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Crypto has been in a bear market from the start of 2022, with the market losing roughly 70% of its value from its all-time high in late 2021. This bear market has instilled a significant degree of uncertainty among many investors who are now trying to pinpoint what may have caused this recent down-swing. Indeed, a number of factors have been cited as having contributed to the current bear market, including crypto market cycles and bitcoin halving events, as well as current inflation and Federal Reserve interest rates.
In this blog, we will provide a breakdown of the current crypto market and look at factors that may have an impact on the market.
The simplest way to define a crypto bear market is a long-term downward trend in the price of cryptocurrencies across the board. In traditional markets, a market is considered bearish when it experiences a market decline of 20% from its previous high. However, given the crypto market is more volatile than traditional markets, it is not uncommon for it to experience stronger and more prolonged bear markets.
There are several factors that can trigger a bear market. These include macroeconomic drivers like a slowing global economy or factors closely aligned with the market itself such as the recent Terra collapse. During bear markets, some crypto investors scramble to sell off their portfolios to accumulate cash or ‘defensive assets’.
To be clear, cryptocurrency has suffered through bear markets before, and even more severe ones. Also looking historically, cryptocurrency prices have been cyclical in nature and a bear market has been proceeded by its opposite, a bull run. What will occur this time is anyone’s guess.
We cannot exactly pinpoint what was the direct cause of the recent crypto crash and subsequent bear market. However, an article written by Bloomberg has touched on a few possible factors. More below:
Rising interest rates are usually part of an effort to combat inflation. Recent evidence suggests that cryptocurrencies may be correlated to interest rate levels in some way. The reason being is that recent interest rate rises have caused a decline in the crypto market and also the broader economy. Whether this holds true in the future will be seen in time.
The announcement of raising interest rates caused both the stock and crypto markets to crash. Interest rates have continued to increase throughout 2022 to mitigate inflation, which in the US is at a 40-year high.
Terra (LUNAC), previously known as LUNA, crashed in early May, resulting in a 99.99% drop in price. Terra’s stablecoin (UST) which was closely tied to LUNA, lost its peg to the US dollar and has not recovered since. Stablecoins are designed to be non-volatile digital assets, so the fact that UST was unable to remain non-volatile triggered a lot of fear throughout the market. It must be noted, however, that UST is an algorithmic stablecoin, so it’s more susceptible to volatility compared to traditional stablecoins like USDT, and USDC which are predominantly backed by cash reserves.
Additionally, the dramatic crash of LUNA, which was a top 10 cryptocurrency caused widespread trepidation throughout the crypto trading space.
Looking at previous bear markets, the two most recent crypto bear markets began in 2018 and 2014. We have summarised these events below but should call out that past performance is not indicative of future results.
Shortly after Bitcoin hit $1,000 USD, it entered a massive bear market, hitting a low of $170 in 2015. One of the catalysts for this crash can be attributed to the Mt. Gox hack. Mt. Gox was a Bitcoin exchange based in Tokyo that once accounted for 70% of all Bitcoin transactions. In February of 2014, Mt. Gox revealed that hundreds of thousands of Bitcoins, around 7% of all Bitcoin at the time, had been stolen. This resulted in the company filing for bankruptcy and contributed to the 2014 crypto bear market.
This bear market lasted about 3 years, before bouncing back in 2017 – a bull run that would catch the eye of the mainstream.
Cryptocurrency bear markets can be particularly harsh. As a sobering example, the price of Bitcoin plummeted by over 80% within 12 months in 2018. The crypto market suffered massive losses during this prolonged bear market, with $700 billion USD in market value being wiped out. The crash began with rumours that South Korea was preparing to ban cryptocurrency trading.
Hot off one of the most bullish markets, where Bitcoin hit the mainstream, the market’s largest asset was quick to correct. Bitcoin dropped from roughly $20,000 USD to under $4,000 by the end of 2018.
It wasn’t until late 2020, that the market saw a huge recovery, smashing through previous all-time highs.
It’s difficult to pinpoint exactly when the bear market may end, however, there are certain factors that will help you better understand the crypto landscape.
Market cycles are at the very core of trading, and cryptocurrency is no different. However, the crypto market is subject to a particular curiosity when it comes to market cycles, an event called Bitcoin halving.
A Bitcoin halving is an event that occurs roughly every 4 years, where the rewards provided to Bitcoin miners is halved. This typically has a profound effect on the demand and scarcity of Bitcoin.
This reduces the supply of Bitcoin in the market, which, if you’re looking through an economic lens, when supply for an asset is low and demand is high, price increases, particularly as more investors enter the market. Since Bitcoin was the founding cryptocurrency and remains the largest by market cap, it has a large influence on the rest of the market. Historically, this price surge following a halving event spike occurred up to one year after the halving event (in 2013, 2017, and 2021 respectively).
The next halving is due to occur around 2024. The previous three halvings have been followed by a bull run within one year of the halving event and as such this is an interesting previous trend to keep an eye on, but does not mean this will occur in the future.
In spite of this bear market, the adoption of cryptocurrencies continues to rise. Over the last few years, the rate of adoption is increasing at a remarkable rate, among not just retail investors, but institutional investors, as well as major tech companies worldwide. Regardless of what the markets seem to be doing, the companies adopting crypto and blockchain seem more concerned with its long-term potential than its volatility.
A host of publicly listed companies and funds such at Tesla, MicroStrategy and GrayScale are investing in Bitcoin and Ethereum, as well as dollar stablecoins and other digital assets.
It’s always important to remember that cryptocurrencies have shown some correlation with the state of the broader global economy. As mentioned above, inflation and rising interest are potential contributing factors to the current bear market. However, when the rate of inflation reaches a sustainable level, interest rates will likely drop, which may provide a healthier economic environment for the broader global economy and the cryptocurrency market. The most recent Consumer Price Index (CPI) out of the US has indicated that inflation has shrunk month on month for the first time in a while. Whether inflation continues to shrink is yet to be seen, but this is a key economic factor.
Other geopolitical factors such as the Russo-Ukrainian war and the ongoing pandemic have also contributed to cautious investor behaviour.
There is immense speculation, anticipation and excitement surrounding Ethereum’s September 2022 transition from Proof of Work to Proof of Stake. Ryan Neuner, the founder and CEO of OnChain Capital has said this event, which is being referred to as ‘the Merge,’ will be the biggest event in the history of cryptocurrency since the first Bitcoin was mined. Whether this is true will be seen in time.
This transition aims to make Ethereum “more scalable, more secure, and more sustainable” as the blockchain will use far less energy and is expected to speed up transaction times and lower transaction costs.
Ultimately, nothing is guaranteed in crypto, and no one can be sure when the next bull run will occur. Crypto is continuing to be integrated into the day-to-day functions of the global economy. Australia is making strong ground in the industry with the Labor Government announcing plans to establish a crypto regulatory framework. As domestic and global adoption becomes more and more widespread, it is becoming clearer that cryptocurrency and blockchain technology in some form is here to stay.