Bitwise: What will happen to the market after the recent market correction?

In July 2024, I wrote an investment memo titled "Short-Term Pain, Long-Term Gain."

At the time, the cryptocurrency market was in a tough spot. Bitcoin had peaked at more than $73,000 in March 2024 before falling 24% to around $55,000. Ethereum fell 27% during the same period.

I wrote that the cryptocurrency market is facing a strange situation right now, where all the short-term news is bad, but all the long-term news is good.

On the upside, I see long-term tailwinds like ETF inflows, the Bitcoin halving, and a shift in attitude in Washington. On the downside, I see short-term challenges like the Mt. Gox Bitcoin distribution and the German government selling Bitcoin.

I concluded that this divergence between short-term bearishness and long-term bullishness creates an excellent potential opportunity for long-term investors.

This call proved to be prescient: shortly after I wrote the memo, Bitcoin hit bottom and then soared to $100,000.

Today’s market dynamics are very similar, with short-term bearishness and long-term bullishness fighting each other. For investors with a long enough time horizon, I think this presents very similar opportunities.

Bad News: The End of the Meme Coin Craze

First, let's look at the bad news.

As I write this memo on the morning of February 25, the cryptocurrency markets are in the midst of a massive sell-off. Bitcoin is down 8% and trading below $90,000, Ethereum is down 10%, and Solana is down 12%.

The immediate cause was the aftermath of last weekend’s hack of Singapore-based cryptocurrency exchange Bybit, which saw hackers steal $1.5 billion worth of Ethereum from the exchange using a classic phishing scam. Although Bybit was (amazingly) able to use its own funds to restore all of its customers’ assets, the hack shook up the cryptocurrency market and triggered a cascade of liquidations.

However, the Bybit hack is not an isolated incident. In the past few weeks, a series of Meme Coin-related scams have also occurred, including:

Libra: Argentine President and cryptocurrency enthusiast Javier Milei once supported a meme coin called Libra, which turned out to be a multi-billion dollar scam.

Melania: A meme coin associated with first lady Melania Trump also suffered a setback, costing investors billions of dollars.

Trump: To a lesser extent, a similar situation occurred with a meme coin associated with President Trump.

News reports suggest that the Bybit hackers may be linked to the North Korean government and that they attempted to launder stolen Ethereum through the Meme Coin platform. The Bybit scam also has a Meme Coin element; regulatory investigations are likely to follow.

Taken together, these events may spell the end of the recent meme coin craze.

While this may be comforting to “serious” crypto investors, meme coins have been the hottest sector in crypto outside of Bitcoin over the past year, injecting a lot of volume and energy into the space (especially the Solana ecosystem). Removing this activity from the system will have a ripple effect, and you are witnessing it today.

The good news: pro-crypto regulation, institutional investors, the stablecoin boom, and more

The problem with short-term news is that its impact will eventually end. With very few exceptions, the memecoin will no longer matter and that will be the end of it. Attention will not drop below zero.

Fortunately, my long-term thesis on cryptocurrency has never revolved around meme coins.

On the other hand, there are some long-term trends that I believe will continue for several years. These include:

Pro-cryptocurrency regulation: Washington’s attitude toward cryptocurrencies is in the early stages of a major shift. In the past few weeks alone, we have seen the SEC drop high-profile lawsuits against companies like Coinbase, while lawmakers have reached consensus on pro-cryptocurrency bills related to stablecoins and market structure. These developments will bring cryptocurrencies into the mainstream and significantly reshape the financial landscape in the coming years.

Institutional Adoption: Institutions, governments, and corporations are buying into Bitcoin in droves. So far this year, investors have poured $4.3 billion into Bitcoin ETFs. We expect this number to reach $50 billion by the end of the year, with hundreds of billions more to come in the coming years.

Stablecoins: Stablecoin assets under management (AUM) have reached an all-time high of $220 billion, up nearly 50% from last year. But we think this is just the beginning. As stablecoin legislation advances in Congress, we expect the market size to surge to $1 trillion by 2027.

The rebirth of decentralized finance (DeFi) and the rise of tokenization: Decentralized finance (DeFi) applications are gaining renewed attention, with increased activity in areas such as lending, trading, prediction markets, and derivatives. At the same time, the AUM of tokenized RWAs is setting new all-time highs every day.

Where is the market heading?

I find this analytical framework useful because, in a way, it makes investment strategies crystal clear. On one hand, we have the fallout from the meme coin craze and the Bybit hack. On the other hand, we have pro-crypto regulation, mass institutional adoption, the trillion-dollar stablecoin craze, the rebirth of DeFi, and the rise of tokenization.

This seems to me to be the obvious choice.

I would caution, however, that this market correction is more severe than the one I mentioned in July 2024. That correction was indeed short-lived, triggered by a one-time asset sale, and ended as soon as it began.

The meme coin craze is huge, and its subsequent impact may be more significant. It may take days, weeks or even months to digest.

But the overall thesis is consistent: short-term news is bad, long-term news is good. When this happens, I am bullish on long-term investments.