In 2021, the value of the entire cryptocurrency market nearly tripled. But so far this year, things haven't been as friendly to investors, as the market has dropped 25% (as of Jan. 27) in less than a month. This makes the 9% drop for the S&P 500 in 2022 look like a walk in the park.
Cryptocurrencies, and their underlying technology, the blockchain, certainly have the potential to change the world. But the industry is still so young and so unproven, not to mention the fact that digital assets are extremely volatile. These characteristics aren't for the faint of heart.
Nonetheless, I think it's best to zoom out and focus on the bigger picture. Don't let the cryptocurrency market crash scare you away from this burgeoning asset class. Here are three reasons to keep investing in it.
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1. Cryptocurrencies have crashed before
The drawdown we're currently seeing is not without precedent. From the start of 2021 through mid-May, the cryptocurrency market's value went from $773 billion to $2.5 trillion, only to fall more than 50% in the following two months. An even-more-dramatic performance happened a few years prior. After soaring 350% from November 2017 to early January 2018, the crypto market dropped 66% in the month after.
Even the two most valuable and long-standing cryptocurrencies, Bitcoin and Ethereum, are known to experience wild price swings of their own.
The fear is that a so-called "crypto winter" is imminent. This term refers to a rapid slump, not unlike the one we're in right now, followed by an extended period of low trading volumes where the market flies under the radar. It's anyone's guess if this is actually going to happen, but what's encouraging is that the industry has always bounced back.
The trend is strikingly clear if we zoom out. Over the past five years, cryptocurrencies as a whole have returned roughly 9,500%.
2. Talent is flocking to the crypto industry
Whether we're about to be in a "crypto winter" or not doesn't matter because developers, the ones who are working behind the scenes to create useful applications on the numerous blockchain protocols out there, are growing in number. According to Electric Capital, a venture investment fund, there were more than 18,000 monthly active developers working on crypto projects as of December 2021, a 75% jump from just 11 months earlier.
The people actually working on some of the most promising blockchain projects, like Cardano and Solana, don't really care what crypto prices do in any given month or year. All they're worried about is building the next great technology.
The industry is attracting major talent from traditional finance and tech companies as well. Executives and engineers from Alphabet, Amazon, and Meta Platforms are taking jobs at crypto start-ups. And the head of global markets at Galaxy Digital Holdings, a crypto-focused investment firm, previously spent 20 years at Goldman Sachs.
This trend creates a positive outlook for cryptocurrencies.
3. The U.S. does not intend to ban cryptocurrencies
One of the biggest bear arguments for cryptocurrencies in general is that governments will ban them entirely. China provides a cautionary tale. The world's second largest economy, with 1.4 billion people, banned cryptocurrency use and mining in the country last year. Always present is the risk that the U.S. could take a similar measure, but I don't believe this will happen.
Gary Gensler, chairman of the Securities and Exchange Commission, said last October that the U.S. won't follow in China's footsteps and ban cryptocurrencies. This message echoes what the Federal Reserve chairman, Jerome Powell, said just a few days earlier about the country not having any plans to eliminate cryptocurrencies.
Obviously, regulation will be a huge topic, as with any unproven, quickly evolving, and innovative technology. But to see these two powerful figures come out and make these comments is an extremely encouraging sign.
Weather the storm
It is definitely unsettling to see the market for digital assets crash so much to start the year. But if you're a believer in the potential for cryptocurrencies to become a more important part of our daily lives, now is definitely not the time to abandon that viewpoint.
Market drawdowns aren't anything new, and the industry has always recovered. Plus, there are so many smart and talented people who are gravitating toward the space to develop the technology and bring it to the mainstream. And probably most importantly, the U.S. has no intention of banning cryptocurrencies.
Therefore, it's a good idea to keep investing.
