Author: Matt Hougan, Chief Investment Officer of Bitwise

Translated by: Luffy, Foresight News

Last July, I wrote an investment memo titled "Short-Term Pain, Long-Term Gain." At that time, the cryptocurrency market was in poor shape. Bitcoin had risen above $73,000 in March 2024, but by July it had dropped to around $55,000, a decline of 24%. Ethereum fell by 27% during the same period.

I noted that the cryptocurrency market was facing a peculiar state. All short-term news was negative, while all long-term news was positive.

On the positive side, I saw long-term catalysts such as ETF inflows, Bitcoin halving, and a shift in Washington's attitude. On the negative side, I identified short-term challenges like Mt. Gox payouts and government Bitcoin sales.

I concluded that this contradiction between short-term negative factors and long-term positive factors created an excellent potential opportunity for long-term investors.

It turned out that this judgment was quite prescient. Shortly after I wrote that memo, Bitcoin hit bottom and then skyrocketed to $100,000.

The current market situation is very similar to that time, with short-term negative factors and long-term positive factors at play. For investors with a sufficiently long time horizon, I believe this is also a rare opportunity.

Bad News: The End of the Memecoin Craze

First, let’s look at the bad news.

As I write this memo on the morning of February 25, the cryptocurrency market is experiencing a significant downturn. Bitcoin has dropped 8%, falling below $90,000, Ethereum is down 10%, and Solana has fallen 12%.

The direct cause is the aftermath of a hacking incident at the Singapore-based cryptocurrency exchange Bybit over the weekend. Hackers used classic phishing scams to steal $1.5 billion worth of Ethereum from the exchange. Although Bybit was able to use its own funds to cover all customer losses, the hack severely impacted the crypto market, triggering a series of forced liquidations.

However, the Bybit hack is not an isolated incident. In recent weeks, there have been a series of scams related to Memecoins, including:

• The Libra Incident: Argentine President and cryptocurrency enthusiast Javier Milei endorsed a Memecoin called Libra, only to discover it was part of a multi-billion dollar scam.
• Melania-related Token Incident: Memecoins associated with First Lady Melania Trump also faced issues, resulting in billions of dollars in losses for investors.
• Trump-related Token Incident: To some extent, Memecoins related to President Trump have also encountered similar problems.

Reports indicate that the hackers behind the Bybit incident are linked to the North Korean government, which attempted to launder the stolen Ethereum through Memecoin platforms. The Bybit scam incident also has Memecoin-related factors, and it is likely to face regulatory scrutiny in the future.

Overall, these events likely signify the end of the recent Memecoin craze.

While this may be comforting for "serious" cryptocurrency investors, Memecoins have been the hottest segment in the cryptocurrency space outside of Bitcoin over the past year. Removing Memecoin activity from the crypto ecosystem will have an impact, and that is what you are seeing today.

Good News: Favorable Regulations, Institutional Investors, Stablecoin Craze, and More

The impact of short-term news will eventually fade. With few exceptions, Memecoins will no longer be significant; that’s just how it is.

Fortunately, the long-term outlook for cryptocurrency does not depend on Memecoins.

On the other hand, I believe there are many long-term trends that will continue for years, including:

• Favorable crypto regulatory policies: Washington's attitude toward cryptocurrency is undergoing a significant shift, and we are currently in the early stages of this transition. In just the past few weeks, we have seen the SEC withdraw high-profile lawsuits against companies like Coinbase, and lawmakers have reached a consensus on crypto-friendly legislation related to stablecoins and market structure. These developments will enable cryptocurrency to enter the mainstream and reshape the financial landscape in the coming years.
• Institutional adoption: Institutions, governments, and corporations are buying Bitcoin in large quantities. So far this year, investors have poured $4.3 billion into Bitcoin ETFs. We expect this figure to reach $50 billion by the end of the year, with hundreds of billions more flowing in over the next few years.
• Stablecoins: The asset management scale of stablecoins has reached a historic high of $220 billion, growing nearly 50% over the past year. However, we believe this is just the beginning. As stablecoin-related legislation progresses in Congress, the stablecoin market could surge to $1 trillion by 2027.
• The resurgence of decentralized finance and the rise of tokenization: Decentralized finance applications are regaining attention, with increasing activity in lending, trading, prediction markets, and derivatives. Meanwhile, the asset management scale of real-world asset tokenization is setting new historical highs every day.

Where Will the Market Go?

I believe this analytical framework is helpful because, to some extent, it simplifies investment decisions. On one hand, we face the decline of Memecoins and the adverse situation of the Bybit hack; on the other hand, we have favorable regulations for cryptocurrency, large-scale institutional adoption, a trillion-dollar stablecoin craze, the resurgence of decentralized finance, and the rise of tokenization.

This is what I call a decision that can be made without much thought.

However, I must caution that this market correction is more severe than the one I mentioned in July 2024. The previous correction was brief and driven by one-time asset sales, which signified an end from the start.

The scale of the Memecoin craze is large, and its negative impact may also be greater. It may take days, weeks, or even months to fully digest these effects.

But our overall conclusion remains the same: short-term news is negative, while long-term news is positive. When this happens, I am more optimistic about long-term investment opportunities.

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