The crypto market is following the stock market’s lead in recent days. Investors have been wary of risky assets such as cryptocurrencies, following moves by Ukraine’s president to pivot away from Russia, higher inflation expectations, and increasing speculation that the US Federal Reserve may start removing stimulus measures sooner rather than later.
The crypto industry has been under increasing pressure to weather the storm. The bear market is impacting companies in a big way. Due to these extreme market conditions, several crypto companies announced layoffs and froze withdrawals — some have even filed for bankruptcy to stem losses.
The longest bear cycle in crypto history may be upon us, with investors treading a tightrope this year.
There appears to be a long bear cycle ahead for crypto investors this year, which could extend into next year. Despite the fact that crypto veterans may feel weary of the anxiety, have we entered completely new territory this year?
Firstly, we should revisit past bear cycles manifested in Bitcoin price declines to establish a proper point of reference.
Taking a closer look at Bitcoin’s Bear Road
Having now reached the age of 13 and 8 months, Bitcoin is entering its adolescent years. As of September 2022, Bitcoin held 40% of the total cryptocurrency market cap, down from 95% in February 2017. This means that Bitcoin has dominated the crypto market for 62% of its existence.
Once Ethereum transitions from proof-of-work to proof-of-stake, this could change. Nevertheless, Bitcoin remains the most dominant cryptocurrency, even with a below-half dominance. As Bitcoin moves, so does the entire crypto market.
In light of this, it is important to understand how long previous bear cycles have lasted. Historically, a bear market requires a decline of at least -20% along with a very negative sentiment, to be considered a ‘bear market’.
- When Bitcoin crashed from $32 to $2 in June 2011, it was the first time it had gone through a bear market. A decline of -93% over 163 days.
- After crossing the $1,000 milestone for the first time in November 2013, Bitcoin crashed for the second time, dropping to $230. The decline was -86% over 410 days.
- Bitcoin recovered from the second bear cycle in January 2017, reaching $20k, but crashed in December 2018 at $3.200. A decline of -82% over 411 days.
- In April 2021, Bitcoin reached $63k after recovering the previous $20k milestone. After that, it continued to slide for three months, eventually falling to $29k. A decline of -54% has been observed over a period of 90 days.
- For the first time since November 2020, Bitcoin dropped under $20k several times in 2022 after reaching ATH in November 2021 at $68.7k. The decline has been ongoing for 309 days, -72% so far.
The rallies occurred on a monthly/weekly basis, but they were generally short-lived. Crypto whales’ shopping sprees or institutional adoption milestones triggered their adoption. It usually takes 289 days for traditional stock markets to go through a bear market.
In addition to its short timeline, the crypto market deals with novel digital assets not present in traditional equities. This is why it is important to consider the main drivers behind the fifth bear market when projecting its end.
Why is the crypto market currently in a bear market?
The reason for the -53% decline in crypto market capitalization during 2022 is remarkably transparent. Liquidity pool management is all about the Federal Reserve. In response to the pandemic-driven economic slowdown, which started in March 2020, the Fed has pumped $5 trillion into the economy, the largest stimulus increase in the dollar’s history.
Despite this liquidity overflow finding its way into cryptocurrencies, DeFis, and NFTs, inflation soon began to show its ugly head. A dual goal of the Federal Reserve is to maintain a low level of inflation as well as low unemployment. The Federal Reserve used its federal fund’s rate tool in March after the Consumer Price Index (CPI) climbed to 8.5%.
March’s measly Fed hike was only 25 basis points. Stocks and cryptocurrencies both went into a downward spiral when it was suggested that the rate would be doubled from April to May. After two 75-bps hikes in June and July, the crypto market continued to crash, one support level at a time.
We can learn a lot about digital assets, specifically Bitcoin, from this experience. Some people might say that Bitcoin has reified itself into an entity by doing this or that. Ultimately, Bitcoin is nothing more than a platform for humans to interact.
As a result, humans react according to the stocks that are heavily capitalized, which are the biggest movers. As a result, stock markets are addicted to the Fed because of its cheap borrowing supply. Additionally, Bitcoin isn’t a hedge against inflation itself, but against the demand for dollars.
Because other countries depend on the dollar, the Fed turned its dollar liquidity spigot on to increase its value. As a result, other countries are forced to buy more dollars in order to counter their devaluing national currencies. The collapse of Sri Lanka due to a lack of foreign exchange reserves amply demonstrated this point.
