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2022's $1 trillion crypto wipeout: 'necessary cleansing' of excess speculation just like dot-com bubble - Bloomberg Intelligence

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(Kitco News) The 2022 crypto winter is a needed downturn to shed excess speculation and establish a stronger foundation, according to Bloomberg Intelligence, which draws parallels to the dot-com bubble of 2000.

"The internet bubble that burst in 2000 was a reminder that nascent technologies/assets are synonymous with volatility, and we see 2022's crypto winter as a necessary cleansing of speculative excesses to solidify the foundation," said Bloomberg Intelligence senior commodity strategist Mike McGlone.

The crypto space is still digesting last week's crash, which wiped out $1 trillion off the total crypto market cap, with many cryptocurrencies falling to the levels not seen since 2020.

The crash was closely connected to the selloff in the U.S. equity market as investors embraced risk-off sentiment ahead of the aggressive rate hikes by the Federal Reserve.

However, price drop or not, Bloomberg Intelligence is still projecting for the crypto market to continue to outperform.

"Cryptos are poised to continue outperforming most assets. A top reason that the total market cap of crypto assets listed on Coindance has dropped about $1 trillion in 2022 to May 13 is linked to world equities declining around $20 trillion," McGlone said in a note Monday. "What's unique about Bitcoin is diminishing supply vs. the unlimited and rapidly increasing number of other cryptos. Coinmarketcap shows about 19,000 crypto assets, roughly double from a year ago, many of which are highly speculative."

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The biggest price drivers in the crypto space will be Bitcoin, Ethereum, and crypto dollars, which represent about 70% of the total crypto market cap. "Purging 2021's excesses may continue, but we expect the market cap of these three stalwarts to have a greater propensity to rise," McGlone noted. "Federal Reserve rate hikes are addressing the need for inflation and risk assets to decline and once things stabilize, we see Bitcoin coming out ahead."

Investing in cryptos in the 2020s could become more about the risks of not allocating to the space. "Understanding the new technology may be less relevant than acknowledging its place in the accelerating trends of digitalization, tokenization and fintech," McGlone wrote.

Bitcoin, especially, could end up following the same volatile path as the tech-giant Amazon, McGlone added.

"The crypto's 260-day volatility to May 13 is, at about 70%, nearly the same as Amazon's stock was in 2009. What's notable … is the high volatility in the early days of the revolutionary technology/assets Amazon and Bitcoin that declines with wider adoption. In a world rapidly going digital, we see the benchmark crypto well on its way to becoming collateral. Old-guard gold positions appear increasingly naked in portfolios if not paired with Bitcoin," he said.

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