Market Collapse 2022: Is the Weeding Out of “Junk” Cryptos Underway?

The collapse of cryptocurrencies in May 2022 and the continued pullback of more cryptos could signal the start of a market cleansing.

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The struggle of Bitcoin (CRYPTO:BTC) to stay at US$30,000 or above indicates the condition of the entire cryptocurrency market. Terra’s collapse, in particular, triggered a contagion that sent shockwaves to the digital currency space. Some crypto analysts said that institutions and individuals have incurred huge losses from LUNA and UST.

While there was a semblance of stability to start June 2022, the pullback of Bitcoin, Ethereum, Solana, Dogecoin, and other cryptos might not be over yet. XRP is also caught the downtrend, but the ongoing legal battle with the SEC compounds its woes. Meanwhile, losses of crypto stocks are piling up.

Too many players

Bertrand Perez, Web3 Foundation’s CEO, spoke about the market players at the recent World Economic Forum in Davos, Switzerland. He said, “One of the effects of what we’ve seen last week with the Terra issue is we’re at the stage where basically there are far too many blockchains out there, too many tokens.”

Perez added that besides the confusion due to the sheer number, they are bringing some risks for users. He likened the situation to the beginning of the internet where companies emerged. According to Perez, many of them were scams with zero values. After the bubble burst, useful and legitimate companies remained.

Scott Minerd, the chief investment officer at Guggenheim, said last month, “Most of these currencies — they’re not currencies; they’re junk.” He believes that Bitcoin and Ethereum will survive. However, the question now is whether the world’s top crypto can bounce back and bring the rest of the crew along with it.

Ultimate bottom

Crypto investors who were not able to cash out before the May crash must hold on for dear life (HODL). Minerd predicted that Bitcoin could drop to the ultimate bottom. He said, “When you break below US$30,000 consistently, US$8,000 is the ultimate bottom, so I think we have a lot more room to the downside, especially with the Fed being restrictive.”

Should Bitcoin plunge as Minerd predicts, the value of the broader cryptocurrency would fall significantly. Like Perez, Minerd compared the current situation to the bubble of the early 2000s. Because of Bitcoin’s extreme volatility, conventional financial institutions have stayed away of the crypto sector. Others with crypto holdings still view them as high-risk investment opportunities.

Crypto stocks

TSX crypto stocks like Hut 8 Mining (TSX:HUT)(NASDAQ:HUT) and HIVE Blockchain Technologies are supposed to be safer alternatives to Bitcoin, Ethereum, and other digital assets. Unfortunately, current investors in both are down by an average of 69.34% year to date.

Had you invested $10,000 on Hut 8 on year-end 2021, your money would be worth $2,910.37 on June 3, 2022. The $503.4 million cryptocurrency mining company boasts an industrial-scale Bitcoin mining operation.

Despite the crypto winter, Hut 8 CEO Jaime Leverton said, “We are uniquely positioned to seize opportunities in this burgeoning industry as they arise.” Market analysts covering HUT have a 12-month-low price target of $5 — a 73% upside potential.

A comeback is possible

Bitcoin remains the top draw in the cryptocurrency market. It has a fairly good chance of making a comeback while alternative altcoins bleed. Watch out for the trading volume, because many investors might begin to accumulate if the price dips some more.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana.

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