When I was evaluating my portfolio performance in 2021, I anticipated that 2022 might be a volatile year for Bitcoin and there is a good chance that it will have an impact on my portfolio performance in 2022. With less than two months to go till the end of 2022, I believe that the statement will likely come true and Bitcoin will be pulling down my investment portfolio.
The year of 2022 (till date) has been a series of never-ending punches on the face of cryptocurrency. You have Luna collapse, several crypto exchanges such as Celsius and of course, FTX falling, and strong macroeconomic headwinds such as persistently high inflation rate (which results in dramatic increase in interest rates) all happening in 2022. We know 2022 is likely going to be a challenging year based on previous halving cycles behaviour, but no one probably anticipated such a dramatic series of events over the past 10 to 11 months. If you tell someone at the start of the year that Luna and FTX will collapse in 2022, they will probably laugh at you and walk away.
All these events result in absolute capitulation of the prices of Bitcoin. Bitcoin slumped 37.3% in June- biggest monthly drop since 2011 (let's see if November beats that). In the past week, the price of Bitcoin dropped a whopping 21%. We started the year 2022 with the Bitcoin price being ~$47,700 and it is now at ~$16,800.
So did anything go wrong in the development of the use of Bitcoin over the past year? After all, the price dropped drastically so something must have gone wrong right?
I wrote a post earlier this year about how we could potentially evaluate the price of Bitcoin. While I'm obviously wrong about how low the price of Bitcoin could go (if you have seen the post), I still stand by the various important metrics which we need to be observing to know how "healthy" the development of the use of Bitcoin has been- which are the hash rate, supply distribution, transaction volume.
If you have not been subscribing to Bitcoin Monthly by ARK Invest, I strongly encourage you to do so. I know there are a lot of negative sentiments on ARK Invest over the past year due to the obviously less than ideal performances of their ETFs, but I must say their analysis on Bitcoin is one of the best which I have seen. It's comprehensive, yet incredibly easy to understand.
Based on their latest monthly report, here is what we have.
You can see that mining difficulty (in terms of haste) has grown 70% over the past year and the transaction volume has also grown 28.4% in the same period. Given the drop in the price of Bitcoin, you might be expecting that Bitcoin network activity must be terrible. In fact, the opposite happens.
Why are all these metrics important?
To me, the price of Bitcoin in the short term is immaterial. What's important is tracking if Bitcoin is fulfilling the objective to be a distributed, worldwide, decentralised digital money. It's only through tracking its network activity do we know if it is on track to meet the objective. If it does, you will be sure that the price of Bitcoin will be in the right place.
In dealing with such a risky asset, one of the best ways is to continuously DCA your funds. If you ever need to be convinced that DCAing is the right way to invest in Bitcoin, just check this blog out. The author of the blog continuously put 500 euros into Bitcoin every month since 2018. He has over 4 Bitcoins now due to his diligent efforts. Based on his latest post in October, he is making on average of +130% for every purchase of Bitcoin that he has made since 2018. If you are thinking S&P 500 might have given him better returns, you should check out his graph which proves otherwise. The issue of investing in Bitcoin is that everyone expects to get rich immediately. This is obviously a very wrong mentality. This blog shows you that you should invest regularly and persistently to get the returns you want.
While there is an extraordinary number of exchanges which failed this year, let's not associate the failure of these exchanges with Bitcoin. As a network, Bitcoin is growing stronger than ever. For the investors, you just have to learn to be patient. The path of adoption of a digital currency is never going to be an easy one, yet along a straight path to success. Are you seriously thinking that countries/institutions will start to adopt Bitcoin without any resistance within the first 13 years of the coin's existence? Ups and downs are definitely expected, and it just so happens that we are in the "down" now.
And do remember the number one rule in crypto- not your keys, not your coins. If you still have any coins on any exchange right now, consider this the last warning to get your coins off the exchange.
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