Is Bitcoin set to crash in 2022?

2021 was a year to remember for bitcoin and the cryptocurrency market in general, with bitcoin hitting an all-time high in November of US$68,000 and the crypto sector showing further signs of a maturing and legitimate investment space. What’s up for the year ahead? Many are predicting more uncertainty and dramatic ups and downs.

Bitcoin is on a major slide since its early November peak, having shed about 37 per cent of its value over that time span. The cryptocurrency still had an all-around great year, however, finishing 2021 up 44 per cent and showing investors and the market in general the strength and staying power of cryptocurrencies, with others like Ether and even Dogecoin.

And the longevity of the space, now four years out from the first major wave of interest, seemed to be confirmed this past year on the one hand with the public listing of crypto exchange Coinbase last April and on the other hand by institutional investors opening the taps to cryptocurrencies and exchanges welcoming the trading of crypto-based ETFs — Canada has led the way in the latter, with the Toronto Stock Exchange launching the world’s first bitcoin ETF last year, allowing investors to take part in the space without having to directly buy coins.

But 2022 is setting up to be a real durability test for bitcoin and the rest, particularly due to the change in fiscal policy towards tightening federal coffers and raising key interest rates, moves which could mean less money available for crypto investing. Retail and institutional investors alike benefitted from COVID-related cash injections from governments worldwide and spurring crypto investment. But with hopes pinned on the pandemic heading out the door in the near future, government stimulus may have run its course and central bankers are forecasting a number of interest rate hikes this year.

“Bitcoin [in 2021] really transformed,” said Brian Kelly of investment management firm BKCM on CNBC this past November. “So, bitcoin had been this very speculative asset … What we’ve really seen [in 2021] is macro investors coming in and saying I would rather own bitcoin than gold, and frankly, I’d rather own bitcoin than bonds.”

“It is encouraging, we’ve really seen the adoption by institutional investors — and this is the first asset class that retail investors were way ahead of institutional investors, so it’s kind of nice to see the little guy when for a change,” he said. “[But] bitcoin is the most volatile asset out there. So, people need to be aware of that.”

Interest rates are on everyone’s mind these days and sectors of the market linked to growth over value are under pressure, including technology, which has seen selling for a number of months now. 

That scenario could be the same for bitcoin in the new year.

“Cryptocurrencies are likely to remain under pressure as the Fed reduces its liquidity injections,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors, in a Bloomberg News article on Monday. “Bitcoin could end 2022 below $20,000.”

“Tighter Fed policy affects not only interest rates but the equity risk premium as the Fed withdraws funds from the capital markets. Riskier investments such as unprofitable tech, meme stocks and cryptocurrency are disproportionately affected relative to the rest of the market since those investments are approximately twice as volatile as the overall market so have double the risk premium as the average stock,” said Hatfield.

Further, the impact of high inflation could be very telling for bitcoin’s potential for joining ranks with gold as a store of value, as gold is often portrayed as a hedge against inflation.

Duke law professor Lee Reiners recently said the fact that bitcoin doesn’t seem to be tied to inflation is one more sign that cryptocurrencies are merely an investment bubble, one waiting to burst.

“To me, it’s pretty clear at least that the reason people buy crypto assets is because they think they can sell them for a higher price in the future. And that’s the definition of an asset bubble,” said Reiners, director of the Duke Global Financial Markets Center, speaking on CNBC on Thursday. 

“All asset bubbles are fuelled by narratives, and bitcoin’s problem and crypto’s problem is that its narrative has been punctured recently because the narrative that’s crystallized in recent years is that bitcoin is digital gold — there’s only going to be 21 million coins ever put into circulation, therefore it’s a hedge against inflation and a hedge against the broader stock market,” he said.

“But guess what? Inflation is as high as it’s been in 40 years and crypto is cratering. Reiners said. 

Aside from being a store of value, bitcoin’s other claim to fame has been its potential as an alternative to bank-controlled currencies, but the impracticalities of its use in day-to-day transactions have been a sticking point on that front. Reiners says that leaves bitcoin without a legitimate function.

“If it’s not useful as an inflation hedge as a market hedge, what is it good for, what’s its utility?” Reiners said. “I think this is a question that folks in the crypto sector haven’t really been answering.”

“13 years is a long time when it comes to technology and I haven’t seen anything useful beyond speculation that crypto is good for,” he said.