Crypto winters are just as common of an occurrence as bull markets for leading digital currencies.
For more than a century, the stock market has been the king of all wealth creators. But when the lens is narrowed to the last decade, cryptocurrencies have, collectively, run circles around Wall Street’s major stock indexes.
Roughly 10 years ago, the cumulative value of all investable digital currencies totaled in the neighborhood of $5 billion. As of this writing on July 24, the crypto universe was worth $3.83 trillion! A scorching-hot bull market for the likes of XRP (XRP 2.55%) and Bitcoin (BTC 0.62%), which have respectively rallied 773% and 426% over the trailing-three-year period, have lifted the crypto landscape to new heights.
Unfortunately, crypto winters are as common of an occurrence as bull markets in the digital currency arena. While XRP and Bitcoin appear unstoppable, a combination of tangible and sentiment-based headwinds can send both superstars plunging by 50% (or more) over the coming two years.
A strong argument can be made that XRP, not Bitcoin, has been the hottest thing in the crypto arena over the last year. XRP is the bridge currency used in the payment network (RippleNet) created by fintech company Ripple to rival traditional payment methods from financial institutions.
The liftoff of XRP occurred once Donald Trump was declared the victor of the November elections. Aside from President Trump being a vocal proponent of digital currencies, his victory meant the resignation of Securities and Exchange Commission (SEC) chair Gary Gensler, who had been a noted thorn in the side of the crypto industry, and Ripple/XRP, in general. Without Gensler at the helm of the SEC, litigation against Ripple concerning XRP is no longer a concern.
With Ripple’s and XRP’s legal clouds clearing, the overwhelming expectation is that banks will jump at the chance to use RippleNet to facilitate and validate cross-border payments. Typically, XRP Ledger can settle and validate transactions in three to five seconds, which compares to up to one week for traditional cross-border payments.
You might be wondering why, if everything is going so swimmingly, XRP can plunge by 50%, or more, over the coming two-year period?
The first thing investors need to recognize is that XRP’s adoption is far from widespread. Though in the neighborhood of 300 global financial institutions are reported to be using Ripple’s payment network, not all of these 300 are necessarily using XRP as the bridge currency. The current cross-border payment system, Society for Worldwide Interbank Financial Telecommunication, or SWIFT, has been adopted by well over 11,000 financial institutions.
Secondly, there’s nothing stopping financial institutions from developing their own blockchain networks with tethered bridge currencies. While there’s no question Ripple has the more proven network with XRP as the bridge, there’s ample competition from traditional financial institutions, as well as other blockchain projects… some of which can rival and/or better the XRP ledger on settlement and payment cost.
Rounding things out, the build out of Ripple’s network doesn’t directly benefit XRP.
If investors were putting their money to work in Ripple and seeing a nearly ninefold return on their principal in three years, I’d understand their excitement. But XRP itself is simply the vessel responsible for facilitating payments on Ripple’s network. A $186 billion valuation for something so few financial institutions are using, and which isn’t even a necessity on RippleNet, is a good bet to lose 50% or more of its value over the next two years.
The other digital currency that could very easily run out of steam at any moment is the world’s largest cryptocurrency by market cap, Bitcoin.
Similar to XRP, Bitcoin caught fire when Donald Trump was elected the next president during the first week of November. Trump had tinkered with the idea of creating a strategic Bitcoin reserve for the U.S., and was viewed as a considerably more crypto-friendly option in the White House than former President Joe Biden.
The more-than-quintupling in Bitcoin tokens over the last three years is also a reflection of it becoming more accessible. The emergence of spot Bitcoin exchange-traded funds (ETFs) allows investors to gain exposure to the world’s biggest digital currency without having to buy it directly on a potentially obscure crypto exchange.
The other recent factor that’s lit a fuse under Bitcoin is the proliferation of the Bitcoin treasury strategy. This typically involves a publicly traded company using its cash or issuing shares or some form of convertible debt to purchase Bitcoin for its balance sheet. More companies adopting this strategy translates into added demand.
While there’s a laundry list of reasons for Bitcoin to have topped $120,000 per token, there’s an equally long list of headwinds that suggests it’ll fall below $60,000 over the next 24 months.
For starters, Bitcoin failed the real-world utility test. El Salvador legalized Bitcoin as tender in September 2021 and encouraged merchants and its citizens to use it for everyday transactions. But based on an analysis by Yale Insights, El Salvadorians hardly used it. Bitcoin’s blockchain is notably slower and costlier than traditional payment networks, which means it provides virtually no real-world utility.
Additionally, Bitcoin provides a false level of scarcity. Though its fixed coin count of 21 million (when fully mined) is viewed as an inflationary hedge, this line-in-the-sand coin cap is entirely based on a few lines of computer code and can be altered with developer consensus. While consensus is unlikely, there’s a non-zero chance Bitcoin’s token count will rise at some point in the future.
But arguably the biggest issue for Bitcoin is the bubble being created by the Bitcoin treasury strategy. The overwhelming majority of companies adopting this strategy are money-losing and/or structurally insolvent micro-cap/small-cap businesses aiming to drum up hype in their stock. Companies with zero background in tech are suddenly pivoting to buying Bitcoin — and they’re oddly being rewarded with absurd multiples to the net asset value of their digital holdings. However (and this is a big “however”), these purchases aren’t altering their struggling underlying operations in any way.
There’s only so much artificial buying pressure Bitcoin treasury companies can exert on the world’s premier cryptocurrency. Further, with nearly a dozen tradable spot Bitcoin ETFs, buying Bitcoin is no longer special. If any random or struggling company can do it, it’s going to lose its spark sooner than later.
With Bitcoin plunging by at least 50% on more than a half-dozen occasions since its inception, expecting history to rhyme, once more, is only logical.