For the first time in twenty years, the euro collapsed under the dollar after Europe sanctioned Russia. Similarly, Bitcoin exchange flows have fallen to multi-year lows.
Thus, despite the increased dollar supply that spiked inflation, its international demand remains unabated. Despite inflation, Bitcoin is ill-prepared to deal with a strengthening dollar, as the vanguard of the crypto market.
Emerging markets offer room for optimism
As for the crypto market, it may seem at the mercy of the Fed, specifically, how their actions affect the stock market and dollar. Crypto markets may have already been reset by the Fed.
According to Chainalysis, the grassroots adoption index is still above the summer of 2020’s bull market, based on 154 countries.
Furthermore, the data suggests that many large investors did not realize their losses. As a result, the crypto market is preventing further price collapses. The news is even better on the issue of price inflation. Cryptocurrency investors are likely to come from countries affected by the strong dollar.
There is still a lot of work to be done in the education department if the next wave of crypto investors is to lift the market out of the bear’s grip. A friend’s recommendation is cited twice as often as educational resources by Gemini’s survey respondents.
Custody security, how to use and buy cryptos, trust, and government backing are the most common concerns. Through education, such concerns can be addressed.
Through increased adoption, volatility concerns are also self-resolving.
Clarity in regulation
Additionally, more than one-third of Gemini’s crypto-curious respondents (not yet owning but willing) told us that regulation was a major concern. Depending on the tax treatment, digital assets can be treated as commodities or as securities.
A “regulation by enforcement” policy has been implemented by the Securities and Exchange Commission in response to the regulatory void in the US. According to Gary Gensler, the SEC Chair, Bitcoin and Ethereum should only be considered commodities, so that they will be subject to less burdensome CFTC oversight.
I believe that the vast majority of the nearly 10,000 tokens in the crypto market are securities. Crypto security tokens are regulated by securities laws for the sale and offer of their tokens. – The SEC Speaks conference featured Gary Gensler of Practising Law Institute
Legislators may also be able to impose strict regulations on digital assets after Terra (LUNA) collapsed. The FATF guidelines recommend all crypto transactions be traceable and reportable, so this is likely to be the cause. To be more precise, from noncustodial wallets to centralized exchanges.
In any case, regulatory clarity would remove a major roadblock to global crypto adoption, whether they are positive or negative. Furthermore, “lack of government backing” would be removed from the concert discussion. It is likely that 2023 will be a decisive year for crypto regulation, following Biden’s March executive order on “responsible development” of digital assets.
The stage is already set for widespread institutional adoption if regulatory clarity is achieved. Coinbase is the crypto interface selected by BlackRock, the largest asset manager on the planet, which handles $9.4 trillion in assets. Investing in Bitcoin ETFs is becoming increasingly popular because they keep custody in institutional hands.
NFTs and Play-to-Earn (P2E) Gaming
There is a strong connection between P2E games and NFTs. Digital assets may be driven most by blockchain gaming. Among grassroots crypto adoptions, Vietnam ranks first according to a Chainalysis report.
There is no chance for this to happen. Sky Mavis, the team behind Axie Infinity, is based in Vietnam, specifically Ho Chi Minh City. With this tactical NFT-powered game, other blockchain players have yet to emerge and break all revenue records. As a result, Vietnam became a hub for crypto startups. Blockchain gaming has also been adopted in many areas of the Philippines.
According to Q2 2022 investments, crypto gaming accounted for 59% of all VC-funded projects. Instagram NFT was integrated across 100 countries by Meta, the king of all things social. There would be a hard time finding a better digital asset infrastructure if there was one.
Aside from Ethereum, there are other infrastructures driving DeFi/NFT. Despite being slow after the Merge, Polygon is Ethereum’s layer 2 scalability solution post-Merge. As of now, the sidechain counts DraftKings, YugaLabs, Disney, Stripe, Reddit, Meta, and Starbucks as business partners.
Viewing Crypto Market from a distance
There is a possibility that the Fed will serve as the world’s central bank. With its tools, it floods or drains economies with liquidity, affecting living standards and business costs. The information is simply a signal. It’s time to start churning again with real-world assets.
A few examples of these assets in the cryptocurrency sector are the unabated VC-backed projects, corporate blockchain integration, and the merging of Web2 and Web3 platforms (Twitter, Reddit, Meta, etc.). Regulation even if negatively received, may turn into a positive if uncertainty is removed.
Considering these factors, we come full circle to Warren Buffett’s investing axiom, “fear when others are greedy, and greed when others are fearful”.
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