It has been a very difficult year for cryptocurrency investors. Here, we will discuss the recent trend of cryptocurrency returns. Also, we will highlight the current cost of cryptocurrency mining, and share some thoughts on the future of this asset.
Cryptocurrency returns in 2022
Year-to-date returns of Bitcoin, Ethereum, and the first ETF that tracks bitcoin futures (ticker: BITO) appear below. Like the stock and bond markets, all three of these assets lost value in 2022. Also, in our previous post on the risks of cryptocurrencies, the volatility of all of these cryptocurrency assets was significantly higher than the long-term historical norm of 15-20% for the S&P 500.
Bitcoin miners
Like oil, natural gas, and precious metals, there is a cost to “mine” bitcoin. Economic theory for commodities suggests that, when demand is constant, rising prices should increase production, since even less efficient miners can operate profitably. However, as prices drop, less efficient producers will exit, and less production of a commodity will occur, thereby stabilizing prices. That may be occurring now, as the price to mine one bitcoin is in the $20,000 to $34,000 range. As of July 31, 2022, the price of one bitcoin was within this range, with a value of $23,819.
The Future of Cryptocurrency
The future of cryptocurrency remains uncertain. However, few expect these new innovations in decentralized finance to go away. Instead, we may see longer-term price stabilization, as the investment in mining produces enough cryptocurrency to satisfy demand. Such price stabilization may not entice investors seeking outsize returns but could help cryptocurrency gain wider acceptance if its volatility can also be reduced.
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