba Inu ( SHIB -seven.81% ).

Nonetheless, the upcoming year may not care for digital currencies as kindly. What follows are five reasons cryptocurrencies, equally a whole, could crash in 2022.

Epitome source: Getty Images.

1. History suggests reversions are commonplace

To begin with, history suggests that the crypto market place is in trouble. Even though big upswings have occurred often over the past decade, reversions post-obit these upswings are commonplace, too.

Since the March 2020 bottom, the total value of all digital currencies has jumped more than than 14-fold to $2.14 trillion. This is somewhat like to the 35-fold increment in total market value over roughly 10 months between March 2017 and January 2018. Withal, post-obit the January 2018 spike, the amass value of all cryptocurrencies would go on to decline past simply shy of 90% over the subsequent 11 months.

We've witnessed similar reversions in individual cryptos that delivered life-altering gains, as well. Pop tokens like Nano, XRP, and Litecoin produced summit short-term gains ranging from 24,000% to about 462,000%. All went on to lose 93% to 99% of their value in a 12-month to 26-month stretch.

The point is this: Trading euphoria e'er retraces in a big way in the cryptocurrency space.

Image source: Getty Images.

2. Blockchain euphoria outpaces its employ case

People have every correct to be excited about the future potential for blockchain engineering. DeFi offers the possibility of making almost instantaneous cross-border payments at depression price and can democratize the process to ensure even emerging-marketplace residents can take role. There are besides smart contract-based blockchains that tin can revolutionize supply chains.

Just if there's one constant with every single next-big-thing technology, it's that investors ever -- and I hateful ever -- overestimate how quickly a new engineering or service will be adopted. We've watched it happen with the advent of the net, business organisation-to-business organisation commerce, genomics, 3D printing, and now, blockchain technology.

While blockchain is exciting, information technology's just non widely adopted however, nor anywhere close to wide-based adoption. Businesses are unlikely to jump at the chance to support large-scale projects until in that location's evidence of its real-world effectiveness. Yet we won't go this bear witness until businesses welcome blockchain with open artillery. It's quite the conundrum/Grab-22 that could stall this monster rally.

Image source: Getty Images.

iii. An disability to decouple from the stock market

Another reason cryptocurrencies might crash in 2022 is their inability to decouple from the stock market place.

In many ways, digital currencies are viewed as independent assets and a hedge to the broader market place. For case, Bitcoin ( BTC -two.98% ) offers the perception of a limited token supply that'southward capped at 21 1000000. With the U.S. coin supply soaring, investors view Bitcoin as something of a condom-haven investment that'll help shop and grow their wealth -- improve than the e'er-diluted U.S. dollar, at least.

The problem is that cryptocurrencies haven't held up well when the stock market place undergoes crashes or corrections. During the 4th quarter of 2018, the South&P 500 approached carry market place territory (a reject of xx%). Meanwhile, the aggregate value of cryptocurrencies plunged from around $222 billion to roughly $130 billion over the same stretch (a 41% drop). The crypto market was besides pummeled during the five-week coronavirus crash in Feb and March 2020.

I offering this warning considering there are a growing number of clues to suggest the stock market will crash or undergo a double-digit percentage correction in 2022.

Image source: Getty Images.

iv. Margin debt wreaks havoc

Look no further than margin debt for a fourth reason cryptocurrencies could plunge in the upcoming year.

Margin describes the amount of money investors are borrowing with interest to buy or brusque-sell securities. In some instances, investors using margin to lever their trades tin supercharge their returns. But if the securities beingness purchased on margin don't move in the expected direction over the brusque term, the brokerages offering those loans could come calling. They'll either want investors to put up actress capital as collateral or could crave/force the sale of assets. This is known as a margin call.

Because the crypto-substitution space is so fragmented, it'due south not exactly articulate how much margin debt is outstanding. Just make no mistake about it -- offers to deploy leverage aren't difficult to find.

Before this year, it was possible for certain investors to utilize 100 times leverage on their cash position when trading Bitcoin. At such immense leverage, even a ane% or 2% motility in Bitcoin (which happens frequently in the blink of an heart) could lead to a margin call and forced liquidation.

If the music suddenly stops in the cryptocurrency market, margin calls could exist right around the corner.

Crypto investors have flocked to Shiba Inu-themed coins in 2021. Image source: Getty Images.

five. Meme coins lose their magic

Last but not least, don't exist surprised if the popular "fear of missing out" (FOMO) moves suck the life out of the cryptocurrency market in 2022.

This year, pretty much any coin named later on the Japanese Shiba Inu domestic dog brood has been on fire. The same Shiba Inu has gained more than than 45,000,000%, while Dogecoin and Floki Inu are higher past three,119% and 2,763%, respectively, through Dec. 13.

Merely these meme coins all share one key trait: They lack anything resembling a competitive advantage.

Shiba Inu may be ane of the most-searched digital currencies this year, but social-media hype doesn't translate to real-world appeal or long-term potential. The fact of the thing is that Shiba Inu is an ERC-20 token built on the Ethereum blockchain that's subject to the aforementioned high fees and processing lag that oft impacts Ethereum'due south network. Nothing about Shiba Inu (or Dogecoin and Floki Inu, for that matter) suggests it'll exist the payment money of pick by businesses in an increasingly crowded field of blockchain projects.

If the FOMO that's driven investors into meme coins subsides, nosotros could watch crypto euphoria speedily evaporate, every bit well.

This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. Nosotros're motley! Questioning an investing thesis – even one of our own – helps united states of america all think critically about investing and brand decisions that aid us become smarter, happier, and richer.

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Source: https://www.fool.com/investing/2021/12/16/5-reasons-cryptocurrencies-can-crash-in-2022/