Author: Matt Hougan, Chief Investment Officer of Bitwise

Compiled by: Luffy, Foresight News

Last July, I wrote an investment memo titled "Short-term Pain, Long-term Gain". At the time, the cryptocurrency market was in a difficult situation. Bitcoin had risen above $73,000 in March 2024, but by July it had fallen to around $55,000, a 24% correction. Ethereum fell 27% over the same period.

I wrote then that the cryptocurrency market was in a peculiar state. All the short-term news was negative, while all the 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 saw short-term challenges such as Mt. Gox payouts and government Bitcoin sales.

My conclusion was that this contradiction between short-term negatives and long-term positives created a great potential opportunity for long-term investors.

It turned out that this assessment was quite prescient. Shortly after I wrote that memo, Bitcoin bottomed out and then soared to $100,000.

The current market situation is very similar to that time, with short-term negatives and long-term positives battling it out. I believe this is another rare opportunity for investors with a long enough time horizon.

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 25th, the cryptocurrency market is experiencing a significant decline. Bitcoin is down 8%, falling below $90,000, Ethereum is down 10%, and Solana is down 12%.

The immediate trigger is the fallout from a hacking attack on the Singapore-based cryptocurrency exchange Bybit over the weekend. The hackers used a classic phishing scam to steal $1.5 billion worth of Ethereum from the exchange. Although Bybit was able to use its own funds to compensate all affected customers, the hack has severely shaken the crypto market, triggering a wave 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 crypto enthusiast Javier Milei had endorsed a Memecoin called Libra, which turned out to be a multi-billion dollar fraud.
• The Melania Trump-related token incident: A Memecoin associated with former First Lady Melania Trump also ran into problems, costing investors billions.
• The Trump-related token incident: To some extent, Memecoins associated with former President Trump have seen similar issues.

Reports indicate that the Bybit hackers are linked to the North Korean government, who were trying to launder the stolen Ethereum through Memecoin platforms. The Bybit fraud also has Memecoin elements, and is likely to face regulatory scrutiny.

Taken together, these events likely mark the end of the recent Memecoin craze.

While this may be a relief for "serious" cryptocurrency investors, Memecoins have been the hottest segment of the crypto space outside of Bitcoin over the past year. Removing Memecoin activity from the crypto ecosystem will have an impact, which is what you're seeing today.

Good News: Favorable Regulation, Institutional Investors, Stablecoin Boom, and More

The impact of the short-term news will eventually subside. Except for a few outliers, Memecoins will no longer be significant, and that's just the way it is.

Fortunately, the long-term prospects for cryptocurrencies do not depend on Memecoins.

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

• Favorable crypto regulation: Washington's attitude towards cryptocurrencies is undergoing a major shift, and we are in the early stages of this transition. Just in the past few weeks, we've seen the SEC drop high-profile lawsuits against companies like Coinbase, and lawmakers reach consensus on crypto-friendly legislation related to stablecoins and market structure. These developments will enable cryptocurrencies to enter the mainstream and reshape the financial landscape in the coming years.
• Institutional adoption: Institutions, governments, and corporations are buying Bitcoin in droves. Investors have poured $4.3 billion into Bitcoin ETFs so far this year, and we expect that number to reach $50 billion by year-end, with hundreds of billions more to come in the next few years.
• Stablecoins: The asset management size of stablecoins has reached a historic high of $220 billion, growing nearly 50% in the past year. But we believe this is just the beginning. With stablecoin-related legislation progressing in Congress, the stablecoin market could explode 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 size of real-world asset tokenization is setting new records every day.

Where Will the Market Go?

I find this analytical framework helpful, as it in some ways simplifies the investment decision. On one hand, we face the decline of Memecoins and the Bybit hacking incident; on the other hand, we have favorable crypto regulation, massive institutional adoption, a multi-trillion dollar stablecoin boom, the resurgence of decentralized finance, and the rise of tokenization.

This is what I call a no-brainer decision.

However, I would caution that this market pullback is more severe than the one I mentioned in July 2024. That correction was short-lived, driven by a one-time asset sale, and those sales were intended to be completed at the outset.

The Memecoin craze was much larger in scale, so the negative impact may also be greater. It may take days, weeks, or even months to fully digest these effects.

But our overall thesis remains the same: short-term news is negative, long-term news is positive. When that is the case, I am more optimistic about the long-term investment opportunity.