Is Monero a Good Investment in 2022?

Monero, like most cryptocurrencies, has struggled in 2022 as concerns about Federal Reserve interest rate rises and the consequences of war in Europe rise. Its price has dropped by about 39% year-to-date, bringing its total market capitalization to about $2.68 billion. So what exactly is Monero, why do some crypto users prefer it, and will it be a good investment in 2022?

What is Monero?

Monero is a blockchain project that aims to be a better version of Bitcoin, the biggest coin in the world. Monero achieves that by having higher transaction speeds and lower costs than Bitcoin. Most importantly, it is known for its privacy credentials, which make it impossible for people to track transactions.

Monero achieves this by using a private and a public ledger and then marrying the two with in-depth encryption. This is different from how Bitcoin works since all transactions are usually offered in a public chain.

As a result, while it is difficult, it is possible to track Bitcoin transactions and find out the sender and the receiver. This explains why the Federal Bureau of Investigations (FBI) has succeeded in tracking billions of dollars worth of Bitcoin transactions.

In 2021, the FBI managed to track millions of dollars of funds that were given to the Colonial Pipeline hackers. Similarly, in 2022, the bureau managed to track and recover Bitcoins that were stolen during the Bitfinex hack.

Therefore, Monero and other privacy coins have become popular among people in the dark web who fear being tracked by investigation agencies. Click here to find out more about Monero.

Monero performance

Monero has had a difficult time in the past few months. On May 7th 2021, the coin’s price jumped to an all-time high of around $520. This increase happened as many other cryptocurrencies also experience a strong upward trend. The rally then faded and today Monero has dropped by almost 75% from its May all-time high.

Subsequently, its market capitalization ranking among cryptocurrencies has fallen from about 18 in 2021 to the current 44. It is not alone as other privacy coins like Dash and Decred have all lost favor among investors.

Why the XMR price has dropped

There are several reasons why Monero has declined in the past few months. First, the main driver is the Federal Reserve, which has hinted that it will start hiking interest rates in March. Analysts expect that the bank will implement between three and seven rate hikes this year. The Fed has also started winding down its asset purchase program.

These actions are driven by the fact that inflation in the U.S. has been in a strong upward trend in the past few months. Inflation jumped to a high of 7.5% in January, the highest it has been in over 40 years. This week Russia’s invasion of Ukraine has also seen energy prices heading skyward.

Historically, risky assets tend to underperform in a period when the Fed has embraced an increasingly hawkish tone. This also explains why the tech-heavy Nasdaq 100 index has dropped by around 17% this year.

Second, there are concerns about 51% attacks in Monero’s network. In the blockchain, a 51% attack is defined as a situation where a single individual or pool gains more than 50% of the total hashing power. In the past few months, the role of one mining pool in Monero’s network has led to these fears. The pool, known as MineXMR has grown its percentage to about 44% and analysts expect that it will cross the 50% threshold in the coming months.

Third, the Monero price has declined because of the overall transition from proof-of-work tokens to proof-of-stake platforms. A key concern about proof-of-work networks (which Monero is) is that they are much less energy efficient than proof-of-stake.

Further, the liquidity that was there in early 2021 has dried up. As you recall, the American government gave out trillions of dollars in stimulus to support the economy. There is no sign that there will be any stimulus this year considering that President Biden’s Build Back Better plan has stalled.

Is Monero a good investment in 2022?

As mentioned, the biggest risk for Monero and other cryptocurrencies in 2022 is the Fed, which is expected to be more hawkish. This explains why the coin has dropped sharply this year. These risks, coupled with those associated with 51% attacks will remain in 2022.

On the positive side, these risks have already been priced in by investors. As a result, there is a likelihood that the coin will start rising when the Fed starts hiking interest rates. This phenomenon is known as selling the rumor, and buying the fact.

Another catalyst that will push the XMR price higher will be clarity on regulations. Clear regulations, especially by the Securities and Exchange Commission (SEC) will incentivize more people to invest in cryptocurrencies like Monero.

Summary

Monero is a leading privacy coin whose price has struggled in the past few months. Its ranking among cryptocurrencies has also been sliding as investors focus on newer platforms like Solana and Polygon. While it appears Monero is somewhat undervalued, potential buyers should wait for more signs before buying.