These currencies will rise sooner rather than later.. 3 reasons confirm this

This article was written exclusively for Investing.com

  • 2021 was another bullish year for a coin; Ethereum performed better

  • Bad start in 2022

  • The first reason: high inflation

  • The second reason: the erosion of confidence in paper currencies

  • The third reason: the increasing acceptance of the category

Nothing fuels a bull market like an impressive performance with tales of early investors making unimaginable fortunes. In my life, I have never seen an asset as profitable to those who invested in it as Bitcoin and specifically those who invested in it from the beginning and continue until now.

The cryptocurrency soared from five cents in 2010 to nearly $70,000 per token in 2021. This huge percentage rise has had its own immense magnetism and strength.

The success of Bitcoin led to the birth of Ethereum, which also provided an incredible fortune to early adopters. As of January 9, more than 16,540 additional cryptocurrencies have appeared in the market in an attempt to capitalize on roaring demand from impulsive investors looking for the next token that will offer bitcoin-like returns.

With the start of 2022, Bitcoin and Ethereum ended the last year that increased the wealth of the investors who owned the tokens. There are three things that could push Bitcoin, Ethereum, and a host of other digital currencies higher and higher during the new year.

However, the risk is always directly proportional to the potential reward, and the path to riches is likely to bump into several obstacles on the way up in 2022 and beyond. And with our expectation of a lot of volatility in the digital asset class, you should only invest capital that you can afford to lose.

2021 was another bullish year for bitcoin; Ethereum performed better

Bitcoin is up 57.81% in 2021, while the price of Ethereum is up 391.75%. On November 10, the two leading cryptocurrencies reached all-time highs when they formed major bearish reversal patterns on the daily chart and a correction occurred.

Volatility is nothing new to cryptocurrencies. It performs such periodic movements between the ups and downs on a routine basis.

Bitcoin futures monthly chart

Source: CQG

The above chart shows that nearby Bitcoin futures traded from a low of $28,440 and reached a high of $69,355 in 2021. On December 31, the closing price of $47,175 was below the mid-year point.

Ethereum monthly chart

Ethereum monthly chart

Source: Barchart

The price of Ethereum increased in 2021 from $716,919 to $4,865,426. It closed at $3,688.877 on December 31, well above the year’s mid-point.

But on January 9, 2022, and since both coins hit their highs on November 10, the trend is still down, and the sell-off continued into early 2022 with further Bitcoin and Ethereum prices dropping below the two cryptocurrencies’ closing point at the end of 2021.

Bad start in 2022

January Bitcoin futures settled at $46,275 on December 31, and selling continued through the first week of 2022.

Bitcoin futures daily chart

Bitcoin futures daily chart

Source: CQG

The chart shows that nearby bitcoin futures were below $41,800 per token on Sunday, January 9, down more than 9.7% so far in 2022.

Ether futures daily chart

Ether futures daily chart

Source: CQG

Ethereum futures for January 2021 closed at $3,685. It reached a level of $3,198 on January 9, declining by 13.2%, and the performance was less than that of Bitcoin, and it fell much more than it after the first week of the new year.

Bitcoin was already heading lower when the Federal Reserve released the minutes of the December FOMC meeting on January 5th. With the announcement of inflation indicators, digital currencies fell to new lows following the publication of the minutes of the meeting, which indicated a more hawkish approach regarding monetary policy during the coming period.

Meanwhile, three factors suggest that Bitcoin, Ethereum and other digital currencies will reach a support level and resume their rally in 2022.

The first reason: high inflation

While the Fed speaks tough, reality speaks louder than mere words. In December, the Federal Open Market Committee forecast that the federal funds rate will rise to 0.90% in 2022 and 1.60% in 2023. Even if inflation declines, real interest will remain in negative territory in 2022, which is an inflationary interest.

If cryptocurrencies are gauges of inflation, they will likely move to the upside and see new buying in an environment where inflation remains a clear and present risk and is growing. Inflation erodes the purchasing power of fiat currencies. Cryptocurrencies are an alternative where values ​​are determined by buyers and sellers, without interference from governments.

The second reason: the erosion of confidence in paper currencies

The fiat currencies derive their values ​​from the full endorsement by governments and the credit of the governments that issue the legal tender of those fiat currencies. The liquidity tsunami and stimulus tidal wave since early 2020 have eroded confidence in governments and credit.

Confidence is critical to determining the value of currencies. While it was moving higher, it was only reflecting the value of the US currency against the yen, the pound and a few fiat reserve currencies. Currency benchmarks in the markets across all asset classes revealed that confidence has also eroded with the value of fiat currencies eroded.

The third reason: the growing acceptance of the cryptocurrency category

Day by day more and more companies are accepting cryptocurrency as payment. Cryptocurrencies reflect the evolution of the financial technology revolution, as technology has finally addressed the issues of payments and finance. With the decline in trust in governments and traditional banking institutions, digital currencies offer a viable alternative for consumers.

Square, a payments company that changed its name to Block (SQ) in late 2021, is headed by Jack Dorsey, who is the founder of the company as well as another company, Twitter (TWTR). He left Twitter last year in order to focus on cryptocurrency in 2022.

In 2021, Mr. Dorsey once said that Bitcoin and cryptocurrencies “will unite the world.”

Meanwhile, more and more wallets are investing in cryptocurrencies as they become more and more popular investment tools. The rise in cryptocurrency ratios in investment portfolios leads to new purchases of this asset class every day.

But the risks remain

The main risk is regulatory government legislation. As this asset class grows, we will hear a lot more about “systemic risk” from cryptocurrencies. However, the main concern of governments is likely to be controlling the money supply, which translates into the power of governments.

With Apple’s (NASDAQ:) market cap rising above $3 trillion for the first time in early 2022, the $1.956 trillion cryptocurrency market capitalization on January 9 is no longer an issue that will create any significant “systemic risk”.

However, the market capitalization of the crypto asset class grew by 182.18% in 2021 to a level of $2.166 trillion. A similar move in 2022 would bring the entire asset class to nearly $4 trillion, which would sound alarm bells for regulators and government officials.

Ethereum is expected to continue to overtake Bitcoin in terms of performance because it is faster and more efficient, and Ethereum 2.0 is less energy consuming in a world trying to deal with climate change. As it relies on Proof of Stake instead of Proof of Work which increases its efficiency compared to its big ‘sister’.

However, I expect both Bitcoin and Ethereum to record higher lows over the coming weeks and months before resuming the rally that has created untold wealth for a large number of enthusiasts of the burgeoning digital asset class.

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